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Aug. 16 — Dallas Police and Fire Pension System participants have an opportunity to reverse injuries to the plan that are catapulting it toward insolvency.
They must first, however, be persuaded to approve their own benefit cuts. And the timing of that decision couldn't be worse as officers are still dealing with the death of five of their own in July at the hands of a heavily armed gunman.
At the time of the tragedy, the city's police and fire pension plan was facing financial turmoil because of bad investments and generous benefits.
The plan’s actuary, Segal Consulting, recently calculated that the plan was only 45 percent funded and headed for insolvency by 2030.
The plan's investment portfolio was a “train wreck,” Dallas City Councilman Lee M. Kleinman told Bloomberg BNA Aug. 12.
But the investment portfolio wasn’t the plan’s only problem. It also had a deferred retirement option plan component that buried the system in debt. The DROP accounts for about 50 percent of the plan’s underfunding, said Kleinman, who previously served on the plan’s board of trustees.
A board subcommittee on Aug. 11 submitted a proposal offering a potential path to avoid insolvency. The proposal, however, includes controversial changes to the DROP. If the board approves the proposal, as expected, it will go to the membership for a vote. There is “considerable risk that the members won’t approve,” Kleinman said.
The DROP permits eligible members to simultaneously stay on the job with full pay while having their full retirement annuity paid into an interest bearing account. The interest paid was, before recent changes, an eye popping 8 percent to 10 percent guaranteed.
A plan amendment to the DROP approved by the membership in 2014 will likely cause the interest rate to fall to zero in about two years. That projection, based on the plan's current funding status, wasn't something that was anticipated when it was approved, plan trustee Phillip Kingston told Bloomberg BNA Aug. 12.
If the rate were to be reduced to zero, many active DROP participants would likely rush to retire, creating much greater liability for the plan, said Kingston, who is also a member of the city council.
Under the subcommittee’s proposal, the DROP’s guaranteed interest rate would be trimmed to 3 percent for seven years. Interest payments would stop thereafter.
In addition, the plan’s current 4 percent cost-of-living adjustment would generally be reduced to 2 percent.
Participant plan contributions would also be raised gradually over three years from the current 8.5 percent of pay to 12 percent of pay. Those actively participating in the DROP would see their contributions rise over three years from the current 4 percent of salary to 12 percent of pay as well.
Current DROP participants can continue to add annuity payments to their accounts so long as they work. Under the new proposal, annuity payments to the DROP would end after 10 years of contributions.
The proposal also asks the city to contribute to the plan a higher percentage of participants' salary, amounting to about $4 million annually. This request would likely require approval from the Texas legislature.
If approved, the proposal is expected to keep the plan solvent until 2046.
To keep the plan solvent indefinitely, the proposal calls for the city to make further contributions.
Kleinman said that he was told by a plan trustee that the city would need to pony up about $600 million at one time or provide four installments of about $250 million each over a 15-year period.
The board of trustees is expected to discuss the proposal on Aug. 18. If the trustees approve the proposal, the membership will likely vote on it by the end of the year, Kleinman said.
Neither plan officials nor representatives of the Dallas Police Association responded to repeated requests for comments from Bloomberg BNA.
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The board subcommittee's presentation to the full board is at https://www.dpfp.org/2016/Long-Term_Financial_Stability_Subcommittee_excerpt.pdf.
Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.
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