Tuesday, December 06, 2016

Underfunded police pensions plague big Texas cities

Texas police and fire pensions in the big cities are a mess the legislature is ill-prepared to deal with in the coming 85th session. The cost of a possible bailout is too large to consider during a budget-year bleeding with red ink, but other alternatives require ignoring fundamental economic realities that could bankrupt the state's largest cities. Reported the Texas Tribune:
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 Moreover, “More than $500 million has been withdrawn from the $1.5 billion fund this year,”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.


David White (aka Caged Monkey #12) said...

The idea of a bail-out by the state would present a real conundrum for the GOP led House/Senate/Governorship. On one hand a bail-out would go against their supposed conservative spending platform, on the other, they love to promote their obsession with "first responders"

I'd say the chances of the state bailing it out are low, but stranger things have happened

Anonymous said...

Given Moody's refuses to release the methodology used to derive their numbers, I don't place too much stock in their latest estimates, especially given the fact that they still rate the credit of these cities as investment worthy. Until they start placing those cities on the "B" scale, they are not believable but given their historical precedent for evaluating credit based on political reasoning ala 2008's crunch, they shouldn't be the focus of any discussion.

As far as Dallas is concerned, it should be remembered that DROP money is an earned benefit subject to almost no restrictions once an employee retires. Those employees have every right to withdraw their funds and the pension system has no legal authority to stop members from taking their own money out. Why the Mayor thinks the pension system should be propped up by employee's personal accounts will be interesting to hear in court because there is nothing in the enabling legislation or pension contract to prevent withdrawals.

Dallas' pension system made some speculative real estate deals that didn't work out, forever chasing better returns needed to keep the city's contribution low. As a result, the city stopped providing new officers/firemen with a DROP benefit and have subsequently had problems finding better qualified candidates for the hundreds of openings. We all know that warm bodies will be found in due time, past records overlooked or educational requirements lowered like Houston had to years ago and frankly, this will help the budget as it is obvious that Dallas can't afford the number of employees it had. They will end up like Houston in cutting core benefits too but the city of Houston opted out of the state constitution provision so their pensions can be lowered while most other cities cannot legally do that.

Houston, on the other hand, is about to make billions in cuts on top of previous cuts dating back as far as 2004 when they stopped providing a DROP benefit and otherwise cut pensions. More than half their police department is under the new plan and they will almost certainly lose hundreds of extra employees who would lose money staying past the proposed date of the new cuts. That will save their city hundreds of millions in costs too, Dallas benefiting more than any other city because they will still pay much better than Houston both in direct pay as well as pensions once both are finished with cuts.

In all of this though, it's important to remember that when comparing numbers from different times, the accounting standards from 2000 are markedly different from now, if the stricter approach used now were applied back then, every pension in the state would have been underfunded then too. But Dallas has been on the fast track to insolvency while Houston simply didn't pay in enough every year, other cities only now being looked at just as the big state pension system is billions in the hole but nobody will talk about it.