STRATEGIC PRIORITY: Government Performance & Financial Management
AGENDA DATE: September 11, 2024
COUNCIL DISTRICT(S): All
DEPARTMENT: Budget and Management Services
EXECUTIVE: Jack Ireland
______________________________________________________________________
SUBJECT
Title
A resolution (1) adopting a funding soundness restoration plan for the Dallas Police and Fire Pension System; and (2) directing the city manager to submit the funding soundness restoration plan and all other required documents to the State Pension Review Board not later than November 1, 2024 - Financing: No cost consideration to the City (see Fiscal Information)
Body
BACKGROUND
The Dallas Police and Fire Pension System (DPFPS) provides retirement, death, and disability benefits for permanent police and fire uniform employees of the City of Dallas. Currently there are approximately 5,300 retirees and beneficiaries, and approximately 5,100 active police and fire uniform employees that are members of DPFPS. The fund was established in 1916 and is governed by Vernon’s Texas Revised Civil Statute Annotated, Article 6243a-1 (Article 6243a-1). The Texas Pension Review Board (PRB) is mandated to oversee all Texas public retirement systems based on Chapter 802 of the Texas Government Code. The PRB’s funding guidelines require that actual contributions should be sufficient to cover the normal cost and to amortize the unfunded actuarial accrued liability over as brief a period as possible, but not to exceed 30 years.
As of January 1, 2023, DPFPS has a funding percentage of 39.1 percent and is projected to achieve full funding in 82 years. To comply with the Chapter 802 funding and amortization period requirements, a jointly agreed to plan by DPFPS and the City, a Funding Soundness Restoration Plan (FSRP), must be submitted to the Pension Review Board by September 1, 2025. The FSRP is required in accordance with Chapter 802 of the Texas Government Code.
Further, the Texas Legislature passed HB3158 in 2017 to address the solvency of DPFPS and outlined additional requirements. As required by Article 6243a-1, Section 2.025(b), the DPFPS Board, not later than November 1, 2024, shall by rule adopt a plan that complies with the funding and amortization period requirements applicable to DPFPS under the Texas Government Code Chapter 802 Subchapter C (Subchapter C) that takes into consideration the independent actuary’s recommendations. Thus, the requirements of a jointly agreed to plan by the DPFPS and the city has been triggered by both the Article 6243a-1, Section 2.025 requirement that the adopted plan must comply with the funding and amortization period requirements applicable to DPFPS under Subchapter C and the requirement that the DPFPS must comply with the funding soundness restoration provisions of Subchapter C, “Administration of Assets,” as actuarial valuations showed that DPFPS’s expected funding period had exceeded 30 years for three consecutive annual actuarial valuations.
The recommendations made by the independent actuary, Cheiron, include: (1) implement an Actuarial Determined Contribution (ADC) methodology, (2) reduce employee contributions as funded status improves, and (3) provide some cost-of-living adjustment earlier than required by HB3158.
1. Cheiron provided multiple scenarios for the ADC including a traditional model, 3-year step-up and step-down model, 5-year step-up and step-down model, 3-year step-up model, and 5-year step-up model. Cheiron indicated that all five models are reasonable and would comply with the Pension Review Board’s requirement for DPFPS to be fully funded in 30 years. Through months of work with the Mayor appointed Ad Hoc Committee on Pensions, representatives of the Mayor appointed task force including financial and industry experts, and DPFPS staff, city staff made final recommendations to the City Council. City staff has recommended implementation of an ADC methodology with a 5-year step-up approach that will better align with budgetary constraints of the City.
2. While city staff agrees that a reduction to employee contributions is an appropriate consideration once DPFPS funding status has improved, the current funding status does not make this possible at this time.
3. HB3158 suspended cost of living adjustments until DPFPS achieves 70 percent funding. City staff recommends maintaining the cost-of-living adjustment methodology and requirements included in HB3158 which becomes available after DPFPS is 70 percent funded. Providing supplemental pay before DPFPS is 70 percent funded has been supported by city staff and members of the City Council but is not included in the proposed FSRP at this time. Contribution of any funding from the City to DPFPS associated with supplemental pay prior to achieving 70 percent funding is paused but may be disbursed at a future date upon approval of the City Council.
Enhanced oversight of DPFPS is recommended to include City Council approval for expenses that will increase the unfunded liability and cost to the city, establishment of guardrails to mitigate year-over-year cost increases to the city, and establishment of a process for managing ADC calculation discrepancies.
PRIOR ACTION/REVIEW (COUNCIL, BOARDS, COMMISSIONS)
Presentations to the Ad Hoc Committee on Pensions occurred between September 2023 and June 2024. Presentations to the Dallas City Council occurred or were provided on January 19, 2024, June 18, 2024, August 7, 2024, and September 4, 2024.
FISCAL INFORMATION
The Funding Soundness Restoration Plan recommended by city staff will have a total cost to the city of approximately $11.1 billion over 30-years as a result of implementing an Actuarial Determined Contribution methodology. The city’s current contribution to DPFPS is based on a fixed rate of 34.5 percent of salary and would have a total cost to the city of approximately $7.9 billion over 30-years, however, this contribution fails to meet the PRB’s funding requirements and timelines. Implementation of the Actuarial Determined Contribution methodology and the increased cost to the City is necessary to meet the PRB’s funding guidelines which require that actual contributions should be sufficient to cover the normal cost and to amortize the unfunded actuarial accrued liability over as brief a period as possible, but not to exceed 30 years. The city’s contributions will be subject to annual budget appropriations. This cost is reflective of the period to achieve full-funding in 30-years in compliance with State guidelines. City contributions to DPFPS will continue beyond 2055 but are not included in the above cited amount.