One of Texas’ largest cities is facing bankruptcy due to unsustainable pension promises made to public-sector unions. It’s a fiscal crisis faced by failed municipalities in California and other liberal states.
The City of Dallas raised their effective budget tax by 7.6 percent in 2016, despite levying one of the highest property tax rates in North Texas. Now, the city has come under criticism again as its pension liabilities exceed $7 billion.
The pension crisis has scared employees who’ve begun to pull money out of the system. Unless lawmakers reform the system, Dallas taxpayers will be hit with even higher property taxes and debt. Pension debt has long gone unreported because financial disclosure laws allowed it to remain hidden. That’s partially because governments use outdated accounting practices that private industry abandoned decades ago.
These failed practices don’t require that all future liabilities be accounted for, such as pension promises to future retirees. Recent changes by the Government Accounting Standards Board now recommends they be disclosed.
Though private businesses transitioned to defined-contribution pension systems decades ago – such as 401(k)’s) – governments continue to offer defined-benefit plans at the behest of public-sector unions. Not only are defined-benefit plans more generous than those earned by taxpayers who foot the bill, they’re unsustainable and woefully underfunded. That’s because they promise insane retirement benefits in the future without setting aside sufficient assets to fund them. Unlike 401(k)s, government employees end up contributing very little to their own retirement.
Over a year ago, the Texas Scorecard published a report by a national transparency group that found Dallas had the “highest total taxpayer burden” of any city in Texas, when pension obligations were included. This month, Moody’s reported that Dallas is currently saddled with more unfunded pension debt than any major American city except Chicago.
State lawmakers beholden to public-sector unions are primarily to blame.
They complicated the problem by cementing into law these unrealistic pension guarantees over twenty years ago, when Democrats ran the legislature. In doing so, they prevented local officials in urban areas from reforming their broken pensions without the state’s blessing. The New York Times recently outlined just how beholden state lawmakers were to public-sector unions who routinely push for unsustainable retirement benefits:
“The fuse was lit back in 1993, when state lawmakers sweetened police and firefighter pensions beyond the wildest dreams of the typical Dallas resident. They added individual savings accounts, paying 8.5 percent interest per year, when workers reached the normal retirement age, then 50. The goal was to keep seasoned veterans on the force longer.”
Not only did lawmakers cement unsustainable promises into state law, faulty assumptions were used to justify them.
“Guaranteed 8.5 percent interest, on tap indefinitely for thousands of people, would of course cost a fortune. But state lawmakers made it look ‘cost neutral,’ records show, by fixing Dallas’s annual pension contributions at 36 percent of the police and firefighters’ payroll. It would all work as long as the payroll grew by 5 percent every year — which it did not — and if the pension fund earned 9 percent annually on its investments. Buck Consultants, the plan’s actuarial firm, warned that those assumptions were shaky, and that the changes did not comply with the rules of the state Pension Review Board.”
Few officials expressed concern that these systems would inevitably become insolvent, since taxpayers could always be asked to bail them out with higher debt and taxes. And that’s precisely what’s happened over the last twenty years. Public pensions in Texas have not been reformed, despite Republicans holding majorities in both the House and Senate since 2004. Lawmakers can begin by returning control over pension plans to locally elected officials.
Beyond that change, lawmakers should require that modern accounting practices be used for all government entities, and ban the use of defined-benefit plans for newly hired public employees.