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.”