Dallas Enacts Pension Reform Legislation

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

The Dallas pension crisis might have an end in sight. Texas Gov. Gregg Abbott has recently signed bipartisan legislation intended to fix the ailing Dallas Police & Fire Pension System (DPFP) by changing the benefit structure, increasing contributions, and realigning the DPFP governance.

With only an estimated 10 year’s worth of assets left to pay benefits, the DPFP has been overrun with $3.7 billion in pension debt and managerial problems that are threatening the stability of public safety in Dallas and the pensions of police and firefighters.

H.B. 3158, sponsored by State Rep. Dan Flynn, was designed to reverse the asset outflows and adjust the benefits of the DPFP in order to save the fund from total insolvency. The legislation saw a contentious road to passage, but ultimately garnered the support of Dallas Mayor Mike Rawlings — a vocal critic of the bill at various points — as well as the House, Senate, and labor representatives.

Key components of the legislation include:

• Increasing employer contributions: These will now be subject to a minimum threshold, and will jump from 27.5% to 34.5% of annual payroll, with an additional $13 million per year for the first five years.
• Increasing employee contributions: For most active members and future hires, these will increase from 8.5% to 13.5% of their pay.
• Benefit adjustment: Participation in the Deferred Retirement Option Plan (DROP) will be limited to 10 years, and future guaranteed returns for active members will be suspended:

1. Retired DROP members will see Treasury yield-based returns.
2. All DROP participants will be subject to the existing ban on large lump sum withdrawals (the kind that put the fund in even worse shape last year).

• Governance changes: The Dallas City Council will now have the voting majority on the DPFP board — something Mayor Rawlings had demanded — with six out of 11 seats on the Pension Board.

The bill that was passed aims at putting the fund back on solid footing, though even if every assumption underlying the legislation’s forecasts are correct DPFP won’t be fully funded for another 46 years. This suggests that it may very well be more of a salve to mend the wounds of the plan rather than a long-term cure.

Most likely the state and city will have to make additional changes down the road, but this legislation improves the status quo and stabilizes the plan until there is the financial room to make the kind of additional funding policy changes necessary to truly put the plan on a path to solvency. Such changes would include adjustments to the plan’s overly optimistic investment return assumption and disproportionately high share of illiquid assets in its portfolio.

Another thing to consider is the possibility of litigation on constitutional grounds. DPFP along with several Houston pension plans is governed by a separate Texas statute, which some argue means the benefits are in fact protected under the Texas constitution. Just recently, Houston police and firefighters sued the city over a similar reform that included pension cuts, claiming that these trimmings were unconstitutional. Further still, H.B. 3158 allows the next DPFP pension board to consider “clawing back” the DROP interest first responders have already accrued. In this case, retirees will surely see it disputed in courts.

Baring any changes due to future litigation, the proposed changes are estimated to increase Dallas’s contribution by about $900 million over the next three decades. This has been reported by some to be an increased “cost” — but in fact it is actually simply a budgetary increase as the forecasted contribution rates have always been less than what is really necessary to fund the pension plan.

Now the city will likely have to decide whether to reduce its other public services, such as schools and infrastructure, or raise taxes to pay the additional contributions.

Even though this is a considerable progress, the passage of this legislation is not the end of the road for the reform process in Dallas, but it is a substantive first step. To effectively implement the changes, the City Council, the pension board, and first responders all will have to continuously work on improving the fund’s asset management, and juggling the budgetary challenges created by the contribution increases.

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
• Considering Proposed Paths Forward in the Dallas Pension Crisis