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State rep: Everything on the table for Dallas Police and Fire Pension fixes if city, system fail to agree


The chairman of the Texas House pensions committee said Friday he can’t rule out moving Dallas police and firefighters away from a pension plan and toward a defined contribution retirement plan.

Such a plan would mean the city would have to only pay in a promised amount of money to a worker’s retirement account. Actual benefits might not be guaranteed.

Many police, firefighters and even city leaders have bristled at that possibility as the pension system faces insolvency by 2028. And state Rep. Dan Flynn, R-Van, would rather not force a defined contribution plan on first responders. But, he said Friday, “everything would have to be considered” if city and pension officials don’t come to the Legislature with a solution to rescue the failing fund.

“As far as I’m concerned, it’s all on the table,” Flynn said.

Flynn’s comments in a phone interview came a day after he wrote a letter to Dallas Mayor Mike Rawlings to chide him for his recent testimony to the Texas Pension Review Board. The mayor told the board that the city could be forced into bankruptcy because of the the fund’s liabilities and a looming police-and-fire pay lawsuit, which could cost the city billions.

Through a spokesman, Rawlings declined to comment Friday. The mayor and Flynn plan to meet in the coming weeks.

The defined contribution suggestion is seen by pension advocates as a worst-case scenario. An influential group, funded by Houston billionaire John Arnold, suggested last month that Dallas switch to a defined contribution plan.

Josh McGee, who co-authored the report and chairs the Pension Review Board, said Friday that he would like to see “a greater volume of dialogue” among city, state and pension officials.

“Everybody needs to come together to fix this,” he said.

Texas Association of Public Employee Retirement Systems President Paul Brown, a critic of McGee’s, mostly agreed and said the city needs “to step up to the plate” and come up with a plan.

Uncertainty has reigned in recent months and caused great anxiety among active and former police and firefighters. Some have suddenly retired or pulled lump sums out of the pension system to avoid benefit cuts, making the situation even worse for future retirees and the city.

And the focus is now fully on Dallas ahead of January’s legislative session after Houston city leaders recently struck a major deal to resolve their pension crisis.

Rawlings’ talk of bankruptcy wasn’t new. But Flynn doesn’t want to hear any rhetoric about the city shirking its responsibilities to pay promised benefits by filing bankruptcy.

“That’s not a plan,” Flynn said. “That’s something that California would do.”

Still, the city’s financial outlook is precarious, as multiple credit downgrades have shown. An unfavorable judgment in the pay lawsuits alone could leave the city facing bankruptcy. And the pension system is on track to become insolvent within about a dozen years, and possibly sooner.

The police and fire pension is governed by state statute, which means the Legislature will have to approve any grand bargain reached by city leaders and pension officials. It also means police and firefighters have been able to vote on their own benefits without taxpayer approval. Some City Council members are on the board of trustees, but they are a minority on the pension board — and many past council members were frequently absent from meetings.

For years, the fund’s members guaranteed themselves generous benefits, some of which made them into millionaires. Other benefits, such as a 4 percent annual cost-of-living increase, were largely unmatched by the private sector.

The system’s investment portfolio was also unable to keep up with the benefits. The previous administration bet heavily on risky real estate and overvalued it for years, creating a massive funding hole.

Pension officials have offered their own solutions. They are asking members to vote largely to cut their own benefits and increase their contributions to the fund. The benefit election begins Monday and ends Nov. 28.

The board also wants the city to pitch in about $1 billion.

Rawlings praised the fund’s new administration and its efforts during last week’s Pension Review Board meeting. He put the blame on the old administration, police and firefighters and the state for allowing the plan to operate semi-independently.

But Flynn said it’s still the city’s problem to fix. He backed the $1 billion suggestion and offered a few of his own, some of which go even farther than police and fire officials want.

Flynn said the city will ultimately have to pay the price for its lack of oversight over the years, including the taxpayers who elected their leaders.

City officials don’t see it that way. They have said they want more control over the fund. But they haven’t offered specifics on what they will contribute to the fix. Rawlings said the pension board’s changes don’t go far enough, and city officials want to avoid a $1 billion payment if they can because it means higher taxes or significant spending cuts — and most of the city’s budget already goes to public safety.

