The Texas Legislature doesn’t send any state funds to the beleaguered Dallas or Houston pension systems. But legislators nonetheless find themselves mediating city-level disputes over a collection of bills aimed at shoring up at least $14 billion in the cities’ collective shortfalls.
Under a practice that dates back to at least the Great Depression, state law dictates a lot of the financing, governance and benefits of dozens of local pension funds. Some say it’s a good use of checks of balances. Others say it’s another example of the state controlling local matters and dictating how a city's money must be spent.
“If they mandate that we have to contribute a certain amount of our general fund to a particular use, that’s a mandate they’re not funding,” said Lee Kleinman, a Dallas City Council member. “The legislature’s not kicking in a dime.”
Many Dallas officials say the way previous legislatures wrote the rules are what opened the door to the current pension woes, which have spurred criminal investigations, ignited political rifts and spawned a spin-off argument about whether to divert mass transit funds to public safety retirements.
(There is also an ongoing legislative debate on how to fix Houston's pension system, though much of that city's problems derive from it not contributing large amounts of money into its pension system when it was supposed to.)
This session, state Rep. Dan Flynn authored House Bill 3158, which seeks to overhaul how the Dallas pension system is funded and governed. He said it’s common for the state to control such local matters.
“We do a lot of these things,” said Flynn, a Canton Republican. “It's not unusual.”
First responders support the bill. But Dallas Mayor Mike Rawlings and several City Council members oppose it because of provisions detailing how much the city would contribute to the fund and how pension board members would be selected.
Yet both sides agree that if the legislature doesn’t do something this session, Dallas could face a number of dire scenarios including crippling budget cuts, debilitating property tax increases and a crisis-level shortage of police officers and firefighters.
“The political apparatus really is tripping all over themselves in an effort to reach a solution and they’re really not doing a very good job,” said Peter Kiernan, a New York attorney who specializes in American public pensions.
A major reason for the Dallas police and fire pension shortfall is a feature of the city's system that allows eligible retirees to continue working while also putting what would have been their pension payments into an account with a relatively high interest rate.
The legislature approved that feature in 1993 at the same time it agreed to increase some minimum monthly pension payments by 50 percent. A fiscal note estimating the bill's impact said that, if it became law, it would take the Dallas pension system decades longer than was preferable to collect enough reserves to be able to cover 85 percent of what it was promising to eventually pay.
The fiscal note also estimated that, under the bill, the system would not be 100 percent funded within 40 years, a situation that should never happen.
“And the legislature passed it anyway,” said Philip Kingston, a Dallas City Council member who also sits on the police and fire pension board.
The current state statute governing the Dallas pension fund requires a seven-member board to oversee the fund with four members appointed by first responders and three appointed by the City Council. Yet the law also included a provision that allows the board to change its own structure without legislative approval.
“It is the strangest statute I’ve ever seen,” said Dallas city attorney Larry Casto. “It allows the board to change the statute.”
Sticking points remain
Over time, the board increased its numbers beyond what was originally set out in the statute. Today, there are 12 members. Eight are appointed by police and firefighters. Four are appointed by the city.
City officials argue that first responders’ greater share of control made it easy to approve some of the pension's generous benefits and questionable investments that are contributing to the current shortfall.
“The fox guarding the henhouse is a great metaphor,” Rawlings told the Texas Pension Review Board last year.
The current version of Flynn’s new bill calls for an 11-member board. Five members would be appointed by the City Council and five would be appointed by first responders. The remaining member would be jointly appointed by the city manager and first responders. There are also some requirements that members have experience in industries like accounting, real estate or investing, which is aimed at limiting future financial shortfalls from investments.
The police and firefighters pension funds support Flynn’s bill. But Rawlings is trying to get Flynn to add a provision that would allow someone else to appoint that 11th member if the city manager and first responders reach an impasse. He proposes giving that power to the governor, comptroller or whoever is Dallas mayor at the time.
“This is consistent with the city’s larger share of contributions into the fund, as compared to employee contributions,” Rawlings told Flynn in a letter last week.
Money and politics
Earlier this month, Keirnan spoke at a seminar on state and local fiscal issues in New York where Dallas’ problems came up repeatedly.
“It suddenly became a critical issue and emblematic perhaps of what is seen in many other states and cities,” Kiernan said.
He said it’s not uncommon for statehouses to put parameters on how local pension systems function. But he also said that – as this legislative session in Austin shows – public retirement woes are inherently more complicated than those in the private sector.
“While the problems are financial in nature, the guts of them are political,” Kiernan said.