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 contributions 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 plan 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 to the police and fire pension fund.
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,” Ireland said, 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.”
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 pension 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 pension 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 showed, and its retirees haven’t received cost-of-living adjustments since 2016. It ranked among the bottom 15 U.S. public pension plans last year by funding ratio, according to Equable Institute data based on market value.
The pension fund had a 10-year net annualized return of 2% at the end of 2022, about a third of the statewide average for public pension plans, 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 fund’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.”