Dallas Police and Fire Pension Board Chairman Sam Friar hopes police and firefighters, some of whom have been reluctant to embrace the changes, are paying attention.

“Some of our members refuse to believe this is real,” he said. “The letter from Chairman Flynn should make them believe this is real.”

Friar also hopes city leaders are paying attention and that maybe raising taxes will be the best option.

“We need some money from the city,” Friar said. “Unfortunately, it may be a bad political move for them, but we’re talking about the life of this pension fund and keeping a viable police force and fire department.”

Dallas must regain control of police and fire pensions, halt run on the bank, study says


A new report funded by an influential Texas billionaire calls for the state to let Dallas City Hall and taxpayers regain control of the Dallas Police and Fire Pension Fund.

The report comes as city officials plan to push for more power over the system, which is scrambling for solutions to avoid insolvency by 2028. And the report coincides with an unrelated ballot measure that would cut retirement benefits for future civilian city employees.

Other changes the report suggests, such as a transition away from pensions to defined-contribution plans, are more controversial and lack political support. The Houston-based Laura and John Arnold Foundation, a prominent player in the national discourse on fixing underfunded public pensions, has pushed for such changes elsewhere.

Pension advocates pushed back on the report. But Josh McGee, the report’s co-author, said at a news conference Thursday that change is needed. Dallas is “in a precarious spot” because of both of its pension systems, he said.

“Even under the best-case scenario, Dallas’ pension debt will have serious consequences for workers and taxpayers,” said McGee, who is also the chairman of the Texas Pension Review Board. “Rising pension costs will affect the city’s ability to recruit and retain workers and provide public services.”

McGee recently described the Dallas police and fire pension fund as a “big, hairy mess.” Pension officials are asking members to vote to cut their generous benefits. The cuts haven’t been popular, but would put the fund’s benefits more in line with other pension funds.

Pension officials also hope the city will pitch in with hundreds of millions of dollars to keep the fund afloat. That means higher taxes, cuts in services or both.

The city’s civilian retirement system, known as the Employee Retirement Fund, also faces a funding deficit of hundreds of millions of dollars. The ERF is asking voters to reduce benefits for future employees on Proposition 1 on the ballot.

And therein lie the differences in the funds: The ERF is governed by local ordinance. Changes to the plan must be approved by the City Council and voters. The Dallas Police and Fire Pension Fund is governed by a state statute, making it semi-independent from the city. Four City Council members are on the board, but officers and firefighters ultimately have the power to make decisions about their own benefits.

City Manager A.C. Gonzalez agreed that the city needs more control during a meeting this week with The Dallas Morning News’ editorial board. He called the police and fire pension fund’s proposals to cut benefits “a good first step.”

Both sides will have to ask the Legislature for help next year. But the city might push for deeper cuts and more control than the system is offering. Gonzalez wants Dallas voters to “tell their legislators to get this thing fixed.”

City Council member Lee Kleinman, who has been working on a solution to the pension plan, likewise believes the city needs control to rein in the pension.

Police and Fire Pension Board Chairman Sam Friar said McGee’s report emphasizes the need for them to approve plan changes.

“I have no problem working with the city, arm in arm, on our solvency issues,” he said in a letter to members. “However, I do not want the city to be in control of our pension issues and how they are solved.”

Paul Brown, president of the Texas Association of Public Employees Retirement Systems, accused the Arnold Foundation of “fear-mongering” on pensions.

Brown also said local control isn’t a guarantee of a well-managed plan. For instance, the city issued $535 million in pension obligation bonds in 2005 to fill a budget hole in the locally controlled ERF.

“That’s not what’s going to fix this situation,” he said. “You have a pension system that can easily be fixed.”

But “easily” is likely an overstatement. No pension in the state is in worse shape than the Dallas Police and Fire Pension Fund. It has become the poster child for what can go wrong with pensions run amok. Overly generous benefits and risky and overvalued real estate investments made by the system’s previous administration left the fund billions of dollars in the hole.

One provision of the pension benefits, the Deferred Retirement Option Plan, is particularly problematic. The fund allows police and firefighters to effectively retire in the system’s eyes but continue working.

