The misery of pension life in Dallas also has implications for Houston.
Like Dallas, Houston cannot afford billions of dollars in future pension payments and needs help from the state Legislature to solve the problem.
But Houston city leaders have something that's proving elusive in Dallas. It's an agreement between employee groups and pension plans that cuts benefits and injects cash into the plans.
Now, some police and firefighters here are wondering why Dallas can't find relief like Houston. The demands will likely grow stronger after mediation between the city and pension leaders failed to produce a solution.
With billions of dollars and public safety employee retirement benefits at stake in the state's economic powerhouse, comparisons between the two Texas cities' pension problems are inevitable.
But experts say Dallas won't find many answers when it looks to Houston. The causes of Bayou City's problems are not the same, and neither are the solutions.
“Houston is very fixable,” said Max Patterson, executive director of the Texas Public Employees' Retirement System Association. “Dallas, I don't know. I don't know if you can fix Dallas.”
The Dallas Police and Fire Pension System is at risk of collapse within the next decade due to inadequate investment and unsustainable benefits. Retirees can also withdraw large amounts of cash at once, making it difficult to identify solutions to fluid and complex problems.
Houston's pension problem is relatively stable. In reality, this is a combination of three pension issues: separate funding for local government, police and fire.
The City of Houston Employees Pension System is in the worst condition of the three systems. And even that system is far from a headache for the Dallas Police and Fire Fund.
The main problem for the city system as well as the police system is that Houston City Hall is not paying into the fund the amount it is owed.
Houston has underfunded police pension contributions by more than $97 million in the past three fiscal years alone, according to city financial documents. Meanwhile, the employee system missed out on his $29 million.
Meanwhile, the city of Dallas paid exactly what it was required to pay under state law.
Patterson, who previously worked for the city of Houston, said the city is simply trying to balance its budget by shorting the pension fund by making required annual contributions.
Houston Finance Director Kelly Dow said the city has budget constraints, but said the decline was due to lower-than-expected market returns from pension funds.
The fire department's endowment is in decent shape, but only if the rosy outlook for investment returns will make up for any future shortfalls.
Houston's other two pension plans also project high investment returns, making it appear that the funds will be better able to repay future commitments. Still, all three of his pension plans in Houston are projected to be billions of dollars short in promised benefits over the next 30 years.
Therefore, the need for modification becomes essential. But it's not yet a crisis.
“What happened in Houston is no different than what happened anywhere else except Dallas,” said Bill Fulton, director of the Kinder Institute for Urban Studies at Rice University.
“We’re really happy for Dallas in Houston,” Fulton said. “It took the headlines away from us.”
Houston Mayor Sylvester Turner, a former state lawmaker who has built a trusting relationship with police and fire associations, began negotiating with the pension system about a year ago. Dow said Turner wanted to prevent the problem from escalating further and put an end to the political controversy.
After months of private talks, the two sides reached a compromise. Employees must pay more and accept reduced benefits. To secure the cash needed to maintain the health of the system, the expected return on investment must be lowered. And through a complex “cost corridor” option, the city and pension leaders could renegotiate benefit cuts in the future if the pension becomes too expensive for the city. And if the fund is well-managed, the city won't have to pay that much money.
Turner also added the sweetener that police and local government pension funds will also share in the spoils of the $1 billion pension liability bond.
Firefighters have recently expressed some reservations about the final content of the agreement, but even the Houston Professional Firefighters Association wants the changes approved so they can move on to other issues facing the department. He has officially stated that he hopes to do so.
Dow said it wasn't easy to get these agreements.
“It took a lot of effort on all sides to resolve this issue,” Dow said. “Everyone understood that not making a change was not an option.”
City Council member and pension trustee Scott Griggs said Houston's agreement puts additional pressure on Dallas. Some retirees at the pension meeting lamented that a similar solution could not be reached in Dallas. Griggs acknowledged that the issues were different, but he praised Houston's spirit of compromise.
“There's no way to avoid sharing the pain. The sooner we get a solution, the better,” Griggs said.
Dallas pension officials proposed a similar solution last year that included benefit cuts and a $1 billion cash injection. This is more painful for Dallas taxpayers than Houston because Dallas is a smaller city. But pensioners voted down the plan, leaving a more radical city plan the only viable option for now.
