Texas lawmakers may not have to fix Fort Worth’s hefty pension gap with a compromise that includes more money out of pocket for both taxpayers and employees.
Taxpayers will likely pay more again in a few years to help keep the fund performing.
A plan put forward Tuesday would cost taxpayers an additional 4.5 percent and an additional 2.9 percent annually for Fort Worth employees. Those costs could rise in four years if the fund under performs. The plan maintains a retiree cost of living adjustment, which has been a sticking point for the police and fire unions, while reducing the city’s unfunded liability — a figure investor services like Moody’s have been keeping a close tab on.
The city’s $2.3 billion Fort Worth Employees’ Retirement Fund is in danger of running out of money between 2040 and 2050.
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“We can argue about when it will run out of money, but it will run out of money,” city manager David Cooke said.
Manny Ramirez, president of the Fort Worth Police Officers Association, and Michael Glynn, president of the Fort Worth Firefighters Association, said their unions wouldn’t support or oppose the new plan.
Ramirez was “very pleased” the compromise protected cost of living adjustments for retirees. Previously plans had reduced or eliminated that benefit in an effort to cut the unfunded liability.
“We’ve never thought it was right, morally or legally, to vote to reduce the plan for a retiree,” he said.
Though general city employees are not represented by a union like police officers and fire fighters, Earnest Thomas said he spoke for coalition for Fort Worth employees. Thomas said general employees weren’t given a strong voice in pension negotiations and were unhappy with the loss of the cost of living adjustment.
We will be voting for what’s best for us, the general employees,” he told council members. “As you cast your vote, keep in mind, general employees, their family and friends will be voting in 2019.”
The compromise passed the Fort Worth City Council easily Tuesday with only Councilwoman Kelly Allen Gray abstaining. Employees will vote on the pension plan in February.
Councilman Cary Moon, who voted against the previous compromise, said he thought it was unlikely the plan will pass a majority vote from city employees.
“If we really want this to pass an employee vote we need to people to stand up and support this,” he said of union support. Moon questioned whether the cost of living adjustment should be maintained for current employees.
Mayor Betsy Price disagreed and said she believed the compromise was the best solution to fix the pension gap locally without going to Austin where she believes “there’s a 90 to 100 percent chance” the cost of living adjustment is removed for all employees and retirees.
The compromise comes at a cost for city employees who will have to pay more into the fund — an additional 2.9 percent compared to 2.6 percent under the November plan.
Active employees will no longer be eligible for a fixed cost of living adjustment upon retirement. Instead, a variable adjustment will be made based on the performance of the fund. Current predictions show it’s unlikely that payment will materialize, so any employee who retires after Jan. 1, 2021 likely won’t receive a cost of living adjustment.
The average fire department retiree has a $69,852 pension while the average police retiree’s pension is $68,244. The average general city employee’s pension is less than $33,000. Civil employees do not qualify for social security.
Like the plan submitted in November, city taxpayers would contribute an additional 4.5 percent or about $21 million more annually to the Fort Worth Employees’ Retirement Fund. That brings the city contribution up to $115 million each year.
Last year, taxpayers contributed nearly $90 million to the fund while employees paid in $32 million. More than $190 million was paid out.
Under the plan, taxpayers and employees will automatically contribute more if the fund performance drops. That amounts to a 2 percent increase each year for two years with the taxpayer pitching more than half of that. Cooke said staff predict that mechanism will be triggered in 2022 and 2023.
Contributing more from the city’s coffers will be mean less money for other city services. Cooke hasn’t specified which departments would see cuts, but between $3 million and $5 million would likely come from the general fund.
In two of the last three years Moody’s Investors Services downgraded city general obligation bonds citing the ballooning pension liability. Fort Worth debt service is rated Aa3 with a negative outlook, which means the rating could be downgraded again in the next 12 to 14 months.
The pension hole pressures other city services, like roadwork, storm water repair and public safety, said Gera McGuire, a Moody’s vice president for local government ratings based in Dallas. It will become hard for the city to lower tax rates without taking a meaningful bite out of the pension gap, she said.
“Across Texas, were’ seeing pension costs starting to crowd out other city services,” she said. “Fort Worth is no exception.”
Moody’s calculates the unfunded liability as $3.75 billion, about four times the city’s revenue and significantly higher than the city’s $1.6 billion estimate.
That’s because Moody’s applies a standard calculation to all the municipal funds it tracks with a more conservative anticipated yield of about 4 percent. The city assumes a return above 7.5 percent, which is in line with what municipal governments typically assume.
Adding to the risk for city funds, a lower bond rating will usually mean the city pays higher interest on borrowed money, McGuire said.
“If you’re going to put bonds you want to spend as little on them and get biggest return,” Price said, noting she thought this pension compromise would keep Moody’s from further downgrading the city’s rating.