The monthly pension benefit checks they would have received while retired are instead credited to a DROP account. For years, the accounts guaranteed interest rates of at least 8 percent.

When those in DROP actually quit working, they could continue to defer their benefit checks into the system and withdraw funds whenever they wanted. Effectively, DROP became a high-interest bank account at a great risk to the rest of the fund.

And when the board proposed benefit cuts, many DROP members withdrew hundreds of millions of dollars. Dozens of them had more than $1 million in the bank. One withdrawal was for $3.4 million. Such withdrawals would be impossible in normal plans, which only pay monthly benefits.

Some of the withdrawals actually helped the fund because it doesn’t have to pay its required 6 percent interest on the money this year. But too many withdrawals would leave the fund in a precarious spot: Pension officials may have to sell assets to pay members. And they need those assets to make money to keep the fund alive.

Pension board trustees elected not to restrict DROP withdrawals weeks ago in an attempt to reassure members about their intentions. McGee and his co-author said the plan needs to reconsider relying on the members’ goodwill to keep the fund solvent.

The city, state and pension board can’t afford to dither, McGee said. The consequences will be too great if they don’t come up with a solution that spreads sacrifice around.

“The bottom line is Dallas will have less money to devote to police and fire departments, libraries and parks … and other important programs,” McGee said. “There will be less discretionary funding to invest in infrastructure improvements that can attract new residents and businesses, and it will be harder for the city to put money aside to weather economic downturns and deal with emergencies.”

Texas House committee vows support, but absolutely no money, for Dallas Police and Fire Pension fixes

Dallas fire & police

ARLINGTON — State legislators said Thursday that they have Dallas officials’ backs as they try to save the city’s police and fire pension system.

Not that the state is offering any money. The Legislature wants no responsibility for the fund’s $3.3 billion funding hole. But members of the House Pensions Committee offered moral support and a vow to work with the city and pension officials if they bring forward a workable solution, which will require state approval.

Committee members also offered a warning: Don’t make the Legislature come in there. City and pension officials may not like the results of state-mandated changes, said Dan Flynn, R-Van, the committee chairman.

“The state can always come in and do things,” Flynn said after Thursday’s meeting at the University of Texas at Arlington. “But we don’t want to do that. I believe local solutions are better.”

Because the Dallas Police and Fire Pension Fund is governed by a state statute, some of the drastic changes that pension officials and the city want will have to receive the Legislature’s approval. Texas Attorney General Ken Paxton also issued an opinion earlier this month that the state would probably not be on the hook financially if the pension fails. So, the cost will be on the city’s taxpayers and police and firefighters.

The pension fund is headed toward insolvency by 2030 or sooner. The system’s previous administration made risky investments and significantly overvalued the fund. The FBI has been investigating transactions related to the fund, pension officials say.

A lucrative perk called the Deferred Retirement Option Plan, known as DROP, has also greatly increased the fund’s liabilities.

DROP allows active police and firefighters to officially retire in the system and continue to work. Their pension checks go into the DROP fund., which for years guaranteed an interest rate of at least 8 percent, no matter how the fund performed. Retirees could keep their money in DROP and could withdraw money whenever they want, like a bank.

But DROP members withdrew more than $220 million from the fund in the last six weeks as pension board members proposed major benefit cuts.

Kelly Gottschalk, the executive director of the fund, said the fund will be in jeopardy if the pace of withdrawals continued because it would force the fund to sell its assets. But the board decided on Monday not to restrict withdrawals.

Gottschalk told the committee Monday that the gambit appears to have worked and calmed some nerves. Retirements have slowed since Monday, and a few have even rescinded their requests to retire, she said.

Gottschalk said she meets regularly with city officials about the city’s role in the pension fix, which could include a cash infusion of hundreds of millions of dollars and some governance changes to give the City Council more control over the fund.

Council member Lee Kleinman, the city’s liaison to the pension board and a former board member, said the pension has been “really, really challenging for us.”

Flynn said especially after the July 7 downtown Dallas ambush, state officials want to preserve the police and fire pension. But he wants the city and pension officials to take decisive action.

“I don’t want to come back and continue to kick the can down the road,” Flynn said. “It is time to correct it.”