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Dec. 5 — Dallas Mayor Michael S. Rawlings sued the Dallas Police and Fire Pension System’s trustees to immediately stop the withdrawal of certain assets from the municipal pension fund ( Rawlings v. Bd. of Trs. of the Dallas Police and Fire Pension Sys. , Tex. Dist. Ct., No. 16-15431, complaint filed 12/5/16 ).
Rawlings filed the lawsuit Dec. 5 in state court in Dallas in his personal capacity. He seeks a court order to temporarily restrict all withdrawals from the pension system’s Deferred Retirement Option Plan (DROP) as 2016 outflows allegedly have greatly reduced the system’s protected benefits. DROP is a program that allows eligible participants to simultaneously stay on the job with full pay while having their full retirement annuity paid into an interest-bearing account.
News reports of a “looming insolvency scenario” earlier this year prompted DROP participants to withdraw their funds in lump sums, the complaint said. That created a “snowball” effect, leading a “staggering” number of other participants to withdraw nearly $500 million in optional lump-sum DROP funds since August, it said. To put this amount in perspective, between 1999 and 2015, the pension system processed approximately $321.6 million in lump-sum DROP withdrawal requests, the complaint said.
The lawsuit “was necessary to stem the outflow of assets from the system,” Dallas City Councilman Lee M. Kleinman told Bloomberg BNA. Kleinman, who previously served on the plan’s board of trustees, said it was unfortunate that the pension board didn’t take the necessary steps to do that months ago.
The system needs to have the ability to pay monthly benefits to the retirees, he said. Furthermore, he said he thought that the DROP interest rate feature being paid to participants is unreasonable and has put at risk the participants’ “constitutionally protected benefit.”
Plan trustee Philip Kingston begged to differ on the helpfulness of the mayor’s lawsuit.
“It fails to do the thing that is most needed right now, which is to present a solution backed” by the full city council, said Kingston, who is also a member of the council. “We need a solution that protects and provides for retirees and their families and that keeps officers and firefighters on the job.”
The trustees have violated their ministerial duties by “cannibalizing” the fund’s assets instead of managing them according to sound actuarial principles, the complaint said.
The pension system provides benefits to 10,000 members, who include the city’s police officers and firefighters as well as their beneficiaries. A series of “reckless investment decisions” by the pension system’s former leadership led to a $1 billion shortfall at the beginning of 2016 and hundreds of millions of dollars in asset devaluation, the complaint said.
As of 2015, the fund had total assets of $2.68 billion, $1.5 billion of which was composed of DROP funds, according to the complaint. It had $3.27 billion in unfunded liabilities for a funding ratio of 45 percent, the complaint said. The over-withdrawal of DROP funds in a matter of months reduced by one-third the fund’s life expectancy, it said.
The “mass exodus of DROP funds, which, as of Nov. 10, 2016, has averaged $36.4 million per week for the past three months, amounts to a ‘run on the bank’ and is exacerbating the financial peril of the pension system,” the complaint said. If nothing is done, the pension system will be depleted of all cash reserves and liquid assets by February, the complaint said.
In October, the trustees told the council that the pension needed a $1.1 billion bailout to avert insolvency. Providing that would require a property tax increase of 130 percent, according to the complaint.
However, the pension's financial problems don't appear to have discouraged investors much (see related article in this issue).
Gruber Elrod Johansen Hail Shank LLP represents the mayor.
To contact the editor responsible for this story: Jo-el J. Meyer at firstname.lastname@example.org
Text of the complaint is at http://www.bloomberglaw.com/public/document/MICHAEL_RAWLINGS_vs_THE_BOARD_OF_TRUSTEES_OF_THE_DALLAS_POLICE_AN.
Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.
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