Last September, Reason Foundation’s Pension Integrity Project reported on the challenges facing Fort Worth’s struggling public pension plan. On Dec. 11, after years of seeking a compromise palatable to all stakeholders, the Fort Worth City Council passed a significant proposal for reform. If city officials are able to win enough votes of approval from the city’s public workers, the proposed changes could be a major step towards protecting the retirement security of Fort Worth’s police, fire, and other government workers.
The City Council’s proposed changes to Fort Worth’s public pension plan focus on adjustments to both contributions and benefits. The proposal increases employer—or city and taxpayer—contributions by 4.5 percent of total payroll beginning in July 2019. This would increase the city’s payment into the plan from 19.75 percent to 24.25 for general workers and firefighters, and from 20.46 percent to 24.96 percent for police officers, which is estimated to increase annual payments into the plan by about $21 million —if payroll increases as predicted.
Fort Worth’s government employees—active and future—would also see an increase to their pension contribution requirements if the proposal is implemented. Police officers are proposed to contribute 3.8 percent more of their pay, with increases of 1.8 percent in 2019 and 2 percent in 2020. General employees would see their contributions increase in 2019 by either 1.1 percent or 1.8 percent, depending on their employment before benefit calculation changes. Overall, the city’s workers are looking at dedicating 1.1 percent to 3.8 percent more of their paychecks to ensure the financial security of their retirement plans.
Interestingly, the proposed reform would also add a limited automatic adjustment feature to both employee and employer contributions, which is promoted as a method to advance “risk-sharing” between the city and its workers. According to this proposed feature, two consecutive annual payments below the actuarially required amount would trigger a 2 percent increase in total contributions, with employees covering 0.8 percent and employers covering 1.2 percent of the increase. The 2 percent increase could be applied in no more than two years, limiting the increase to annual contributions to no more than 4 percent. These increases in contributions could be removed by the City Council if actuarial reports show two consecutive years of sufficient annual contributions.
Also packaged with the proposed contribution changes are several changes to the pension plan’s benefit structure. Most notably, cost of living adjustments (COLAs) would no longer be available to new hires. Current employees would still have COLAs already earned for their previous service, but it would now be at a rate that is variable and based on the pension fund’s performance and health.
The failure to properly pre-fund the cost of living adjustments has been a significant contributor to the Fort Worth Employees Retirement Fund’s (FWERF’s) unfunded liabilities. The elimination of COLAs for new hires and for current employees’ future service would remove this source of debt. COLAs would still exist for service already earned by current employees and current retirees, but pre-funding of future service would not have a COLA component.
The changes proposed by the City Council effectively address one of the hardest parts of pension reform—creating additional funding for a plan that is proving to be more costly than anticipated. The increases in contributions are in line with the priority of shared responsibility between public workers and the taxpayers they serve.
Importantly, the proposed automatic adjustments to contributions demonstrate a long-term commitment to fully funding all of the benefits that have already been promised to Fort Worth’s public workers. The 4 percent cap on these adjustments may limit this feature, but this part of the proposal would at least partially ensure that the fund’s contributions would increase if necessary. Colorado included a similar automatic adjustment mechanism in its bipartisan pension reform last year, which helped the state avoid a costly credit rating downgrade.
While the proposed contribution changes do improve funding, the reform does not address one of the main sources of unfunded liabilities for FWERF—underperforming investments. FWERF reports show that the pension plan’s returns have averaged just 4.75 percent over the past decade in contrast to the plan’s assumed rate of return of 7.75 percent. These lower than expected investment returns mean less money has been put into the system than actuarially required. Within the context of the proposed reforms, such an undercalculation would diminish the effectiveness of the automatic adjustment mechanism. In the coming years, Fort Worth policymakers would be well-served to consider a pension reform that reduces the assumed rate of investment returns, taking a more conservative approach.
The City Council’s proposed pension reforms and contribution changes would face an employee vote in February. In order to succeed, the plan would need the agreement of a majority of all employees, not just those who vote. With this goal in mind, a campaign to educate and inform employees has already begun. There are over 20 meetings on the topic scheduled for January 2019.
The successful passage of these reforms might also have the additional benefit of boosting the city’s general obligation bond rating, which suffered two recent downgrades. A recent credit upgrade in Michigan, and an improved outlook for Colorado, both occurred after the states implemented pension reforms that combined meaningful funding policy changes with modest changes to benefits for new hires.
Critical to any pension reform, proposed changes must not only improve the fiscal health of a plan but must also adhere to the priority of keeping all promises made to public employees. The proposal passed by Fort Worth’s City Council makes responsible changes to promised benefits for future service, while still committing to paying for all past promised benefits in full. These reforms would be a major step towards acknowledging risks, stabilizing costs, and reversing the growth in Fort Worth’s unfunded pension liabilities.
Stay in Touch with Our Pension Experts
Reason Foundation’s Pension Integrity Project has helped policymakers in states like Arizona, Colorado, Michigan, and Montana implement substantive pension reforms. Our monthly newsletter highlights the latest actuarial analysis and policy insights from our team.