FORT WORTH - The City Council approved significant benefit cuts to the city's pension Tuesday, trying to close the plan's fast-growing $748 million unfunded gap, but raising the likelihood of a lawsuit by police officers.
The reductions affect general employees and police and are for future service, not benefits already accrued. But the Fort Worth Police Officers Association contends they are tantamount to an unconstitutional cut in vested benefits promised officers when they were hired.
"We do intend to file a lawsuit," Sgt. Steve Hall, association president, said.
The city fired the first legal shot Tuesday, filing suit in State District Court in Fort Worth against the Fort Worth Employees' Retirement Fund, seeking declaratory judgment that the benefit cuts are legal.
The suit also seeks a declaration that a recent police association vote, in which officers overwhelmingly offered to raise their pension contributions and leave more money in the fund in exchange for keeping the benefits formula, is invalid. The suit says state law requires all members of the fund, including the city's general employees and firefighters, to vote.
The Fort Worth law firm Kelly Hart & Hallman filed the suit for the city. The council is scheduled to vote Nov. 6 on retaining the firm to represent the city on the pension, including what Fort Worth will pay the firm, said Bill Begley, a city spokesman.
The council's vote is the city's latest move to check the unfunded liability since the 2008 market plunge exposed a big gap.
Last year, the council approved cuts for employees hired after July 1 that year. The council says the fund is not troubled, but that the unfunded gap must be dealt with to avoid eating into the city budget, raising taxes, or risking the city's credit rating.
Tuesday, the council voted 8-0, with Kelly Allen Gray, whose husband is a Fort Worth officer, abstaining.
Mayor Betsy Price stressed the cuts are necessary for the plan to be "sustainable" and "affordable."
"This is not a vote against the police, this is not a vote against any of our employees," Price said.
She noted that the city doubled its contributions to the fund between 2007 and 2010. They were $78.4 million last fiscal year, or 5.9 percent of the operating budget, up from 3.3 percent 10 years earlier. The city's contribution is 20 percent of payroll; the council says no higher.
"We have done our part," Price said. The fund's problems mean "it's necessary for our employees to take a smaller benefit or work a little longer."
Under the changes, the city will reduce the multiplier used in calculating benefits, raise the number of years used in figuring base retirement pay, and eliminate overtime in calculations. Critics of the plan say police routinely spike their pensions with a lot of overtime in their final years.
The city will also give employees a one-time option to change their retirement pay to include a flat 2 percent annual cost of living adjustment, instead of a variable annual increase that pays off only when the number of years to extinguish the plan's unfunded liability falls below a certain level.
The impact from the variable COLA is not currently figured in the unfunded liability. The staff proposed to offer the switch to the flat 2 percent so the city could lock in the liability with certainty.
The changes go into effect Jan. 1 for new police officers, and Oct. 1 next year for the future service of police and general employees. The city is entering contract talks with its firefighters and will pursue similar changes.
General employees don't have a contract, and the police agreement, under negotiation, doesn't cover the pension. So the City Council didn't need an agreement to change those two groups' benefits.
Under one staff example illustrating the changes, an employee earning $50,000 this year with 15 years of service would have a $30,565 starting annual pension for those years.
Assuming the employee works for another 15 years and receives 2 percent annual raises beginning in 2014, she would receive a $23,789 annual pension for those years, for a total starting benefit of $54,354.
Council members acknowledged the plan they passed won't solve the problem. They followed the city's actuary, who said the staff plan would be more effective than the police association's.
More moves ahead
More changes are coming.
The fund next year is set to review its assumptions, including the critical assumed rate of return, now at 8.25 percent. Critics of the plan say that rate is much too high given the market's volatility in recent years, and should be closer to 7.5 percent.
The fund actuary dropped the rate by a quarter point two years ago and indicated more reduction would be necessary. The actuary also is expected to raise assumptions for retirees' longevity.
Both moves would increase the unfunded gap.
City staff and council members have said they want to see if Tuesday's changes work - and wait for the outcome of litigation - before the city considers more moves.
According to the city actuary, under an 8.25 percent assumed rate of return, the unfunded liability is $997 million and would take 29.4 years to pay off. That includes the council's changes Tuesday and 90 percent of fund participants moving to the 2 percent fixed COLA.
Under a 7.5 percent assumed rate of return, the unfunded gap is $1.23 billion and would take 50.3 years to pay off.
The association's proposal would result in a $1 billion unfunded liability and take 31.1 years to pay off at 8.25 percent, the actuary estimated. At 7.5 percent, the police proposal would leave a $1.3 billion gap that would never be paid off, the actuary estimated.
Hall maintained his criticism of the actuary's numbers for including the impact from the COLA switch, noting that the city has no idea how many employees will move to it.
The 90 percent estimate is too high, he said. City employee groups and the fund's director have said many employees are suspicious of the COLA offer.
"We are neither naive nor ignorant of the need to do something," Hall said. But "why would you agree to shoot at a moving target when you don't even know what the target is?"
Costly legal fight
Hall told the council approving the staff changes "will force the city of Fort Worth and the taxpayers of Fort Worth into a very costly legal battle to resolve this issue."
The association has maintained the benefit reductions are a drag on officers' morale. In weekend robocalls and mailers, and in social media posts, the association said the changes tell officers to "not risk their lives saving citizens."
After the vote, Hall told reporters, "the men and women of the Fort Worth Police Department are not going to stop being police officers."
Councilman Jungus Jordan, who had expressed reservations about the fact that neither the staff nor the police association's plan solves the problem, voted for the changes.
He said his office received "close to 200" calls and e-mails from constituents since Friday, with 51 percent in favor of the police position.
On why he voted in favor, he said, "it boils down to fiduciary responsibility. Not being able to fund it is not a good option, either."
Bill Leonard, a retired CPA and leader of a Fort Worth Chamber of Commerce group that's been pressing for the changes, told council members Tuesday nothing has changed in the fund's situation since new City Manager Tom Higgins began looking into it months ago.
"The time to study is over," he said.
His group will continue to press the fund to lower the assumed rate of return. "The majority of the problem is the failure of the fund to meet its assumed rate of return," he said.
Councils in the early 1990s, during a strong market, set the fund down its path, paring city contributions and raising benefits. The fund in turn raised the assumed rate of return. The council's addition of the variable COLA in 2007 added a new liability.
Whit Smith, the chamber's chairman and an HR consultant, praised the staff and council members for raising the issue, saying the citizens owe them "a huge debt of gratitude," but also remarking he's a big backer of the police.
"We still have a great plan," he said.
Councilman Sal Espino said the city had few choices, given market volatility and the council's reluctance to raise what it puts into the plan.Mayor Pro Tem W.B. "Zim" Zimmerman dismissed police association claims that the chamber wants more room in the city budget for tax abatements.
"This is a standalone issue," he said. "Now, did we get it right? I don't know that ... If we've gotten it wrong, we'll figure it out and we'll go back and adjust."