As state system faces shortfall, some may cut benefits, raise tax rates

A state pension fund used by more than 820 Texas cities – including most of those in North Texas – faces a $1.7 billion funding shortfall. And fixing the situation will force some cities to raise taxes, cut future retirees' benefits or both.

Although cities won't receive definitive numbers until April, some expect to face double-digit increases in their contribution rates to the Texas Municipal Retirement System beginning next year. That's the equivalent of adding millions of dollars in expenses to their annual budgets – and multiple cents to their property tax rates.

"This gives me a headache," Duncanville City Council member Johnette Jameson said during a briefing session on a potential $2 million increase in the city's annual payment to the fund. "You just feel like you're stuck between a rock and a hard place."

TMRS, created by the Legislature in 1947, is the pension provider for most Texas cities, though Dallas, Fort Worth, Bedford and some others maintain their own plans. The system covers more than 45,000 employees and retirees in North Texas and more than 130,000 statewide.


Not 'going broke'

Overseers of the $17.8 billion pension fund say it is not in jeopardy, and have asked city officials to help quash such rumors.

"TMRS is not 'going broke,' and no retiree benefits are in danger," TMRS said in a Dec. 10 e-mail bulletin to member cities.

TMRS, which has always invested conservatively, has not experienced the investment failures that have hurt private and other government pension funds. Rather, the shortfall is due to changes in actuarial procedures, the methods used to predict how much money the fund will need to make promised payments, said executive director Eric Henry.

TMRS had considered the changes for at least two years. Mr. Henry, who took over in June, said they call for cities to pay in advance for retirees' future cost-of-living increases. The overall cost to cities hasn't changed, he said, but they are being asked to pay more of the total sooner.

Municipal employees in the system make contributions – 5 percent to 7 percent of their salaries – and their cities match or exceed that amount. In return, the employees are guaranteed monthly payments in retirement. The setup differs from that of a 401(k), in which benefits may be higher or lower, depending on how much and how successfully participants invest during their working years.


Older cities hit hardest

The impact of the changes on individual cities will depend on factors such as payroll growth, the size and age of the workforce, benefits and workers' length of service. Young, small, fast-growing cities are less likely to be hit hard; officials in Little Elm and The Colony, for example, expect minimal or no increases. Older, larger, more established suburbs – Garland, Carrollton, Farmers Branch and Duncanville, for example – anticipate big bills.

City Manager Kent Cagle predicted that Duncanville's payments could double. The additional $2 million a year would be the equivalent of adding 8 cents to the property tax rate, he said.

Farmers Branch faces an increase of about $1 million annually, the equivalent of 3 cents on its tax rate. But finance director Charles Cox said the city would do all it could to avoid raising taxes.

"We're trying to be as fair as possible to existing employees and retirees, but at the same time we have to be fiscally responsible," he said.

One alternative to raising taxes may be cutting future benefits.

"What this is forcing is a very difficult discussion between employers and employees about what are appropriate benefits and what are acceptable costs," Mr. Henry said. "Our role is to make sure that the benefits that have been promised are soundly funded."

The situation puts city councils, which must balance the needs of employees and taxpayers, in a difficult position, Carrollton City Manager Leonard Martin said.

"No one is pleased to find out the funding of your pension system is not what you've been told all these years," unless the change is in your favor, he said.


'Impossible situation'

Paul Nicholson, executive director of the Texas Pension Review Board, the state agency that oversees public retirement systems, called it "an impossible situation."

"I know the cities are unhappy. They should be," he said. "We do hear the anger and frustration. Many cities are beside themselves. But what if ... [TMRS] hadn't caught it? How much worse could it be?"

At the end of 2006, TMRS was 82 percent funded under the old actuarial method but just 74 percent funded under the new one. Pensions funded above 80 percent are generally considered financially sound.

Mr. Nicholson said TMRS has handled the shortfall in the best way possible – by openly communicating with its cities and members.

"Historically, should this have gone differently? Probably," he said. "But it has happened, and they are dealing with it."


Automatic renewal

The biggest burden will fall on cities that offer annuity increases, similar to cost-of-living adjustments, and updated service credits, which account for salary increases later in employees' careers. Both tend to increase payments to retirees.

Historically, cities renewed those benefits annually, and TMRS considered them optional. But about 15 years ago, TMRS gave cities the choice of having the benefits renew automatically until cities acted to turn them off.

More than two-thirds of cities adopted the automatic renewals, and 90 percent of TMRS members are covered by them. The benefits have become an expected part of retirement packages, Mr. Henry said.

"No one expected all the cities would keep them," he said. "It's clear now that they are what we call committed benefits, and we must look at the future liabilities."

Several city officials said TMRS, under its former leadership, sold the automatic renewals to them by saying they would add no cost.

"It wasn't until a number of years later that the actuaries looked at it and said, 'We really aren't doing this correctly,' " said Mr. Cox of Farmers Branch. "And boom – all of a sudden folks have to come up with all this money."

Said Mr. Martin of Carrollton: "Some of these changes probably would not have been done if we'd known how much it really cost."

Former TMRS executive director Gary W. Anderson, who retired in October 2006, said that public pension funds are generally in good shape and that he didn't want to be drawn into a debate about what should have happened when.

"Things happen that require you to make course adjustments along the way," he said. "Changes to actuarial assumptions occurred on more than one occasion over the years. That's an ongoing process, and that's something all pension funds have to do to remain financially viable."


Help isn't enough

TMRS will offer cities some help adjusting to the changes. The fund traditionally avoided stocks, which can have wide price swings, in favor of more stable bonds. But its board recently approved moving 12 percent of its holdings into equities, which fund managers expect will increase earnings and therefore reduce cities' contributions.

TMRS also plans to allow cities that face contribution increases of more than 0.5 percent to pay their additional liability over 30 years instead of the standard 25. Those cities can also phase in their higher payments over eight years.

City officials say those measures could help but probably wouldn't eliminate the need for changes to their pension plans. Many North Texas cities plan to hire consultants to review TMRS' figures and recommend solutions.

Retirement plan changes made by cities would not alter what employees have already earned or reduce payments received by current retirees. But if cities eliminate cost-of-living adjustments, their current retirees would no longer see annual increases.

"I think the employees and the retirees are going to be up in arms if the ... [cost-of-living adjustments] go away," said Duncanville council member Ken Weaver.

Mr. Martin said he wants Carrollton employees to have a solid retirement, but that it won't be the Mercedes of plans.

"They'll have a good solid Ford or Chevy that will fire up every day and serve them well, but it won't have the chrome knobs," he said. "Everybody's got to feel the pain. It's not just the taxpayers feeling the pain."

TEXAS MUNICIPAL RETIREMENT SYSTEM
•Created by the Legislature in 1947, it began operating in 1948.

•It is underfunded by $1.7 billion, not because of bad investments but because forecasting changes indicate that the fund will need more money to make promised pension payments.

•It has 821 member cities, ranging from the tiny (Blue Ridge, in Collin County) to the large (San Antonio).

•The system covers more than 130,000 employees and retirees.

•Catching up on funding will require increased contributions from many cities. The impact will vary depending on factors such as workforce size and age, workers' length of service, and whether a city has opted for the equivalent of annual cost-of-living and other adjustments for retirees. Older, larger, more established cities are likely to be hit hardest.

•To hold down their costs, some cities may choose to reduce future retirees' benefits.

•The fund has invested mainly in bonds but recently decided to move 12 percent of assets – and possibly more later – to stocks. The hope is that the expected higher long-term return on stocks would reduce the burden on cities.


http://www.dallasnews.com/sharedcont...s.29186b6.html