SPECIAL REPORT: El Paso’s City Pension Bomb

Across the country, city and state governments are taking drastic measures because their pension plans are underfunded by hundreds of millions of dollars — in some cases, billions of dollars.

City Representative Steve Ortega believes El Paso is in much better shape, despite its underfunded pensions.

“At this point, our management thinks we are in a pretty healthy state,” said Ortega. “Certainly, we’ve heard about the catastrophes that have taken place in cities like San Diego, and we are no where near that.”

As of August 2010, the El Paso city employees’ pension fund had nearly $570 million in it. It is underfunded by more than $140 million.

“Eighty percent funding is a good level; 100 percent is a little bit better,” said Richard Mackesey, the fund’s actuary. “But what you want to see is not just 80 percent funding or 100 percent funding but the path to get to 100 percent funding.”

Barring any setbacks, Mackesey expects the retirees pension to be 100 percent funded 43 years from now.

“The 43 maybe we’d like to see it a little lower, at 40 or 35 or 30, but its on that path,” he said.

The fire and police pension funds are in slightly better shape. They’re both approximately 82 percent funded, and combined they are $217 million dollars short of full funding.

That wasn’t the case a few years ago.

In 2007 and 2009, the city issued a combined $210 million in bonds. That money was pumped into the fire and police pension and a second tier with more sustainable benefits was implemented.

The amount employees must contribute was increased for all three funds, as well, yet risks still remain.

“So much of the pension business depends on what happens in the market, so from about 2008 to 2010, we were hurting. Now that the market is starting to recover, we are doing better as well,” said Ortega.

That risk is why some believe municipalities should do away with defined compensation pensions.

“I think local governments should be moving, as nearly all large companies in the private sector have, to what are called defined contribution programs. Essentially 401ks,” said Josh Barro, a journalist with the Manhattan Institute who has done extensive research on public employee pensions.

Barro believes the current system is flawed because if there’s a shortfall in a fixed benefit plan, the city’s taxpayers must make up the difference.

“People really need to be paying attention to pensions because it has huge direct impacts on what tax rates are going to be, what other services the city can afford to provide,” he told ABC-7. “When you have a cost explosion in pensions, it put tremendous pressure on all the things we expect our government to do.”

Yet despite all three funds being underfunded by a combined $357 million, Bill Studer, the city’s deputy city manager for finance, said there is little talk of doing away with the fixed benefit plans.

“If we were to create a different type of pension plan it would only be in effect for employees going forward.”

Barro agrees.

“No, a move to 401k can’t fix the under funding problem you have right now,” he said. “What it does is prevent you from having any new underfunding problems. So, then you can devote your energies to fixing the funding gap you have today.”

While there are no plans to overhaul the pension plans, Robert Ash, El Paso’s city’s pension fund administrator for the past 15 years, told ABC-7 changes are coming.

“We’ve been talking with the city manager’s office about potentially increasing contributions, creating a second tier, redesigning some of the benefits and just the components of the benefit,” Ash said.

Studer also believes there is no need for taxpayers to be alarmed.

“I think we are headed in the right direction. I certainly wouldn’t lose sleep over it but if I was a citizen I would try to stay involved on this issue,” he said.