Austin, Dallas, Houston and San Antonio collectively face $22.6 billion worth of pension fund shortfalls, according to a new report from Moody’s, the credit rating and financial analysis firm. Moody’s analyzed the nation’s most debt-burdened local governments and ranked them based on how big the looming pension shortfalls are compared with the annual revenues on which each entity operates.
“Rapid growth in unfunded pension liabilities over the past 10 years has transformed local governments’ balance sheet burdens to historically high levels,” the report says. ...
Houston, which came in fourth, faces a $10 billion shortfall, according to the report. That amount is more than four times the city’s annual operating revenues.In Dallas, the Mayor has sued in a personal capacity to stop payouts that would bankrupt the pension fund and, ultimately, the city. According to the Dallas News, "hundreds of police officers and firefighters have become millionaires while insulated from the whims and risks of the markets." Moreover, “More than $500 million has been withdrawn from the $1.5 billion fund this year,”
One big issue which Grits had highlighted earlier is the pension funds penchant for excessive optimism when predicting future growth rates. According to the Tribune;
Moody’s applied its uniform analyses and formulas to the myriad governmental entities so that consistent comparisons could be made. But the firm’s process also resulted in different shortfall amounts than government agencies may estimate themselves. One reason for the differences is that Moody’s used each funds’ recent growth rates to estimate future fund balances, while many governmental entities estimate that their funds will draw higher growth rates in the future.
For instance, Dallas reported a 5.4 percent growth rate that would put its shortfall at $5.4 billion. But Moody’s found the city’s pension fund was growing at a rate of 3.95 percent at the end of 2014. It calculated a higher shortfall of up to $7.6 billion.
Houston reported a 7.72 percent growth rate and a $4.9 billion shortfall. Moody’s concluded that the city’s pension funds were growing at 4.44 percent in mid-2015 and adjusted its shortfall estimate to $10 billion.
The report concluded that both Dallas and Houston in 2015 likely exacerbated their pension problems because they each contributed less to their funds than what was needed to keep the shortfalls from growing. Moody’s also downgraded the credit rating for both Dallas and Houston to AA3 this year. Unfunded pension liabilities were a primary driver in Dallas’ downgrade, whose outlook was also revised to negative.Though, in the press, Houston's situation is always portrayed as less dire than in Dallas, it's worth noting Moody's downgraded both cities to the same levels. That's particularly salient once you account for Houston's high-balled estimated growth rate. Both of these pensions are in bad shape.
Already facing a multi-billion dollar shortfall, it's hard to imagine the Legislature effectively dealing with this issue next spring. But given how close the cities seem to be to full-blown catastrophe, it's possible they won't have a choice. If it comes to that, look for them to deal with it in a special session. I don't believe anyone is walking into opening with a set of real-world solutions that would satisfy everyone, and the issue is too big, complex, and involves too many powerful, interested parties to resolve in just a few months.