A Texas law governing firefighter pensions is straining city budgets

The Texas Local Fire Fighters Retirement Act is financially straining municipal budgets across Texas. As this law stops municipalities from amending pension benefits for new hires without the consent of active and retired firefighters, taxpayer costs have skyrocketed in many Texas cities. The few cities that have not directly raised contribution rates have instead chosen to take on risky pension obligation bonds or have taken on expensive pension debt.  

The Texas Local Fire Fighters Retirement Act (TLFFRA), in its current form, ties the hands of municipal governments, forcing them to resort to precarious financial strategies that offer only temporary respite. State legislative reform is urgently needed.

The structural flaws of the Texas Local Fire Fighters Retirement Act

The Texas Local Fire Fighters Retirement Act is a state law that governs retirement systems for firefighters employed by cities or other political subdivisions in Texas. These systems are managed by a board of trustees, which typically includes municipal representatives, firefighters, and additional appointed members. 

The TLFFRA gives each participating pension board the flexibility to design its retirement plan and determine benefit levels, eligibility criteria, and contribution rates, which are paid for by local tax dollars. The law requires regular actuarial evaluations to monitor the financial health of the pension systems and mandates the pension boards to adopt adjustments as needed to maintain fiscal balance.

Ironically, the structure of these pension boards has often led to significant imbalances. Take Midland, for example, where the seven-member pension board includes three active firefighters, the mayor (or a designee), and the city’s chief financial officer. The remaining two seats are chosen by a vote of these five members. As firefighters control three of those votes, they effectively hold the power to shape the board’s makeup. What should be a balanced board skews heavily in favor of firefighter interests, leaving the city with just two representatives advocating for taxpayer concerns despite the firefighters, in most cases, bearing zero responsibility to pay for unfunded liabilities.

In addition to unbalanced board representation, cities also have no authority to amend the pension benefits offered to new hires under TLFFRA. Any changes to the pension plan must be agreed and voted upon by the active firefighter membership. This structure inherently disincentivizes firefighters from agreeing to necessary benefit adjustments for future hires, as they bear no direct financial risk for their constitutionally protected benefits’ impact on county and city budgets. This lack of financial accountability among firefighters creates a cycle where pension promises remain generous while the means to fund them become increasingly strained. 

Simply put, firefighters design and run the firefighter pension system while taxpayers pay when it goes off the rails. 

TLFFRA sparks a rash of pension obligation bonds that rarely work

Pension obligation bonds (POBs) are not without risk and are a poor replacement for actual funding and benefit adjustments. These bonds are bets that the returns on invested funds will exceed the bonds’ interest costs. However, history has shown that this strategy can lead to disastrous outcomes if market conditions deteriorate. Cities like Stockton and San Bernardino in California experienced severe financial crises when their POB-funded pension strategies failed, leading to bankruptcy and immense taxpayer burdens.  

Today’s high-interest rate environment makes it a terrible time for Texas cities to pay off their unfunded pension liabilities with pension obligation bonds. If the investments underperform the interest rate of the borrowed funds or the market crashes, the returns will not cover the cost of the debt, leaving the issuer with even larger pension obligations.

Midland, Texas

Midland serves as a stark example of the detrimental effects of the Texas Local Fire Fighters Retirement Act. In recent years, Midland has seen its pension fund’s unfunded liabilities grow to $121 million due to the combined effects of lavish benefit promises and underperforming investments. As a result, the city needs to allocate more of its budget to cover pension costs, which limits its ability to fund other essential services. The city’s leaders are caught in a financial bind where raising taxes or cutting services are the only immediate options, both of which are politically and socially challenging.

The city’s firefighter pension fund crisis has escalated to the point where public safety costs consume over 50% of the city’s general fund budget. This immense financial pressure has forced Midland to seek emergency solutions to bridge its pension funding gap. Failure to properly address the issue will result in the pension system soon exhausting its assets, which will lead to costs triple or quadruple what they are today. 

Despite the mayor and city council’s efforts, the existing TLFFRA framework leaves them with limited options to control these escalating costs. Over the past three years, Midland has presented various solutions to its firefighters to address the pension fund shortfall, including multiplier changes, final average salary changes, removal of pension spiking, and contribution rate changes. Unfortunately, these proposals have been met with significant resistance, with firefighters rejecting nearly all of them apart from a small increase in contribution rates. This stalemate has worsened the financial crisis as the city cannot unilaterally implement changes to the pension plan under the current TLFFRA regulations. 

Irving, Texas

Irving’s issuance of an $86.3 million POB in 2021 reflects the desperate measures cities are resorting to under the TLFFRA. The decision to issue pension obligation bonds was driven by the need to stabilize the firefighter pension fund without resorting to drastic measures, such as slashing benefits or significantly increasing taxes. The plan sat at a funded ratio of 64%, just a couple of bad years of investment returns away from spiraling into insolvency. 

Longview, Texas

Longview has similarly issued pension obligation bonds to address its firefighter pension fund issues. In 2022, the city approved a $45.6 million bond to stabilize its Firemen’s Relief and Retirement Fund, which sat at just 41% funded. This move mirrors Irving’s approach and underscores the widespread reliance on risky financial instruments to manage pension liabilities under the TLFFRA. Longview took another step backward by also reducing the employer contribution rate to the plan, dropping from 19% to 12%.

Longview’s pension fund challenges, like its sister cities around Texas, were compounded by a history of underfunding and investment shortfalls. By issuing

POBs, the city aims to shore up its pension fund and reduce its unfunded liabilities on paper. However, this strategy does not address the underlying issues of pension plan design and governance that have led to the current financial predicament. The reliance on POBs is a stopgap measure that postpones the day of reckoning while exposing the city to even more financial risk if market conditions become unfavorable.

The need for legislative reform

With the Texas Local Fire Fighters Retirement Act preventing reasonable solutions, many municipal governments are left with having to make poor decisions for their taxpayers, highlighting the need to reform this law. 

The Texas Legislature should consider amending the statutes governing firefighter pensions. Key reforms should include:

1. Allowing cities to adjust benefits for new hires: Municipalities need the flexibility to modify pension benefits for new hires to ensure long-term sustainability.
2. Increasing transparency and accountability: The Texas Pension Review Board has highlighted many issues with these TLFFRA plans, but has limited authority to force changes. 

Without these reforms, Texas cities will continue to face escalating public pension liabilities, jeopardizing their financial stability and burdening taxpayers. It is imperative for the legislature to act now to secure a sustainable future for both Texas cities and their firefighters.

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