As Dallas officials and the Dallas Police and Fire Pension System forge ways to fill a $3 billion pension shortfall, legal correspondence recently made public shows the two are at odds on who gets the final say in approving the plan.
On Jan. 16, Ben Mesches, a lawyer representing the pension system, wrote to state officials and said the pension system did not need the city’s approval to adopt a funding plan. “The System’s board has exclusive authority to adopt a pension plan,” the letter said.
The letter, which was first reported on by KERA, said the state pension board’s reading of two state statutes, which cast the city as the final arbiter, were “erroneous.”
City Attorney Tammy Palomino wrote a legal rebuttal to Mesches’ letter on May 10. She said state law required the pension system and the city to jointly formulate a plan. In every scenario, Palomino said, the plan couldn’t go forward without the Dallas City Council weighing in.
Council member Tennell Atkins, who chairs the ad hoc committee on pensions, said council members recently learned about the Jan. 16 letter.
“We as policymakers, we have to stop and turn and say, hey, we don’t agree with the letter. But did we get caught off guard? Yes, we got caught off guard,” Atkins said. Taxpayers will be the ones to have a final say since they would be the ones footing the bill, he said.
Kelly Gottschalk, executive director of the pension system, told The Dallas Morning News the pension board has been vocal about having the final say.
She said a “negotiated right” was put into law in 2017 when the Texas Legislature reeled the pension fund back in from collapse, restricted city’s contributions for seven years and changed the governing structure to give the Dallas mayor the authority to pick six of 11 pension board members. The city, she said, also hasn’t adequately funded the pension system as it has other services it also has to pay for.
“We’re committed to try to find a solution where the city agrees, and we agree, and we all adopt the same plan, but we know — because we’ve been here before, we’ve dealt with the city on a lot of issues — the chances are there might be a provision or more that we don’t agree on,” Gottschalk said.
Consensus or no consensus, the board will have to adopt the plan because it is legally required to do so, Gottschalk said.
Jack Ireland, Dallas’ chief financial officer, told The News the city wanted to build consensus and arrive at one plan together, and he hoped the city will have a more concrete plan by midsummer.
Ireland rejected the notion that there was a pension crisis at hand. The city, he said, could reach its goal to fully fund the plan in 30 years just off its operating budget. He said the city is looking for a steady revenue stream that isn’t attached to the general fund, so that the city doesn’t have to cut services to fix the pension fund.
In the past, city officials have considered liquidating more of its real estate portfolio to put more cash into the fund. They have also recommended seeking voter approval to change contribution rates for the employees’ retirement fund.
Ireland said the city has also considered pension obligation bonds. But that would need more research and more favorable interest rates.
Recently, city council members have also begun contemplating whether it can reduce the sales tax it sends to Dallas Area Rapid Transit. DART collects a penny sales tax — a 1% tax on every dollar spent — in all 13 of its member cities. The transit agency collected over $400 million in Dallas annually for the last two years, sales tax data shows.
Finding consensus
Ireland and Gottschalk have been trading recommendations for the past several months, meeting each other for a call at 8 a.m. every morning.
They said they both want to fill the pension gap faster. Both the city and the pension system, they said, agree they need to ramp up pension contributions that match the recommendations from the actuarial firm, Cheiron, which was hired to assess and recommend the best models that can help fill the gap.
Both want a plan that fully funds the system in 30 years, and they plan to do so by having the city make “actuarially determined” contributions instead of fixed rate contributions.
But flipping to those contributions in one fell swoop is not economically tenable for the city, so they’re planning on incrementally reaching those contribution levels over a period of time, according to Ireland.
The pension system would like for the city to begin filling the hole with a three-year phase-in. The city, on the other hand, wants to do that over a five-year period, Ireland and Gottschalk said.
“They both get to the same place,” Ireland said. “There’s just two different ways to get there.”
Ireland said the city prefers the five-year step-up plan because that would mean increasing the city’s yearly contribution by $17 million or $18 million a year. “It is something that we can manage in a way that I think is appropriate and reasonable for the city,” he said. The city currently contributes $184.7 million to the police and fire pension. With a five-year step-up model, that contribution will go up to $202 million in fiscal year 2025.
Atkins said as budget considerations continue, council members will also be contemplating what services they need to prioritize in order to make more room to fund the pension fund.
Ireland said the city’s goal was to keep up with its peer cities in providing competitive pay for police officers and firefighters. “At the same time, we have code issues, we have park issues, we have libraries, we have all the other services that the city provides that we have to balance,” he said. The city will present its budget plan in August.
The recommendation the city and pension system diverge on most is related to cost-of-living increases in the plan. State law mandates that cost-of-living adjustments to a pension plan occur only when the pension plan reaches a 70% funding level. Gottschalk said the pension is 39% funded and the actuarial firm estimates that that the fund will reach 70% by 2046. “That’s 30 years without a cost-of-living increase,” Gottschalk said.
The pension system wants to figure out a way to provide cost-of-living increases to its members, especially since members of the civilian pension fund get cost-of-living increases, Gottschalk said.
Ireland said he, too, would prefer reaching the 70% funding threshold faster than 2046. It would be difficult for the city to give cost-of-living increases when there aren’t enough employees paying into the pension fund, and the city will only take on more unfunded liabilities, he said.
Dallas has until Nov. 1 to come up with a 30-year funding plan to resolve its pension predicament. The fire and police pension system faces a $3 billion shortfall in its police and fire fund, which administers the pension program for over 10,000 current and retired officers. The pension fund for civilian employees also suffers a $1 billion shortfall, according to city officials.
Most of the pension issues emanated from decisions that supported unsustainable benefits and poor investments, like owning a 3,100-acre California resort bought for close to $111 million in 2006, the director of the Dallas Police and Fire Pension System, Gottschalk, told The News in 2018. The resort was later sold for $22 million in 2018.
