To appreciate the backbreaking difference between business and government, consider how they each deal with something they can’t fund: pensions.
Private companies have been dropping pensions for the past three decades, even going bankrupt to ditch them. (Recall LTV Steel, United Air Lines, General Motors.)
It may be cold to break promises to workers and retirees, but sometimes it’s necessary.
Except in the public sector, the last place where defined benefit plans still permeate the workplace. In Fort Worth, for example, the pension that covers police, firefighters, and city employees has been barreling toward disaster since the 1990s, yet nobody can summon up the spine to fix it.
Ultimately, taxpayers will be on the hook, and they’re already shoring it up. With that kind of backstop, it must be easy to avoid the tough call.
The root cause of Fort Worth’s shortfall is that pension benefits were expanded generously in the good times, as if the bull market would run forever. But they never got rolled back after the economy and Wall Street went south—not the first time or second or third.
This fall, as Fort Worth’s pension liability made headlines again, leaders proposed pumping in more taxpayer money and slashing benefits—but for future hires only. They want to leave the status quo in place for 10,000 people, including 2,160 who aren’t vested yet.
As one councilman said, that was like taking a small bite out of the tail of the elephant in the room.
Cowtown’s rising debt is not unusual among public pensions. A 2010 study by the Pew Center on the States says that state and local governments will have to raise an additional trillion dollars to keep their retirement promises to employees. That gap covers both pensions and health care obligations, and researchers said it’s probably understated.
In late October, Dallas Mayor Tom Leppert called for a review of the City of Dallas’ pension system, citing concerns about the increasing number of struggling systems across the country. A couple of states are so worried about underfunding that they cut benefits to current retirees, a rarity that prompted lawsuits. Most public pension sponsors choose the same path as Fort Worth, ratcheting back plans for new hires only.
Three years ago, the Texas attorney general examined what went wrong with Fort Worth’s pension and caused its liability to skyrocket. David C. Mattax, chief of the finance division, listed the many times that benefits were enhanced, and even once when contributions were simultaneously cut.
To pull this off, the plan increased the projected investment returns—once by 25 basis points and once by jacking the estimate from 7 percent to 10.23 percent annually.
“Magically, everything worked,” Mattax said at an April 2007 hearing of the state Pension Review Board. “If you change your assumptions, you can force the numbers to fit the result you’ve already predetermined.”
The city repeated the pattern three years later, with a twist. It again boosted benefits, increasing the multiplier in the payout formula and making early retirement easier, and then stretched the amortization period to 30 years and later 35. At one time, the pension aimed to be fully funded, not paid off over decades.
With pensions, Mattax said, almost any numbers will work if assumptions are changed.
Benefits were enhanced in 1990, 1993, 1996, 1999 and 2002, and workers exacerbated the liability by gaming the overtime system. City and employee contributions increased occasionally, but not nearly enough to make up for the richer benefits and declining stock market.
Today, it’s not uncommon for Fort Worth police and firefighters to retire in their early 50s with full pay for life, along with a lump sum from a deferred plan. In the private sector, most people must work at least 10 years longer and would be thrilled to get two-thirds of pay.
Employees in Fort Worth negotiated their pension improvements and campaigned for local candidates who backed the mantra: “A promise made is a promise kept.”
It’s hard to argue with that. But even the best employers, including Fort Worth, sometimes have to lay off workers, cut salaries and charge more for benefits. The city may avoid a pension showdown by leaving current workers untouched, but the bill will come due eventually.
Fort Worth’s pension paid out about $26.6 million more in benefits than it took in last year, after paying out almost $18 million more in 2008. Last spring, the city also threw in a $7 million lump sum. This merely hints at what’s ahead.
By the most common measure, unfunded actuarial accrued liability, the Fort Worth pension is more than $700 million short of its obligations over the next 30 years. The city describes the amortization period as “infinite,” as in it’s never going to happen.
Here’s another way to look at the Fort Worth gap: To make good on its pension promises, the city would have to chip in 42 percent of payroll for the next 30 years.
That’s nearly four times more than most companies contribute to employee retirement. The standard perk is 6.2 percent for Social Security and a 3 percent match in a 401(k), if business is going well.
In October, Fort Worth increased its city contribution to nearly 20 percent of payroll, with employees throwing in 8.4 percent from their salaries. (They opt out of Social Security.) The city wants to give new hires a slimmed-down plan with a cash balance and a smaller city contribution. If it also caps investment gains at 2.6 percent annually, the pension problem should level out in about 60 years, officials say.
That doesn’t mean the pension will be fully funded, just that the liability will stop getting worse. And even that half-measure may be hobbled. In April, the city signed a four-year labor contract with firefighters with a key provision: no changes in the pension for current employees or new hires.
The sound you hear? Fort Worth kicking its pension problems down the road again.
Mitchell Schnurman is the business columnist for the Fort Worth Star-Telegram. For the past five years, his column has been named the “Best in Business” by the Society of American Business Editors and Writers.