Considering Proposed Paths Forward in the Dallas Pension Crisis

This is the third part of an on-going series about the Dallas pension crisis.

As the Texas 2017 legislative session unfolds, conflict and controversy continue to haunt one of the worst funded local pension plans — the Dallas Police and Fire Pension System (DPFP). The severely underfunded system requires a significant infusion of contributions at minimum, as well as the dismantling its solvency-destroying Deferred Retirement Option Plan (DROP) program that fell victim to more than $500 million in lump-sum withdrawals last year amid pensioners’ fears of the looming insolvency of the system. Despite a lingering stalemate among policymakers over the appropriate course of action, recent developments suggest that the parties may finally be finding some common ground on the potential reform path forward.

DPFP is currently around 36% funded — having been depleted by more than $500 million in DROP withdrawals last year — and is swiftly heading into the financial abyss. The classical pension policy dilemma of how taxpayers and beneficiaries (i.e. public safety officers) should divvy up the costs of shoring up the system, as well as a dubious governance structure that insulates pension board’s decision-making from city’s oversight, are among the challenges that have prevented parties from tackling plan’s nearly $4 billion shortfall until now.

There are currently three major policy proposals on the table —

• Dallas Mayor Mike Rawlings: Retroactively collect all previously accrued interest on DROP accounts, among other changes.
• State Rep. Dan Flynn (R—Canton): Change the plan’s benefit eligibility criteria along with other assumptions, coupled with an extra annual contribution from the city.
• Dallas City Councilman Scott Griggs: Redirect a portion of the local sales tax money, which currently finance the regional mass transit agency (DART), towards aiding DPFP.

Mayor’s Rawling’s negotiations with a Pension Review Board in the Texas state capitol took a negative turn this past January, given that there was a clear lack of agreement between himself, local union leaders, and the DPFP pension board. The Rawlings proposal to “clawback” interest by adjusting DROP accounts to zero percent of interest would provide an estimated $1 billion in funds for the pension plan — however labor representatives have balked at this idea.

While negotiations continue to drag on, the risk of more funds being withdrawn has generated continuous legal battles. Four Dallas city council members joined the mayor in a lawsuit to prevent further withdrawals from DROP accounts scheduled for March. The DPFP board ultimately relented in the face of legal pressure and voted in mid-March to not allow further lump-sum withdrawals until April. The board has continued to pay out normal monthly benefits.

Another proposal from city council member Scott Griggs is estimated to provide about $32 million in additional annual revenue for DPFP by shifting proceeds from sales taxes. Although the plan could help avoid raising additional local taxes, it would involve reallocating a portion of the sales tax collections away from the Dallas transit program DART, which in turn could create its own headaches. According to DART spokesman Morgan Lyons, this move would be “potentially devastating for transit operations.”

While clawing back accrued interest on DROP accounts is almost certainly destined to fail — retirees will surely litigate any clawback — and diverting transit dollars to pensions may be a nonstarter, there may be progress on a separate reform front. Last month the DPFP Board voted unanimously in favor of a plan from State Rep. Dan Flynn, chairman of the State House Pension Committee. Even though the plan is not yet complete, preliminary sketches suggest that it would raise the retirement age for Dallas police and fire fighters from 51 to 58, and increase city’s contribution by $22 million a year to fully fund the plan in the next 40 years.

As of now, Flynn’s plan, which requires concessions from both labor and management, has the potential to be the most viable of the three options, as it lays the ground for mutual discussion and cooperation among all of the parties involved. The ultimate solution may require elements from all three proposed paths, though.

As negotiations continue legislators, the Dallas city council, and labor leadership should also think about creating a new plan for future hires that is not beset with the existing financial challenges. Such new plan design could either be an appropriately priced defined benefit plan without a DROP that guarantees interest above 0%, a more flexible hybrid plan, or an optional defined contribution plan.

Regardless, any solution would need to be approved by state lawmakers before the legislative session ends in late May, so the time is running short to make progress advancing a viable reform solution.

For more about Dallas see our previous coverage:

• Dallas Pension Crisis Prompts Another Credit Rating Downgrade and Ban on DROP Withdrawals
• The Role of Governance in the Dallas Police and Fire Pension Crisis