Dallas Police and Fire Pension Members May Have to Pay Back Funds

by Tanya Eiserer, WFAA:

Bernie Madoff.

It’s a name now often bandied about when talking about the failing Dallas Police and Fire Pension fund.

“The reality of it is that it was a Bernie Madoff type scheme,” says Lee Kleinman, a city council member and former pension board trustee.

The city has agreed to put in an additional billion dollars over 30 years, but they’re proposing a series of bitter pills to make up the rest of the nearly $4 billion shortfall.

The bitterest pill: A proposal to take back all of the interest police and firefighters earned on Deferred Option Retirement accounts, or DROP. That would amount to an additional billion dollars saved.

The city is calling it an “equity adjustment.” Retirees call it an illegal “claw back.”

“We’re looking at it as a prepayment of their future pension that is something above and beyond what the other cities were paying,” outgoing City Manager A.C. Gonzalez said Thursday.

Whatever you want to call it, it’s outlined in a draft legislation being hammered out by the city and pension fund leaders. Pension fund representatives and the city have been meeting almost daily to try to come to an agreement on proposed legislation that they can take to the state capital to fix the failing fund.

Gonzalez says he hopes that they can craft a joint proposal by the time the legislative session starts next week.

Current leaders of the pension fund acknowledged during last week’s meeting that they aren’t in a great bargaining position after police and firefighters rejected a series of changes to try to rescue the failing fund last month. That plan would have fixed about 50 percent of the problem.

If nothing is done, the fund would run out of money in about a decade.

DROP, which was created in the early 1990’s, allowed police and firefighters to retire while still on the job. Their monthly pension checks then were deposited into DROP accounts, which were guaranteed an eight to 10 percent interest.

The pension continued to pay those high interest amounts in the bad years even when the fund lost hundreds of millions of dollars.

“It was an unsustainable feature,” Gonzalez says. “What they turned it into was an investment strategy and guaranteed themselves a return that is unheard of.”

City leaders point out that other peer cities did not pay interest on DROP accounts.

The excessive interest paid on those DROP accounts, along with years of bad real investments made by past fund leaders, are a major reason for the fund’s looming insolvency.

In recent years, Dallas public safety workers agreed to lower the interest payments to DROP accounts.

But even now the pension fund is paying 6 percent on those accounts, causing further losses to the pension.

News 8 obtained a copy of the legislation which says accounts would be “adjusted to zero percent of interest.”
“It’s very tough but the city wants to protect the monthly benefit,” Kleinman said. “It’s a restatement of their accounts.”

The city is also seeking to “equity adjustment” on cost of living increases. The city says that pension checks are about 20 percent higher than they would have been if increases had been tied to inflation.

The city’s proposing to freeze cost of living increases until it catches up to the inflation index.

DROP and the cost of living increases account for about half of the fund’s liability, the city says.

For those retirees who have already taken the money out of DROP accounts, they’d garnish their future pension checks to recoup excess interest. Worried retirees have withdrawn in excess of $500 million from DROP accounts in recent months.

News 8 spoke to angry retirees last week who packed the pension board meeting.

“We used the rules they gave us now all of the sudden they’re going to go back on the rules and say hey you don’t get any of that,” said Charles Hale, a retired police officer. “That’s not fair.”

Retirees promised they’d be suing if anybody tried to take back money they feel they’ve earned.

“It’s acting like it was an underhanded Ponzi scheme that we pulled,” said Joe Dunn, a retired police officer. “It’s not fair.”

Kleinman agrees they’ve got every right to be upset.

“I think it’s unfair that they were made those promises in the first place,” he says. “That was what was wrong.”

The city currently puts in about $124 million a year into the fund. The city officials point out that 83 percent of the fund’s money comes from the city and 17 percent from the members.

Under the city’s plan, the city’s contribution would rise from 28.5 percent to 34.5 percent.

Their position is that the state set up a flawed system that gave control to the members of the pension fund, who in turn, voted themselves overly generous benefits.

The city is also asking the legislature to give them more control over the fund to prevent the same thing from happening again in the future.

The city says that if DROP interest money isn’t returned to the pension fund, the shortfall will have to be made up somewhere – but not, city leaders say, from taxpayers.

“There’s just not enough money to go around,” he says. “The kind of money they’re looking for would require tax increases” over 100 percent.

For his part, Kleinman is doubtful that the city and the pension board can come to an agreement on a legislation.

Kleinman, the council’s ad hoc legislative committee chairman, says he’s been told by lawmakers that they want the pension fund and the city to bring them a joint plan.

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