In any case, Dallas officials have shown no interest in using pension liability bonds. The city's bond rating has plummeted, so bonds could be a tough sell. And bonds are a gamble because they have high interest rates. If a pension plan can generate a much higher return on investment than interest, say 4 percent or 5 percent, that's a win. If not, bonds become a drag on the balance sheet.
In 2005, the city of Dallas used $535 million in bonds to strengthen the city's pension system, the Employee Retirement Fund. Houston also issued hundreds of millions of dollars in bonds during the same period.
But some Dallas city officials still defend the decision, which hasn't yielded as much profit as expected, especially due to heavy losses during the recession.
These bond repayment plans have caused the city to once again underfund its pension plan in recent years. Last November, Dallas city officials needed voter approval to cut future employee benefits to fill holes in private pensions.
Josh McGee, chairman of the Texas Pension Review Board, said bonds may be worth it to ensure an agreement is finalized and has a chance of working out. But it's still a gamble.
“This is a dangerous time to be putting this much cash into the market,” McGee said.
Dow, Houston's finance director, said he needed the money to close the deal in Houston.
“If we didn't reimburse them for some of the missing funds, we wouldn't have had an agreement with the municipality or the police,” he says.
In Dallas, the agreement is even more elusive. A system that a few years ago billed itself as one of the best in the country has collapsed.
“Dallas is literally in a state of crisis, and the scale of the problem is getting bigger,” McGee said. “Further-scale measures are needed to resolve this issue, and they need to be implemented in a fairly short period of time.”
The pension system has one big problem that Houston doesn't have. It's their investment strategy.
Previous leaders of the Dallas Fund had bet big on nontraditional real estate holdings.
Amid troubles with the investment and mounting questions from trustees, city officials and the press, the board fired its leadership. In 2015, the system's new leadership announced that the fund's valuations under its predecessor had not been accurate. The problem was hidden for years due to fraudulent accounting practices.
Patterson, president of the State Public Employees' Pension Association, said the Dallas Board of Directors (which also included some city council members) had given too much power to the system's leadership and had become too involved in investments. He said that he had breached his duties as a member of the public.
“The trustee should act as a check and balance,” Patterson said. “If the proper infrastructure had been in place, this would never have happened.”
Compounding the problem were high cost-of-living adjustments and high interest rates paid to police and firefighters through the Deferred Retirement Option Plan (DROP).
DROP was intended as a retention benefit. This allows veteran police officers and firefighters to earn guaranteed high interest rates on pension benefits accrued during their service. That way, you can keep that money in a growing account even after you retire.
Houston's pension also had a DROP. Still, they were somewhat less profitable. The interest rate had a minimum guaranteed rate, but it was much lower and more flexible depending on the fund's performance.
Similar to pension liability bonds, DROPs can be a boon to pension funds if they return more profits than they pay in interest. But that wasn't the case in Dallas.
Dallas leaders are proposing to reduce future pension payments and modify the fund by retroactively reducing the DROP interest received. City officials hope to somehow get their money back. The only sacred cow they see is their monthly defined benefit check.
To get more of that money back, the city wants to lower future monthly benefit checks by the amount people get in interest savings.
The city doesn't offer much sweetener, only providing about $11 million a year on top of annual payments, compared to $124 million last year. But that number is based on a percentage of pay, excluding overtime, and does not necessarily take into account the mass retirements and resignations that have reduced the size of police and firefighters.
So far, Congress has resisted raising taxes to get more money, which pension officials believe is necessary.
Negotiations are currently at a stalemate. A lack of trust from all sides, especially police and firefighters, makes it difficult to find common ground.
Additionally, Kelly Gottschalk, executive director of the Dallas Police and Fire Pension Plan, remains concerned that the city's plan won't stand up in court. Otherwise, your system will remain in a worse state.
The city's backup plan is to start a new retirement plan for junior employees and disrupt the current pension system and the thousands of active and retired police officers and firefighters who participate in it.
All sides are negotiating with the understanding that they are in a far more desperate situation than Houston.
Former City Manager AC Gonzalez said in a recent meeting. dallas morning news The editorial board is dedicated to the pension system and the enormous sacrifices made in fighting for changes to the pension system and assisting in court to avoid decades of police and fire salary litigation that could drive the city into bankruptcy. Without it, he said, it may not be possible to rescue the pension system.
“If we lose in court, Armageddon will come,” Gonzalez said. It's a terrible situation. ”
