Dallas will face tight budgets for the next few years, partly because it must keep hiring more police, paying them more and contributing more to the Dallas Police and Fire Pension Fund. In January, that fund, which has about 11,600 members, was $3.73 billion short of what it needs to meet its existing obligations.
But selling pension obligation bonds, sometimes called POBs, to help fill that gap will only make a bad situation worse. We wish the city manager and some city council members would back away from this proposal. Issuing long-term debt to help pay an unfunded liability isn’t a last resort, it’s a should-never-happen resort. Ask the experts. On its website, the Government Finance Officers Association cautions, with a warning sign icon, “State and local governments should not issue POBs.” Seems pretty cut and dried.
Local governments issue pension bonds in an attempt to make money. Cities hope they can sell the taxable bonds, invest the proceeds and earn a higher rate of return on the investments than they pay in interest on the bond debt. It’s risky. Those investments have to consistently outperform the decades-long duration of the bonds.
Unfortunately, markets turn, inflation spikes, pandemics happen, wars erupt. More often than not, pension obligation bonds just become another layer of debt a city must repay out of its general fund.
Dallas has done this before. The city still owes $79 million from the last time it issued pension bonds — in 2005. Their interest rate is about 2% higher than most of the city’s other general obligation debt.
Dallas residents and their representatives on the City Council must face an unpleasant reality: For the foreseeable future, pension contributions are likely to gobble up more and more of the city’s general fund, the same pool of money that funds things like libraries, recreation centers and police and fire operations. Without significant revenue growth, such as ad valorem taxes from new property development, the share of revenue available for discretionary services will shrink.
In next year’s budget, Dallas must contribute more than $200 million just to help pay down the unfunded liability in the police and fire pension. It also has to make its normal annual contribution to that fund, which is about another $41 million. Civilian employee and supplemental pension contributions require another $50-plus million. Pension costs will total about 15% of the general fund.
A decade ago, John W. Diamond, a fellow at Rice University’s Baker Institute for Public Policy, wrote a white paper analyzing how Houston struggled with a $5.6 billion unfunded liability in its public employee pension funds. Dallas should heed his conclusion: cities should consider a different approach to retirement.
“Given the uncertainty surrounding the calculation of saving and investing now to meet a promise to pay some amount several decades from now, it would be wise if the reform shifted the system toward a system with a defined contribution and away from a defined benefit system.”
He’s right, but does Dallas have the courage to take on this reform?
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