Latest / The Fiscal Policy Podcast with Fexingo: Government Budgets, Stimulus, and Public Spending / How One City Fixed Its Pension Crisis
Transcript
- Lucas: So Fort Worth, Texas — not a city you normally hear about in fiscal policy circles, but in 2024 it had a pension problem that looked terminal. Its main pension fund for police and fire employees was sitting at a funded ratio of about 46 percent. That means for every dollar of promised benefits, the city had set aside less than fifty cents. Luna: Forty-six percent is dangerously low. That's the kind of number that triggers credit downgrades and forces service cuts. Lucas: Exactly. And the annual required contribution was already eating up nearly 20 percent of the city's general fund budget. But instead of doing what a lot of cities do — which is kick the can, lower the assumed rate of return on paper, or negotiate benefit cuts — Fort Worth chose a different path. Luna: What did they do? Lucas: Three things, all at once. First, they went to the voters and asked for a dedicated property tax override — a specific levy, above the regular tax rate, whose revenue could only go into the pension fund. Second, they changed the investment strategy from a relatively aggressive mix — heavy on equities and alternatives — to what they called a 'liability-driven' glide path. And third, they committed to a five-year contribution ramp, front-loaded. Luna: The tax override is the interesting part. Voters approve a property tax increase specifically for pensions? That doesn't happen often. Lucas: It doesn't. But Fort Worth framed it as 'fixing the pension so we don't have to cut police and fire services later.' And it passed with 63 percent of the vote. The override generates about $35 million a year, which is roughly half the additional contribution needed. The other half came from redirecting existing general fund growth — basically, any new property tax revenue from new development went to pensions for five years. Luna: So they didn't raise the base tax rate for everybody. They just said 'any growth in the tax base from new construction, that goes to pensions.' Lucas: Correct. And that was politically palatable because no one's existing tax bill went up. The second piece — the investment glide path — is worth digging into. The old portfolio was roughly 70 percent equities, 20 percent fixed income, 10 percent alternatives. They shifted to a 40-50-10 split, with a bigger allocation to long-duration bonds that match the duration of their pension liabilities. It sounds arcane, but the effect is that the fund's returns become more predictable, less correlated with the stock market. Luna: That also means lower expected returns, though. So the city had to increase contributions even more to compensate. Lucas: Exactly right. They lowered the assumed rate of return from 7.5 percent to 6.75 percent. That alone increases the present value of liabilities — meaning the funding gap looks bigger. But they made the math honest. And the five-year contribution ramp meant they didn't try to close the gap overnight. Year one, they contributed the full actuarially determined contribution plus a supplemental amount. By year three, they were contributing roughly 150 percent of the annual normal cost. Luna: And what's the result, now in 2026? Lucas: The funded ratio as of the last actuarial valuation — December 2025 — was 82 percent. That's up from 46 percent in just three years. The fund still has a way to go to get to 100 percent, but the trajectory is steep and positive. The city's bond rating got upgraded one notch, and the annual contribution as a share of the general fund has started to decline. Luna: That's impressive. But the obvious question is: can other cities copy this? Most municipalities can't just call a special election for a pension tax override. Lucas: That's the constraint. Fort Worth is in Texas, which has no state income tax but does allow local option property tax overrides for specific purposes, if voters approve. In a state like California, where Proposition 13 caps property tax increases, or in a state with strict tax and expenditure limits, this specific playbook wouldn't work. You'd need a different mechanism — maybe a dedicated sales tax or a parcel tax. Luna: What about the investment side? The liability-driven glide path — is that something any pension plan can adopt? Lucas: Technically, yes. But there's a governance barrier. Many pension boards are dominated by union representatives or political appointees who are reluctant to accept lower expected returns because it forces higher contributions today. Fort Worth had a board that was willing to take the short-term pain for long-term stability. That's rare. Luna: So the lesson might be less about the specific tools and more about the political alignment. The voters trusted the city, the board accepted lower returns, and the council redirected growth revenue. Lucas: Right. And the timing helped. Fort Worth's economy was growing — property values were rising, new commercial development was happening. If you try this in a city with a stagnant tax base, the 'redirect growth' trick doesn't produce much revenue. Luna: Honestly, if this episode helped you understand a piece of municipal finance that you hadn't thought about before, that's the kind of thing that makes producing the show worthwhile. We keep Fiscal Policy Podcast ad-free, and listener support is what makes that possible. If today's episode was worth a coffee to you, you can find us at buy me a coffee dot com slash fexingo. Lucas: Yeah, it's a small gesture that really does keep us independent. And we appreciate it. Luna: So back to Fort Worth — one detail I want to circle back to is the contribution ramp. How did they afford that 150 percent of normal cost in year three without cutting services? Lucas: They used a combination of the tax override, the redirected growth revenue, and a small reduction in other capital spending. They didn't cut police or fire positions, which was the whole point. But they did delay a new fire station and pushed out some street repairs. So there were trade-offs. Just not the ones that would have made headlines. Luna: And the pension board's decision to lower the assumed return — that had to be approved by the city council. Was there pushback? Lucas: Some council members argued that lowering the return assumption was 'defeatist' and that a 7.5 percent assumption had been met historically. But the board's actuary showed that with the new glide path, the probability of earning 7.5 percent over 30 years was below 50 percent. The council ultimately voted 7-2 to adopt the lower assumption. Luna: That kind of transparency is key. A lot of cities hide behind optimistic assumptions and then get blindsided when a bear market hits. Lucas: Exactly. And that's the broader lesson. Fort Worth's story isn't about a magic bullet. It's about a city that looked at a 46 percent funded ratio, acknowledged the math, and made a series of politically difficult but analytically sound decisions. The playbook won't work everywhere, but the principles — honest assumptions, dedicated revenue, liability-aware investing — are universal. Luna: One thing I wonder about: what happens if we hit a recession? Property values dip, growth revenue dries up, and the city's contribution capacity shrinks. Lucas: That's the vulnerability. The plan assumes continued growth. In a downturn, the tax override would still generate revenue because it's based on assessed value, which lags market values. But the redirected growth piece would disappear. The city built in a reserve — they set aside roughly two years' worth of the supplemental contribution in a stabilization fund. But it's not bulletproof. Luna: So the next stress test for Fort Worth isn't the stock market — it's the local economy. Lucas: Right. And that's true for every city with a pension plan. The funded ratio is a snapshot. The real test is whether you can sustain contributions through a cycle. Fort Worth has bought itself time and credibility. Whether that translates into full funding by 2035 depends on the next recession. Luna: It's a good case study, though. It shows that pension reform doesn't have to mean cutting benefits or declaring bankruptcy. Sometimes it means being honest, asking voters for help, and taking the long view. Lucas: Yeah. And for listeners in other cities who are staring at similar numbers — there's a path. It's just not an easy one.