Fort Worth Pension Bubble Ready to Blow Up?

Mitchell Schnurman of the Star-Telegram reports, Fort Worth pension bubble will blow up in our faces (HT: Robert):

To understand why Fort Worth's pension system is such a financial disaster, look at one month's list of recent retirements.

In January, a 53-year-old policeman retired with an annual benefit of $90,312 for life, plus $256,000 in a lump sum payment. Another policeman, 57, got almost $74,000 annually, plus $313,000 in a lump sum. A 54-year-old firefighter got an annual pension of $90,130, plus $178,000 in cash.

These are not typical cases, but they're not rare, either. The shocking takeaway from the 22 retirees is that they stand to earn significantly more from their pensions than they earned on the job.

With an average age of 50 for the police and 54 for the firemen in this group, they're likely to spend more years in retirement than they worked. An analysis for the City Council, presented in July, projected that the retiring policemen would collect $3.1 million in pension pay.

That's a stunning number, almost twice as much as their career earnings, and it more than compensates for the fact that city employees don't get Social Security or a 401(k)-type account. It's worth stating again: In retirement, many will get more money than they made on the job, and for more years.

You don't have to be an actuary to know that this pension plan will end badly. The technical phrase is "trending toward insolvency."

Except that the city is on the hook for all the promised benefits. Taxpayers will have to pony up hefty contributions for years, even generations, and the city may have to cut services to afford it. The pension for city employees is currently projected to pay out $432 million more than it brings in over the next 30 years.

And that's the optimistic scenario. If investment returns average 7 percent, rather than the dreamy 8.5 percent in the assumptions, the unfunded liability could approach $1 billion.

The pension will require $60 million in city funds next year, and it's already a drag on a strapped city budget that has to close swimming pools and libraries and impose furloughs. Every year, the pension hole grows, because the benefits keep piling up.

"This is the elephant in the room," Mayor Mike Moncrief told the council in late July. "Not only for this budget, but for all the budgets to come."

For decades, most private companies have moved away from pensions, because they were simply unaffordable, and added or enhanced 401(k) plans. Traditional pensions remain primarily in the public sector. And like Fort Worth, scores of cities and states face overwhelming liabilities, and their promises have to be kept.

Councilman Carter Burdette is right to say the only solution is to increase contributions and reduce benefits. But the city keeps being told that it can't cut benefits, because it's blocked by contracts with fire and police, a state constitutional amendment and rulings from the attorney general.

"All we're left with is going to taxpayers and saying, 'You're going to have to pay more, more, more,'" Burdette said at a June budget session. "It's time we quit that game and we do something."

The city manager appointed an ad hoc committee to look at the pension problem. It had a few businessmen, but most were employees -- a mix of police, fire and general workers. Imagine they had a little conflict?

They recommended that the city contribute an additional 6 percent of employee pay into the plan. (In their defense, if my employer wanted input on saving my retirement, I'd say the same thing: Put in more money!)

The committee said the city should evaluate the idea of sharing the higher contribution with employees, although it acknowledged that a majority of the 6,600 plan participants would have to vote for the increase. Fact is, pumping in more money won't close this gap anyway, because pension payments will keep outstripping contributions and investment gains for ... infinity, according to a city projection.

How did this happen? City employees, led by police and firefighters, steadily won more benefits, enabling them to rack up outsized pensions. City leaders agreed to the sweeteners to win contracts (and elections) and avoid bigger raises. That's a seductive path for everybody, when the bill isn't coming due for years -- and can be passed on to taxpayers.

One of the worst moves was to raise the assumed rate of return on the plan's assets. By lifting projections for investment gains, you can justify about anything. In 1990, Fort Worth increased its estimated returns from 7 percent to 10.23 percent annually. Banking on a bigger gain, it cut contributions from the city and employees -- and simultaneously enriched the benefits.

Can you say pension bubble?

The multiplier went from 2 percent for each year of service to 2.5 percent. (Six years later, it was increased to 3 percent, which means that working 33 years at the city equals a pension of 99 percent of pay.) Early retirement was also granted, plus minimum benefits.

In 1997, overtime was added to the compensation base. Two years later, a cost-of-living increase was guaranteed, plus a more generous formula for base pay. In 2002, a new benefit allowed employees to start collecting pensions while still working full time and funnel the money into a separate account.

The so-called DROP funds can total hundreds of thousands of dollars. This is on top of a pension that pays close to 100 percent of pre-retirement income -- on a base that police and firefighters often inflate with overtime.

Most Americans can only dream about such a nest egg. Social Security replaces about 40 percent of pre-retirement income for an average worker. Add in a 401(k) and personal savings, and many are fortunate to get to 75 percent of their earlier income.

And if they quit working in their mid-50s, they'll never get close to that threshold.

Fort Worth employees do not participate in Social Security. But the January retirees had an average pension that was twice as high as Social Security's $29,000 maximum, and they started collecting it 10 years earlier. In the private sector, taking a pension before age 65 usually carries a steep discount, often by half.

In the Fort Worth plan, general employees don't do nearly as well as police and fire. They have much smaller pensions and lump sums.

Averages can be misleading. January may have been an exceptional month for police and fire retirees, and they don't always live to their expected age. But taxpayers should be cynical about a different average from the Fort Worth Employees' Retirement Fund. It says the latest average pension payment was less than $31,000 annually, with both fire and police under $48,000.

But many of those retirees worked before overtime was included in the formula; before the DROP benefit was added; and most important, when the multiplier was less than 3.

That's the scary secret about Fort Worth's pension. In real time, in today's world, the numbers are even worse than people imagine.

As pension gaps loom larger, some of the worst problems can be found in city and municipal pension plans. I rarely talk about them, but know all too well the pension woes that lurk behind these city pension plans. I would consilidate them and tighten up their governance, but even that won't solve the deep structural problems that plague these plans.