Submitted by Michael Shedlock via MishTalk.com,

The Dallas Police and Fire Pension plan is severely underfunded. Not even a $1.1 billion taxpayer bailout the plan officials request will make the plan whole.

Discussion of a possible freeze in lump sum payments led to a run on withdrawals. The board still has not suspended lump sum payouts.

On Saturday, Dallas Mayor Mike Rawlings proposed targeting those who got rich from the system. This is sure to accelerate the run on assets via lump sum withdrawals.

As background to this story, please consider my October 16 article: Dallas Police Retiring in Droves, Taking Lump Sum Pensions, Fearing the Money Isn’t There (And It Isn’t).

Today, DallasNews reports City’s plan to save Dallas Police and Fire Pension Fund will target those who got rich from the system.

A City Council briefing posted online late Friday night provided the first glimpse into the city’s plan to save the Dallas Police and Fire Pension System from insolvency within the next decade or so. Rawlings and the City Council will discuss the plan Wednesday.

 

While the presentation is short on details, Rawlings said he can be clear about a few aspects. The city won’t pay the $1.1 billion bailout that pension officials want. Taxpayers will chip in, but he doesn’t want to issue debt to pay for it. Base benefits will be protected. And the city’s general philosophy is that those who profited from the overly generous benefits will have to take part in the banquet of consequences.

Mish Comment: The stance that Dallas will not pony up $1.1 billion is a good one but does not go far enough. Taxpayers should not pay an extra dime.

Pension Board Chairman Sam Friar said he was happy to work with the city but called the proposal a “non-starter.” And although he and Rawlings both say they want to work together, the city’s stance will almost certainly lead to a showdown at the state Legislature next year. Pension officials hope active police and firefighters will vote to support a package of benefit cuts that they believe will pass legal muster.

 

Friar believes it’s illegal to penalize members for benefits they’ve already received and accrued.

 

“This is the one issue that we’re just not going there,” Friar said. “We will not do it. The pension board — we will just not go there. … You cannot put toothpaste back into the tube.”

Mish Comment: You either put toothpaste back into the tube, or those standing in line to brush their teeth will discover there is no toothpaste. At the very least, stop squeezing the tube via lump sum payments.

Ultimately, the Legislature is the biggest unknown. The pension system is governed by state law, not city ordinance. The City Council has four of 12 seats on the board but otherwise has no real power over the fund even though taxpayers have been paying more than $110 million into the pension system each year.

Mish Comment: City taxpayers have paid enough, too much actually. Benefit cuts drastically needed.

City officials want the pension system to allow inflation to catch up to the unusually high 4 percent automatic annual cost-of-living increases that the system has awarded since 1989. That means many retirees wouldn’t see another cost-of-living increase for years.

 

The Deferred Retirement Option Plan, known as DROP, is the city’s biggest target. DROP gave officers and firefighters the right to essentially retire in the eyes of the system while they continued working. Meanwhile, their pension benefit checks were sent to a separate account, which guaranteed them at least 8 percent annual interest for years.

 

DROP also had few limits on withdrawals. Retirees were also allowed to remain in DROP and continue to accrue interest.

 

The result was that hundreds of police officers and firefighters became millionaires while insulated from the whims and risks of the markets. Currently, 517 DROP accounts total in excess of $1 million, according to the city’s presentation.

The pension plan guaranteed 8% returns plus a 4% annual inflation benefit. It’s no wonder the system is broke.

The lack of withdrawal restrictions led to a run on the bank once retirees caught wind of the pension system’s proposed benefit cuts, which include new limits on DROP. Since Aug. 11, the fund paid out nearly $500 million in lump sums.

A liquidity crisis remains a risk. If money continues to flow out at that pace, the pension system will have to sell its assets to pay out the withdrawals. That will mean the fund goes insolvent even sooner.

Mish Comment: This is not a liquidity crisis. This is a solvency crisis that one could have easily foreseen more than a decade ago. Some people did see it of course, me included. But nothing ever happens until a crisis hits. Guess what? The crisis hit.

The city’s plan would essentially negate those guaranteed-interest gains by stopping or reducing payments on future monthly benefit checks for DROP recipients for a while.

Rawlings said he knows the plan will face political and legal hurdles. Some officers and firefighters sued the pension system after members voted in 2014 to gradually lower DROP’s guaranteed interest rate.

Mish Comment: The idea that reducing DROP payments or lowering interest for “a while” will fix anything is pie-in-the-sky hope.

Bankruptcy the Only Solution

Unions would be wise to come up with a plan that preserves the most benefits for the most people. But they won’t.

A fair restructuring would cut the most at the top. Million dollar payouts are beyond affordable.

The city of Central Falls, Rhode Island shows what can happen if things end up inside bankruptcy court: “The city’s 133 retirees had their pensions cut by up to 55 percent, with pensioners now getting an average of $16,626 a year. The state allocated $2.6 million to soften the blow for the next five years.”

Having a pension cut from $200,000 to $100,000 is quite different than a cut from $25,000 to $12,500.

However, steep across-the-board cuts are where things are headed because unions never negotiate cuts.

Related Articles

• November 22, 2016: Dallas on Verge of Bankruptcy Due to Pensions; Just a Matter of Time (For Dallas, Houston, LA, Oakland, Chicago, etc)
• May 25, 2016: Detroit, Fresh Out of Bankruptcy, Discovers $195M Pension Shortfall
• May 20, 2016: Rejected: Central States Fund Proposes 60% Pension Cuts, Treasury Dept Says “Not Enough”; 407,000 Affected
• May 19, 2016: Chicago Pension Liabilities Jump 168%, Understated by $11.5 Billion
• January 22, 2016: Former Hasbro CEO Says “Providence Should Consider Bankruptcy”; An Option Chicago Needs

Dallas is headed for bankruptcy court. The sooner it gets there the better off the city will be.