Dallas pension funding fix would ramp up city payments over five years

Dallas would ramp up contributions to its Police and Fire Pension System over five years and could pursue additional funding options, including pension obligation bonds and using a portion of sales taxes earmarked for mass transit, under recommendations presented to a city council committee. 

Jack Ireland, Dallas' chief financial officer, told the Ad Hoc Committee on Pensions Thursday the city staff's recommendation, which would increase city contributions from $184 million in 2024 to $282.6 million by 2029 and make actuarially determined payments between 2030 and 2055, was less costly than a proposal by the pension system and could be accommodated within the existing city budget. 

"We will be having to make some cuts this year to be able to fund that, but we believe it's manageable," he said.

City of Dallas

Incorporating the plan, which includes a 1% hike in retiree pay, would increase the projected fiscal 2025 general fund shortfall to $38.4 million, according to Ireland's presentation to the committee.

The pension system's proposal, which calls for a three-year ramp up in contributions, would increase the budget gap to $51.3 million. In a statement earlier this month, the system addressed the potential of a disagreement with the city over a pension fix that could lead to intervention by the Texas Legislature next year.  

"DPFP has negotiated with the city of Dallas in good faith to solve the funding issues and will continue to do so," the statement said. "If an agreement is not reached with the city of Dallas, the DPFP Board will fulfill its legal obligation and adopt a plan for submission to the Texas Pension Review Board as required by the statute."   

The state board has until December to issue a report on whether Dallas has a plan to fully fund public safety pensions within 30 years. Ireland said the city expects to submit a plan in August or September.

As of Jan. 1, 2023, the police and fire retirement system's unfunded actuarial accrued liability increased by $155 million to $3.2 billion due mainly to investment losses, according to the latest annual financial report. The funded ratio slipped to 39.12% from 41% and the funding period time frame jumped from 68 years to 82 years.

If the city council chooses to go "above and beyond" staff recommendations, Ireland outlined options to make lump sum pension payments by selling city property or issuing pension bonds. He said Dallas has the financial capacity to sell $400 million of POBs between 2025 and 2029 that could be placed on the ballot and issued when certain triggers are met. 

A recurring funding boost could come from shifting 0.25% of Dallas Area Rapid Transit's (DART) 1% share of a 2% local option sales tax to the city, which would gain about $100 million annually. Ireland said doing so would require approval from the DART Board and possibly from the Texas Legislature and voters. 

The move would have a devastating impact on DART, which serves 13 cities, according to spokesperson, Jeamy Molina.

"No one city has the authority to unilaterally reduce this tax rate exclusively," Molina said in an email. "The 15-member DART Board of Directors may only reduce the rate levied by all service cities."

Another ongoing funding option would be asking voters for a property tax rate hike. 

In 2017, a state law made several changes to DPFP, including increasing contribution rates by both the city and its employees.

The law was spurred by the city's projection that the system, which then had an unfunded liability of nearly $3.7 billion, would become insolvent within 10 years. The pension crisis led to downgrades of the city's bond ratings.

Analysts at rating agencies are keeping an eye on pension developments.