Texas Supreme Court Grants Dallas Police and Fire Pension System a Legal Victory

The Texas Supreme Court has recently ruled in favor of the Dallas Police and Fire Pension System (DPFP) in a lawsuit brought forth by retirees, who claimed that changes to the guaranteed interest rates credited to their DROP retirement accounts were unconstitutional. The ruling represents a legal victory that will help avoid further dents to the pension plan’s degraded solvency and will bolster the security of promised pension benefits.

As we have previously noted, DPFP is one of the few public pensions that has its own governing statute under the Texas law, essentially granting full autonomy over plan changes to the pension board and plan members. And certain local pension plans’, DPFP included, previously accrued pension benefits are protected under the Texas Constitution, Article XVI, Section 66, whose contractual clause is nearly identical to the federal one.

On March 8, the highest civil court in the Lone Star State validated previous prospective reductions to the rates on interest bearing accounts in the problematic deferred retirement option plan (DROP) benefit, which allows retired members to earn interest on deposited pension checks if they stay on the job for an extended period of years beyond normal retirement.

The court specified that since the change doesn’t impact “funds deposited before the amendments became effective,” they are to be “prospective only.” As such, there is no violation of the constitutional protection of already accrued, as opposed to future, benefits.

This reaffirms the 2016 decision by David Godbey, federal judge in Texas’ Fifth District of the  U.S. Court of Appeals, who ruled in favor of the pension board’s decision because the DPFP was steps away from fiscal collapse if nothing was done.

In October 2014, with DPFP only 38.2 percent funded (based on GASB accounting methods) and almost $5 billion in the red, its governing board along with an overwhelming majority of active public safety officers approved reducing the 8 percent interest rate paid on DROP accounts by 100 basis points each year until it reached 5 percent in 2017. This was accompanied by a reduction in employee contribution rates and vesting periods, as well as a requirement to take out all account balances after a certain age.

Kelly Gottschalk, executive director of the pension fund, said the fund was “obviously pleased” about the decision since the changes were an “important piece in the solvency of the plan.” Indeed, guaranteed returns that exceeded plan’s average historical returns and a loose lump sum withdrawal policy resulted in at least $500 million in DROP account withdrawals in 2016 alone, escalating DPFP solvency concerns.

As a part of a multifaceted reform package, culminating in H.B. 3158 in mid-2017, the rehashed pension board initiated a new DROP policy later that year, pegging guaranteed returns on DROP accounts to 5-to-30-year Treasury yields and restricting large lump sum withdrawals. As of the DPFP’s latest actuarial valuation (January 2018) the plan was 46.7% funded on market valued basis, and contributions totaled 74.8 percent of the actuarially determined employer contributions over the year. While this remains far short of full actuarial funding, it is an improvement relative to the 45.6 percent of required contributions deposited in the FYE2016. According to Segal Consulting, if DPFP’s payroll and other actuarial assumptions hold water, the plan would reach full-funding by year 2063.

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
• Dallas Enacts Pension Reform Legislation
• Dallas Police and Fire Pension Reforms See Early Success