Fort Worth takes another bond rating hit due to pension liabilities

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Fort Worth bond rating

A hit in Fort Worth’s bond rating, largely due to rising pension liabilities, means taxpayers could take it on the chin on future loans.

S&P Global Ratings recently downgraded Fort Worth’s general obligation debt rating to AA from AA+. The service noted the city’s obligations to current and future government retirees, pointing out that pension contributions are below actuarially determined levels.

S&P pointed out that the $2.3 billion Fort Worth Employees’ Retirement Fund was less than 43 percent funded as of Sept. 30. It has an unfunded pension liability — meaning money promised to retirees but not currently in its accounts — of $3.1 billion.

Moody’s Investor Service downgraded Fort Worth’s general obligation debt to Aa3 in 2017, also citing the growing unfunded pension liabilities.

A Fort Worth pension task force is expected to make recommendations to improve the funding status of the city’s pension plan, but nothing has yet been adopted. An aggressive timeline set by City Manager David Cooke would initially have had the task force present a plan to the City Council in February with that body adopting changes in May. But that hasn’t happened.

Some in Fort Worth worry the Texas Legislature could dictate solutions there as it did in Dallas in 2017, with local taxpayers on the hook for tens of millions of dollars.

As of now, Fort Worth plans to increase pension contributions by 2 percent over the next two years, but S&P said this still falls short of actuarially required levels and unfunded liabilities are actually expected to still rise.

Fort Worth’s continued problems follow the recent report by The Texas Monitor that the Austin Employees’ Retirement System is in crisis.

As in Fort Worth and many other cities in Texas and around the nation, unreasonable return on investment projections have allowed Austin city leaders to contribute much less in taxpayer money than is needed to fund the promises to retirees. By kicking the can down the road, Austin has rang up more than $1 billion in unfunded liabilities.

A report from the Texas Pension Review Board finds that the 92 pension systems it tracks owe $69.3 billion in unfunded liabilities and are only 79 percent funded, on average.

Many states, including Texas, guarantee pensions to government retirees, which means taxpayers are exposed to significant risk when there is a downturn in the stock market. Assumed rates of return are frequently in the range of 8 percent, and the stock market has often fallen far short of those goals.

Bill Bergman, director of research for the Chicago-based Truth in Accounting, said the “safety net” of taxpayers “can motivate pension plans to concentrate in risky investments, given that plan members get the upside and taxpayers get the downside.”

“The incentives are underlined by current — and questionable — accounting standards, which call for pension liabilities to use discount rates based on expected rates of investment returns,” he said. “Higher-risk investments offer higher expected returns, leading to higher discount rates and, in turn, lower reported pension liabilities.”

Johnny Kampis can be reached at [email protected].

5 COMMENTS

  1. Dear Editor:

    We at the Texas Association of Public Employees Retirement Systems appreciate your continuing interest in Texas pension systems. Your readers should know that pension funds seek to diversify their assets among a wide range of asset classes. Diversification lessens the impact your story ascribes solely to reliance on stock market performance.

    Our most recent survey of members shows that about 47 percent of their assets are, on average, in US and international stocks, while another 27 percent is invested in alternative assets and 22 percent in bonds. This diversification helps reduce the negative impact of underperformance of any one asset in any one year or business cycle. Your readers can view that complete report here.

    In addition, the same Pension Review Board mentioned in this report shows that only 17 Texas pension systems have a target rate of 8 percent or greater – so 76 systems have a target in the 7-7.99 percent range. Pension systems have been working to gradually reduce their target rates in a responsible manner to reflect new investing forecasts. Gradual reduction is the key here. Gradual decreases along with good diversified investment return performance help keep the needed contributions from plan sponsors as low as possible.

    Sincerely,
    Max Patterson
    Executive Director, TEXPERS

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