Dallas police and firefighters were once promised earlier retirement ages and plentiful pension benefits. Now that the Dallas Police & Fire Pension System (DPFP) is horribly underfunded, these promises are much harder to keep. Due to colossal mismanagement, city officials and plan administrators had to urgently find a way to save this broken system before it’s too late.
Thankfully, H.B. 3158, unanimously passed by the state legislature, aims to get the fund back on solid footing by increasing worker and taxpayer contributions, raising the retirement age, restructuring the plan’s governance, and significantly cutting on the post-retirement benefits. The plan––originally sponsored by Rep. Dan Flynn and recently signed into law by Gov. Greg Abbott––should reach the 100 percent funded status in 46 years.
The issue isn't limited to Dallas alone––pension mismanagement happens all over the country. Chicago is raising taxes across the board to perk up the city’s insufficient pension contributions. Detroit, following the largest municipal bankruptcy, is now grappling with ballooning pension contributions as well.
Where Dallas stands out, though, is in the magnitude of the problem. Last year Moody’s reported that Dallas has accrued more pension debt relative to its resources than any major American city except Chicago. In just three years, the plan managed to lose half of its funded status—from being 76 percent funded in 2014 to just 36 percent funded this year. The fund is currently $3.7 billion in the red and pension reform is needed before its coffers dry up in 2027.
There are three major reasons behind the Dallas pension crisis: inferior investment returns, dubious governance structure, and an unsustainable Deferred Retirement Option Plan (DROP).
Created to keep the experienced officers on the job after retirement, DROP quickly turned into high-yield savings accounts, providing eight to 10 percent guaranteed returns on deposited pension checks. Meanwhile DPFP’s overall investment returns were nowhere near these rates in the past decade.
On top of that, participants were given unlimited access to their DROP accounts, despite the fact that all these balances were counted towards the plan’s long-term assets. Last year that lead to nearly $500 million in panicked withdrawals, accelerating the fall of the plan’s funded status.
The new law would see that DROP participation is limited to 10 years, eliminate guaranteed returns for active members, and prolong the ban on large lump sum withdrawals that was reinforced last year. In addition, the first respondents will start contributing 13.5 percent instead of 8.5 percent of their payroll starting September 1.
For an ordinary Dallas officer these changes might be challenging, as first respondents are usually not covered by Social Security. For example, a police officer with 30 years of service and an average salary of $67,444 would have received $60,700 in yearly pension upon reaching 50 (for those hired before March 1, 2011) or 55 years of age. Now, the same officer would be receiving roughly $10,000 less per year and working until 58 years for full benefits, according to new pension provisions.
Meanwhile, taxpayer contributions will increase to 34.5 percent instead of 27.5 percent of aggregated payroll, plus an additional $13 million each year for the first five years. This leaves Dallas’s taxpayers on the hook for another $900 million over the next 30 years. To help mitigate future problems, the Dallas City Council will be given the majority on the DPFP Pension Board with six out of 11 seats. This will make the new board more accountable to city taxpayers rather than plan members, and ensure greater impartiality.
Dallas Mayor Mike Rawlings who, at one point, opposed the bill, believes that committing more taxpayer money to the fund without giving the city more control over the pension board would have been a disaster. Fortunately, the final package tilts the funding authority scale towards the city, as decisions will rest with city taxpayers––not the DPFP board.
The city now has to contemplate ways to fund the contribution increases. Raising additional taxpayer money will be challenging, as Texas already charges no state income tax and has some of the highest property taxes in the nation. As new revenue sources grow thin, Dallas will have to start reducing funding for public services such as libraries, parks and public safety. Let’s hope mismanagement doesn’t plague Dallas’s pension system again and accountability becomes a permanent part of the system.
This column was written by Anil Niraula.