DALLAS - Texas governments face rising challenges from public pensions that have been underfunded for years, according to a report from Moody's Investors Service.
The report, "Cost Deferrals Drive Rising Pension Challenges for Texas and Some Locals," came amid lawsuits between local governments and pension funds and on the heels of state efforts to close the funding gap through delayed retirements and higher contribution rates. State law also controls some local pension plans, notably the Houston Firefighters pension plan.
Houston last year filed an unsuccessful lawsuit challenging the state statute governing its firefighters' pension plan, seeking a court decision declaring the law unconstitutional.
Among other items, the city asserted that the state law illegally delegates legislative power to the pension fund and illegally regulates the affairs of a municipality because the city has little control over contribution requirements and pension benefit levels for its firefighters.
In August Fort Worth will go to federal court to settle a disagreement about whether its reduction to the future pension benefits of current employees violates state constitutional protections.
"Most Texas local governments face greater legal constraints and procedural hurdles to pension reform, while the state has substantially more legal flexibility to change and adjust benefits to its plans," Moody's analyst Thomas Aaron wrote in the Jan. 20 report.
On the state level, Texas participates in four single-employer plans, with the majority of costs associated with the Employee Retirement System and the Teachers Retirement System.
Amid ongoing funding problems, the ERS requested a 59% increase in the state's contribution rate for the fiscal 2016-17 biennium for that system alone, a cost increase of nearly $540 million across all of the state's funds, Aaron wrote.
Local governments can have one or more single-employer plans, and may also participate in either the Texas Municipal Retirement System or the Texas County and District Retirement System.
"The state's largest cities - Houston, Dallas, San Antonio, and Austin - face varying levels of projected pension cost and liability growth, driven in part by divergent historical contributions compared to plan funding requirements," Aaron wrote.
The Dallas Police and Fire Pension System is currently embroiled in controversy over its investments and accounting practices.
Pension officials' refusal to provide documents led to a lawsuit by city officials who wanted to conduct an audit of the $3.3 billion fund.
Dallas Mayor Pro Tem Tennell Atkins, who serves on the pension board, brokered a deal to provide an audited report from the firm of Deloitte.
A summary of Deloitte's report released Jan. 20 focused on $1.287 billion in alternative assets held by the fund at the end of 2013. Of those, Deloitte found that $772 million in assets were at risk of being overvalued "because the valuation approaches or methods appear to have been improperly applied and/or inconsistent with commonly accepted valuation practice."
The Dallas fund also suffered about $96 million in losses on risky real estate investments in 2013 due to write-downs that followed new appraisals.
"This report shows we need better governance and more transparency into our pension fund so we can address issues as they come up — not years after the damage has been done," Atkins said at a press conference Jan. 20.
The Dallas Police and Fire Pension System is a major investor in two public-private toll projects in the Dallas-Fort Worth area, the LBJ Managed Lanes Project in north Dallas and its suburbs and the North Tarrant Express in Tarrant County.
In 2003, Texas voters approved a state constitutional amendment that prohibited the reduction or impairment of already accrued benefits for members of non-statewide retirement systems, such as those provided by local governments. Local jurisdictions were given a one-time opportunity to opt-out with local voter approval.
The cities of Denison, Galveston, Houston, Marshall, McAllen, Paris and Port Arthur opted out. The constitutional amendment also excluded San Antonio's police and fire plan because the state statute governing the city's plan already provided an explicit contractual protection, limiting the city's flexibility, Moody's noted.
