The Dallas Police and Fire Pension Board approved a plan Thursday asking its police and firefighters to help rescue their failing retirement fund.
Sixty-five percent of police and firefighter would have to agree to the changes that would cut benefits and increase contributions.
If no changes are made, the $2.39 billion dollar fund would be bankrupt by 2028.
“We do not like the idea of cutting benefits,” said Sam Friar, the board’s chair and a member of the fire department. “However, it is something that we absolutely have to do.”
The changes will only cover about 55 percent of the funding shortfall, which is why taxpayers will end up footing a huge portion of the bill.
The city is also going to be asked to contribute at least a $1 billion to rescue the failing fund. That’s up from about $650 million a couple of months ago. It’s likely that the city would have to ask voters to approve a bond issue to do so.
“We cannot do it ourselves,” Friar said. “We’re aware of that and we’re sorry for that, but this is just the situation that we’re in.”
The unfunded liabilities of the fund are about $4 billion.
“It’s a lot of money any way you look at it,” said Scott Griggs, a council member who served on the board.
Still, the hits just keep coming.
A so-called “run on the bank” has exacerbated its woes – and it’s why the amount taxpayer will ultimately have to put more into the fund.
Over the last two months, more than $400 million dollars in lump-sum withdrawals have been made by retired police and firefighters, who were concerned about the ongoing problems of the fund. That includes the $22 million dollars withdrawn just in the past week.
And it’s coming just as the pension’s fund woes have made it more expensive for the city of Dallas to borrow money. This month, two credit ratings agencies, Moody’s and Fitch, cited the mass withdrawals from the fund as a key reason they were reducing the city’s bond rating.
“If we’re not able to fix it, then our bond rating will continue to collapse,” Griggs said. “That means you’ll pay more for less. As you know we borrow significant amounts of money to fix our streets and our interest rates will go up and taxpayers will have to pay more.”
And things are so bad that the pension board recently voted to ask the city to pay its administrative costs of about $36 million annually. The board did so after receiving a letter from its actuaries indicating that paying administrative costs was negatively impacting the fund’s ability to pay benefits.
“That’s written in our plan that if the pension fund were to have administrative issues that actually strained our plan, that administrative fees would be paid for by the city,” Friar said. “That’s not something we just dreamed up. They are on the hook for it.”
City officials said they were aware of the action by the board, but had not received an "official notice." Once the request is received, the City Council will be briefed, officials said.
“That’s a big chunk of change,” Griggs said. “That’s money right now that’s already allocated in the city’s budget to things such as libraries and parks and fixing our streets.”
The massive withdrawals totaling in excess of $400 million dollars were taken out of accounts known as the Deferred Retirement Option Fund, or DROP. The mechanism allowed veteran police and firefighters to effectively retire from the fund while they kept working.
Their pension funds were deposited into DROP accounts. Those accounts were paid a guaranteed interest rate of at least eight percent for many years, even in years when the overall pension fund was earning much less, or even took losses.
The discussion about the proposed changes caused many retired police and firefighters to panick and withdraw their money. Some police and firefighters retired just so that they could withdraw their money from their DROP accounts.
DROP now accounts for in excess of 50 percent of the pension’s assets, up from 30 percent just six years ago. Pension board members have been trying to quell the fears of retired police and firefighters to try to slow the run on the DROP money.
A YouTube video presentation released last month by the pension fund explains how the situation got so bad.
In July 2015, the fund’s actuaries projected it would run out of money in 2040.
But things continued to get worse, mostly due to poor real estate and private equity investments. By January, the fund was projected to run out of money by 2030.
The city is almost certainly on the hook to protect benefits. The Texas Constitution mandates that it is the city and the pension system’s responsibility to “protect benefits from being reduced or otherwise impaired.”
City contributions are not currently even enough to pay current retirees, much less those who retire in the future, the video says.
One-third of the problems are related to bad investment decisions, it says.
It attributes the remaining two-thirds to other factors: Benefits that were “too rich” including the exorbitant interest rate paid on DROP accounts and the “the uncontrolled growth of drop account balances; the 2008 global financial collapse; decreased hiring; lower pay raises; longer life expectancy of members and the fund’s failure to recognize how severe the problem were quickly so that they could be addressed.
The plan would increase the contributions of police and firefighters who are not in DROP from 8.5 percent to 9 percent.
The contribution of active police officers and firefighters who are in DROP would rise from 4 percent to 9 percent.
The plan calls for ultimately increasing the contribution to 12 percent by 2018, but that requires legislative approval and the city making it legally obligated to provide funding to the plan.
The city has already agreed to increase its contribution from 27.5 percent to $28.8 percent – the highest percent allowed by state law.
It would also spread the pain to retirees. They would see their cost of living adjustments drop significantly drop.
Big changes would be coming for DROP.
Under the plan, the interest paid on DROP for active police and firefighters would be 3 percent for seven years. Payments could be deferred into DROP accounts for active members for a maximum of 10 years. There are now limits.
It would also make significant changes to the DROP program for those who are retired.
For years, the lucrative pension fund also was a selling point to convince rookies to take jobs with the police and departments, even when pay was significantly higher at other area departments. That is no longer the case and it’s impacting the recruitment efforts of the police and fire departments.
The police department is currently about 400 officers short with more and more officers heading out the door.
Friar said he believes that with “proper explanation” police and firefighters will approve the changes. He also said that the head of the legislature’s pension commitment has made it clear that not making changes is not an option.
“They told us that point blank,” Friar said. “They will take of it for us if we don’t.”
Ken Sprecher, a retired Dallas police sergeant, said he’s hopeful the changes will steer the fund toward a path that leads to solvency.
“It’s pretty well documented that we’re in a severe financial predicament,” Sprecher said.
The proposed changes would also give the city the right to approve any plan that results in an increase in the pension’s liability, but that is contingent on the city committing fund to rescue the fund.
It is likely, however, that the city will demand more control given the vast sums of money involved.
“I think that’s going to be inevitable,” Griggs said. “The pension system is certainly going to require some infusion of cash from the city of Dallas. Obviously, the city of Dallas is going to want a greater control over the governance.”
Copyright 2016 WFAA