Preparedness & Recovery

After Reform, Outlook for the Dallas Police and Fire Pension 'Cautiously Optimistic'

Late last year, the system was projected to be bust within the decade.

by Tristan Hallman, The Dallas Morning News / July 13, 2017
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(TNS) - For the first time in the last four years of turmoil, the Dallas Police and Fire Pension System's funding picture is brighter than the year before.

The improvement is small compared with the system's funding ratio last year. And the outlook is still not pretty. But the future is officially not horrendous anymore.

Officials from the pension system and Segal Consulting presented a report Thursday that shows the fund's performance in 2016 and projections going forward. The projections showed the dramatic long-term financial impact of legislation, set to become law Sept. 1, that will save the fund from insolvency.

"There is a future for this plan," said Jeff Williams of Segal Consulting.

But the fund was in such bad shape that the situation remains delicate. Williams warned the board if they "get a couple of bad years, all bets are off."

The Dallas Police and Fire Pension System now stands at 49 percent funded, a ratio that is dependent upon the system making an average 7.25 percent annual return on its investments after the fund's investment expenses are paid. Segal Consulting's analysis showed that the fund returned 6.82 percent on the market value of its investments in 2016. A lower actual annual return would mean a much lower funded ratio.

Williams told the board that the funded ratio will probably get worse in the short term before it improves. But, he advised the board to not "freak out" about the dips. The changes to the system mean the system could be fully funded by 2061.

Like all pension projections, the figures are based on assumptions that may or may not come true. Still, the new numbers represent a remarkable change for the fund, which has $2.15 billion in assets.

Late last year, the system was projected to be bust within the decade. The system took in more than $171 million in contributions from taxpayers, police and firefighters and bled out $825 million in benefit payments and refunds in 2016.

The bulk of the payments — $606 million — came from the Deferred Retirement Option Plan, known as DROP. The plan was a lucrative perk for veteran workers that functioned similar to a high-interest checking account for retirees. Almost all that money came out in a panic over the future of the system's solvency.

New restrictions on DROP will return those annual payments to a lower, more stable and predictable amount.

But the system also now has hundreds more retirees to pay. Trustees approved 32 retirements Thursday and are bracing for dozens more retirements in August.

Some of the spike can be attributed to older police and firefighters trying to avoid an increase in their contribution rates, which means a cut in take-home pay. Those in DROP pay only 4 percent of their paychecks into the fund. The new rate for all officers and firefighters will be 13.5 percent.

But executive director Kelly Gottschalk said some older police and firefighters mistakenly believe their already accrued benefits will take a hit if they don't retire by Sept. 1. For officers and firefighters at or closer to retirement age, their past years worked are unaffected.

Gottschalk said the system will likely have another retirement spike in January when officers and firefighters who have been in DROP for 10 years can no longer put any money into their DROP accounts.

Those retirements could all have a bigger impact on the city's shorthanded police and fire departments — and the city's public safety, by extension — than on the pension. The legislation requires the city will make a minimum payment into the system for the first seven years, no matter how many police and firefighters are employed. Previously, the city's contribution was based on payroll.

A new board, which will begin to take shape in September, will be responsible for stewarding the system going forward. Until then, the current board is working on a transition and trying to get City Hall to pay for $2 million in pension contributions for the time police and firefighters spent on military leave. Gottschalk said they've made progress in talks with the city.

The issues pale in comparison to the fight over billions of dollars the pension system had with City Hall over much of the past year. And Thursday's board meeting was noticeably smoother than the tense and well-attended white-knuckle meetings of the past year.

Gottschalk said she's "cautiously optimistic" about the system's future.

"I feel a lot better than I felt a few months ago," Gottschalk said. "We certainly aren't out of the woods, but to actually have a plan that is projected to be solvent, funded in 44 years from running out of money in 10 years — it's monumental to do that in one year."

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