While clamoring for more “local control” on fiscal matters, big-city politicians in Texas have, at the behest of their public-employee unions, resisted efforts to restore local accountability on pensions. And problems are piling up.
Austin, Dallas, Houston and San Antonio carry a whopping $22.6 billion in unfunded pension liability, according to Moody’s, the financial analysis firm.
“Rapid growth in unfunded pension liabilities over the past 10 years has transformed local governments’ balance sheet burdens to historically high levels,” the Moody’s report stated.
Dallas — second only to Chicago in its liability ratio — has unfunded obligations totaling $7.6 billion. That’s more than five times the city’s annual operating revenues.
Houston, which came in fourth on the Moody’s list, faces a $10 billion shortfall, more than four times operating revenues.
Austin’s unfunded pensions are 2 ½ times operating revenue and San Antonio’s are nearly double.
The problem should concern every taxpayer in the Lone Star State, says James Quintero, director of the Center for Local Governance at the nonpartisan Texas Public Policy Foundation.
“There are other ticking time bombs out there getting ready to explode,” he forecast. “It’s not just Dallas’ pension plan that’s taken on excessive risk to chase high yields in a low-yield environment.”
Texas officials say the recession hit pension funds hard. But every fund manager in America was slapped by the same economic headwinds, or worse.
The excuses don’t explain why Dallas and Houston racked up higher liability ratios than down-and-out Detroit, or why Texas — the nation’s biggest job-producing state — has four cities among the 12 worst performers.
“It’s a head scratcher and a warning,” said Jonathan Williams, vice president at the American Legislative Exchange Council.
“Clearly, the status-quo is not working. To protect the [cities’] promise to employees,” Williams advised, “stop digging the hole deeper and transition into more sustainable plans.”
In Dallas, Democratic Mayor Mike Rawlings has ordered an independent investigation into the handling of police and fire pensions there.
The city’s funds had invested in speculative real estate deals. With estimated losses at $545 million, the police and fire pension system now teeters on the brink of bankruptcy.
A new report from the Texas House of Representatives recommended that debt-plagued plans consider floating pension obligation bonds “and/or one-time payments” to reduce unfunded liability.
Such moves perpetuate the problem and contradict guidance from Speaker Joe Straus, R-San Antonio, that bonds or one-time payments were “not the preferred method of reducing unfunded liabilities.”
“The common element in most, if not all, of these systemic failures is the defined benefit pension plan,” Quintero said.
“Because of the political element, as well as the inclusion of inaccurate investment assumptions in the defined-benefit model, these plans are almost destined to fail, threatening the taxpayers who support it and the retirees who rely on it,” he noted.
Williams, co-author of a new report, “Getting Politics Out of Pensions,” said, “Texas should be on cutting edge of free-market reforms.” He asserted that shifting from the old defined-benefit system to defined contributions would bring sustainability to ailing public pensions.
Additionally, the ALEC report recommended a series of administrative reforms, including:
- Public conflict-of-interest disclosure by all fund managers and trustees.
- Annual reports detailing votes on each pension shareholder resolution and the justification for their decision.
- Live-streaming pension board meetings should be live-streamed, recorded and easily accessible to the public.
- Making pension fund trustees personally liable for losses deriving from failure to adhere to fiduciary standards.
“Trustees should manage the pension fund for the exclusive purpose of providing pension and other post-employment benefits to plan participants … not the limited, tangential benefits local economic development and social projects may provide,” the report concluded.
Some ship-righting reforms could be implemented by cities and counties exercising “local control.” State Sen. Paul Bettencourt, R-Houston, has refiled a bill, SB 152, to give municipalities broader responsibility for their pensions.
“This is not a Republican versus Democrat issue,” Williams said. “It’s about financial sustainability and integrity.”
Kenric Ward writes for the Texas Bureau of Watchdog.org. Reach him at [email protected] and follow him on Twitter @Kenricward.