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(Bloomberg) — Dallas is part of America’s fastest-growing metropolitan area, a burgeoning powerhouse for finance jobs that’s in the midst of a construction boom.
And yet, as flush as it appears to be, the city of 1.3 million still faces some hard choices as it grapples with how to tackle roughly $19 billion in projected pension payments over the next 30 years, including shoring up a police and fire retirement system that ranks among the nation’s worst-funded.
It’s a dilemma almost two decades in the making that’s coming to a head now because of a state mandate to adopt and submit a plan by Nov. 1 to plug the funding gap in the first responders’ pension within 30 years.
The solution is forcing officials to consider the kinds of painful budgetary decisions that are more familiar to cities like Chicago, which is notorious for its underfunded retirement systems. For this fiscal year, Dallas has already combined departments, added a fee on water bills and narrowly averted shuttering a public library as part of sweeping efforts to save money and generate more revenue.
But officials are considering other steps for the coming years, according to Dallas Chief Financial Officer Jack Ireland. Those include selling city-owned property over the next year — such as an airport — and potentially borrowing to fund its obligations to retirees.
“What we’ve got to be careful of, is how do we balance out this payment in making sure that we maintain the things that create a vibrant city,” said city council member Paula Blackmon, who represents the district where the library was targeted for closure.
As part of its budget deliberations for the fiscal year that started Oct. 1, the city council passed an agreement to contribute $11.2 billion over the next three decades into the police and fire pension. The pension system, meanwhile, adopted a separate plan that would require paying an additional $500 million, and has sued the city to determine which plan is legal. A hearing is set for Oct. 30.
Dallas is also committing to pay $7.9 billion into its city employees’ retirement fund, pending voter approval. That potentially brings its total pension contributions to at least $19.1 billion over the next three decades.
“Our plan is something that we believe is sustainable,” said Ireland, thanks in part to the construction boom. “The numbers do get big, but the city’s budgets are going to grow over the next 30 years.”
Credit Crossroads
How it all pans out will be decisive for Dallas’ credit rating and its standing with bond investors as it seeks to pay for mounting infrastructure needs to keep up with its rapid growth. The Dallas-Fort Worth region’s population rose by nearly 153,000 in the year ending July 1, 2023, the most among US metro areas, Census Bureau data show.
Rating companies cite the city’s history of underfunded pensions as a key blemish on its credit profile. S&P Global Ratings, for example, says that the approach the city chooses has the potential to shift Dallas’ AA- grade, three below the top, in either direction.
The ratings outcome risks raising the city’s borrowing costs the next time it issues municipal bonds. In May, Dallas voters approved the sale of $1.25 billion of debt over the next two years for hundreds of capital-improvement projects, including roads, bridges, parks, athletic fields, libraries and arts centers.
For Matt Fabian at Municipal Market Analytics, as Dallas confronts these budget pressures, a concern is that Texas caps certain types of tax revenue for its cities.
Investors “shouldn’t assume that growth will save that credit,” said Fabian, a partner at the research firm. “Investors in longer Dallas bonds should be prepared for a larger rating downside in the longer-term.”
A spokesperson for S&P declined to comment.
Ireland said he hopes rating companies will view the adoption of a plan to address the pension liabilities and meet the state deadline as credit-positive.
History of Stress
The pension system for police and firefighters was at risk of going broke around a decade ago, partly after it recognized hefty losses, tallying hundreds of millions of dollars, on exotic investments that the city has called “ill-advised.” Those included Hawaiian houses, a Napa Valley vineyard and undeveloped land in Arizona.
The fund shifted into such alternative assets starting in the years before the 2008 financial crisis in a bid to diversify away from stocks, before the real estate slump contributed to a decline in the value of some holdings. Retirees worried about the fund’s solvency also pulled out money.
The state intervened in 2017 with a plan to cut benefits and require the city and first responders to boost contributions. The pension for civilian employees also reduced benefits for new hires to ease the city’s liabilities.
The police and firefighters’ pension was about 34% funded based on market value at the start of 2024, its latest data show, and its pensioners haven’t received cost-of-living adjustments since 2016. It ranked among the bottom 15 US public pension plans last year by funding ratio, according to Equable Institute data based on market value.
The system had a 10-year net annual return of 2% at the end of 2022, about a third of the statewide average for public pensions, according to a report that a financial adviser made to the city council this year.
Nicholas Merrick, the chairman of the board of trustees for the police and fire pension since 2017, attributes poor returns to investment decisions that predate most of the pension’s current management and governance personnel.
“When you make the commitment on illiquid investment, you own that outcome,” he said. “We’re left with the result and we’re doing our best.”
Tax Cushion
Ireland, the city CFO, says the increase in residential and commercial building is helping Dallas handle the stepped-up payments that the pension-funding plan requires — about $200 million this fiscal year to the first responders’ pension and roughly $120 million to the employees’ system. The metropolis has become an American financial center second only to New York, with banks including Goldman Sachs Group Inc. expanding there.
Property tax is Dallas’ largest single source of revenue and the new development has added millions of dollars to city coffers. But it hasn’t been enough to stave off spending cuts. The city trimmed around $13 million for this fiscal year through steps such as consolidating departments.
But other measures are in the works to bolster revenue for the years ahead. It also plans to sell some real estate. Aside from the Dallas Executive Airport, it may look to unload property including more than 300 acres owned by a water utility, two public libraries and a vacant homeless shelter, according to a presentation to city council.
“Every dollar we can find,” said council member Chad West, “will help us chip away at our pension obligations over time.”
–With assistance from Andrew Harrer.
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