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Dallas Vows to Solve Its $4 Billion Pension Shortfall—But How?

Austin is letting city officials in Dallas know that their deadline for developing a path to solvency for its two broke pension plans is quickly approaching.
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Kelsey Shoemaker

The city and its pension systems appear to be progressing in their joint quest to make the retirement plans solvent, but one Pension Review Board official reminded officials last week that the clock is ticking before the state steps in. City officials are confident they will deliver paths to solvency ahead of their November deadline.

Keith Brainard, the chair of the review board’s actuarial committee, said the challenges faced particularly by the Dallas Police and Fire Pension Fund “are the result of years of poor governance and poor decisions made by multiple entities, including the legislature, the city, and the pension fund.”

Since there is plenty of blame to go around amid a looming deadline, “assigning fault would be a waste of time.” The Employees’ Retirement Fund faces a $1 billion shortfall. The police and fire fund, which administers the pension program for over 10,000 current and retired officers, is short by $3 billion. The city has known it would need to fix an expected shortfall since 2015, when it became clear that the pension fund’s investments were not generating the expected returns. The meeting in Austin was only about the deeper challenges facing the police and fire fund.

Last Thursday’s meeting included Kelly Gottschalk, the executive director of the police and fire pension; Nicholas Merrick, the board’s chairman; and Jack Ireland, the city’s chief financial officer. Two consultants from the actuary firm Cheiron, which the the review board hired to craft a plan to bring the two funds to solvency, were also in Austin that day.

The police and fire fund is still working to course-correct the previous board’s investments that didn’t generate enough in returns to keep enough money in the fund once pensioners got wind of the shaky status and started making withdrawals. Gottschalk told the committee that a preliminary 2023 financial report indicates that untangling those bad investments has decreased the pension system’s funding level from 41 percent in January 2022 to 34 percent in January 2023. Without any changes, it would take 82 years for the fund to reach solvency.

But city and pension system officials feel that a plan is coming together. With Cheiron, the city and the pensions have a menu of options that aim to achieve solvency for both pensions within 30 years. They also plan to provide those plans to the review board by the fall. 

In prepared remarks, Ireland told the committee that Cheiron had already provided a preliminary report to the city’s Ad Hoc Committee on Pensions in November and would likely deliver a final report on February 8. He said the city agrees with the actuary’s recommendation to phase in its contributions over five years, which “would allow the city to responsibly manage the budgetary impact of significant contribution increases.” There were also some potential deviations from what Cheiron recommended. The actuary suggested the city adopt an accelerated cost of living adjustment in pension payments before the fund reached 70 percent of funding. 

“City staff is focused on achieving a 30-year funding period before increased benefits are considered,” Ireland said.

The committee reminded Ireland, Gottschalk, and Merrick that the pension boards and the city would need to work together. No plan to solvency will be viable without buy-in from the pension boards and an infusion of city dollars, which requires approval from the Dallas City Council. If they cannot agree on a path to solvency, legislation passed when the police and fire pension nearly collapsed in 2016 will send the matter back to state lawmakers. 

“If you are unable to come to an agreement to fix the problem, the legislature will do the job,” Brainard said.

In a memo to Council, Councilman Tennell Atkins, who chairs the Ad Hoc Committee on Pensions, said that Gottschalk expects to have the police and fire pension plan to the review board earlier than the November 1 deadline. Potential changes in how the Employees’ Retirement Fund operates could see it go before voters in November. 

The city also launched a new website to keep employees and residents up-to-date. It includes links to meetings, memos, and timelines for each pension system.

Before Thursday’s meeting in Austin, Ireland and City Manager T.C. Broadnax sat down with D Magazine to discuss the progress the two pension boards and the city have made in meeting their goals. Ireland said that the options boil down to “the math—we either need more money coming in or less money going out.” He said that they do not favor increasing the amount employees contribute to the pension. 

If we continue to increase their contribution rate, they would be paying more for a benefit than what it is going to be worth,” he said. “Therefore, it’s going to fall back to the city—the fix is going to be an increase in money from the city.”

Broadnax and Ireland are determining the speed with which the city can increase its payments.

“How quickly can we increase our annual amount from the $180 million or so that we’re already paying—at least on the police and fire side?” he said. “How soon can I get that to $220 and $240 and $260, and for that to continue on how for the next 30 years?”

Those increases, he said, will have to be balanced with the city’s ongoing needs, such as the services residents expect and paying employee salaries.

A plan has emerged to gradually increase those payments over the next five years, and then move to an actuarily determined contribution (ADC)—a rate that combines the cost for benefits that year and the unfunded liabilities from any funding shortfall over time.

“And if we don’t have enough resources, we’re trying to define what that looks like, whether it’s a 10 percent or a 20 percent increase, something we know we can manage,” Broadnax said. The city would also need a plan for those years to allow it to recalibrate and bring its payments back up to the target rate.

The fire and police pension made significant changes since the near-catastrophe of 2016. “I think they’re much further along in their fiduciary understandings of what’s going to make sure that their funds perform and do well, and we feel a lot more comfortable than we did five years ago,” Broadnax said. Both Ireland and Broadnax said as briefings continue with the Ad Hoc Committee on Pensions and the full Council, “we feel like we’re in a good place.”

City staff is taking notes from the committee. At its last briefing, council members peppered Ireland and Broadnax with questions about the potential of transitioning the employee retirement fund to a 401K, as well as selling off certain city assets to pay down the pension obligations.

Last week, Ireland told D that his staff is researching those questions. But he said even if the city converted to a 401K program, “we still have the unfunded liability on the existing plan for employees that have already accrued benefits, and retirees who we owe benefits.”

Broadnax said switching to a 401k program would likely put the city at a “competitive disadvantage” in recruitment for harder-to-hire positions, including police and fire. 

The two said potential cash infusions could periodically occur, too, much like when a homeowner uses their bonus check to pay down the principal on their mortgage, thereby reducing the amount of interest that continues to accrue. Some of those cash infusions could come from selling, leasing, or engaging in public-private partnerships to monetize city assets. 

But both were quick to say that they don’t see selling off city property as a way to increase payments; if anything, this would be a way to occasionally pay down the amount in arrears for both pensions.

“A lot of talk has been out there about this, and we do have properties, but it would take a significant property to come up with enough money to really make it worthwhile,” Ireland said. “I hate to oversell that point, but there may be opportunities. We have properties we’ve heard interest in.”

For instance, Ireland said there has been private sector interest in selling or developing the city’s 20 or so acre service center on Canton Street in Deep Ellum. But selling it off would require relocating existing city services, including the fleet maintenance operations and a police substation. Replacing that property would also eat into any proceeds from the sale.

“We own a lot a property, but we’re either on it or it’s too small to redevelop and is of no value, folks aren’t coming out of the woodwork to me,” Broadnax said. “We would have to bundle 50 of them to probably even get $20 to $30 million.”

Broadnax said that getting the pensions right and on the path to solvency is also a matter of the city’s commitment to its employees.

“At the end of the day, they just show up to work with a promise on the first day that they sign that they’re going to get a pension if they last and stay here five, 10, 15, 20 years,” he said. “That’s what we’re committed to finding a way to make sure we do no matter what.”

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Bethany Erickson

Bethany Erickson

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Bethany Erickson is the senior digital editor for D Magazine. She's written about real estate, education policy, the stock market, and crime throughout her career, and sometimes all at the same time. She hates lima beans and 5 a.m. and takes SAT practice tests for fun.
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