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This week, we’ve been focusing on how lavish pension benefits promised by the officials of local and state governments across the U.S. have combined with the extremely poor returns that those officials have realized on the pension funds they have been investing on the behalf of public employees to produce an insolvency crisis for the governments, where their pension funds are rapidly approaching bankruptcy.
Yesterday, one local government in the U.S. reached a crisis point, where in the city of Dallas, Texas, the reaction of the city’s mayor and its pension board was to act to deny the city’s police officers and firefighters the right to protect themselves and their retirement pension wealth from the city’s mismanagement by making lump sum withdrawals of their portion of the pension funds invested on their behalf.
Tristan Hallman of the Dallas Morning News reports:
The Dallas Police and Fire Pension System’s Board of Trustees suspended lump-sum withdrawals from the pension fund Thursday, staving off a possible restraining order and stopping $154 million in withdrawal requests.
The system was set to pay out the weekly requests Friday. Pension officials said allowing the withdrawals would leave them without the liquid reserves required to sustain the $2.1 billion fund.
“Our situation is currently critical, and we took action,” board chairman Sam Friar said.
Pension officials and many police and firefighters have blamed Dallas Mayor Mike Rawlings for forcing the latest run on the bank. Dozens of retirees rushed to request withdrawals after Rawlings filed a lawsuit Monday to stop the withdrawals.
By then, more than $500 million had already gushed from the fund since the board proposed benefit cuts in August.
The article goes on to describe just how lavish the city’s pension benefits are for public employees, which are a major contributing factor to why the pension fund was “hurtling toward insolvency” in the words of one pension board member:
On Wednesday, the city officially unveiled its plan to save the fund. The biggest target was the lump-sum program officially called the Deferred Retirement Option Plan, or DROP.
That plan, originally intended as a retention perk for veterans, made hundreds of officers, firefighters and retirees into millionaires. DROP allowed them to retire on paper, continue working and meanwhile defer their pension benefit checks into a separate account. Once they actually retired, they could remain in DROP and continue deferring their checks.
For years, DROP guaranteed at least 8 percent interest on the money. That hurt the entire fund when the investment returns couldn’t keep up. The problem was made worse when the pension’s current administration revealed that their predecessors had significantly overvalued risky real estate investments.
The city is looking for a $1.1 billion taxpayer bailout to paper over its pension fund insolvency crisis, which it will seek to obtain through imposing higher taxes on Dallas residents, cuts to city services, and new borrowing.
What Dallas is experiencing is what the end of the road looks like for governments that rack up excessive liabilities and debt.
That overly lavish promised pension benefits and incompetent management of pension investments are responsible for the Dallas pension funds problems are driven home in an earlier Dallas Morning News article by Michael Schnurman:
The more you pay, the more they need.
That’s one takeaway from the crisis at the Dallas Police and Fire Pension, and everybody has a right to be angry.
Taxpayers pony up nearly 28 percent of those workers’ pay for their retirement. That’s roughly three times more than most workers get from their employer with Social Security and a typical 401(k) match.
Police and firefighters get triple the standard benefit and their retirement fund is going broke?
Incredibly, this isn’t unusual. Nationwide, state-run retirement systems are underfunded by over $900 billion, according to Pew Research. Throw in local pension systems, such as police and fire plans, and the nationwide gap is projected to top $1.5 trillion in 2015.
The article goes on to describe the mismanagement of investments and some of the lavishness of the pension benefits for city employees.
In contrast to the 28% of city worker’s pay that taxpayers pony up to support their retirement pension income, in the private sector, employers are required to match 6.2% of their employees’ income through their portion of Social Security’s payroll taxes. In addition, private sector firms will also provide roughly an additional 3% match on average toward their employees contributions to their defined-contribution 401(k) retirement plans, which do not carry the same risks of underfunding the way that traditional pensions like those enjoyed by government workers often do.
But that was an option considered and rejected by the officials who have overseen and contributed to the Dallas public employee pension funds growing insolvency crisis. Unfortunately, better and more competent oversight would have done little to avoid its core problems:
But there’s no assurance that more Dallas oversight would have prevented the problems. In other cities, politicians have traded pension increases for smaller employee raises or cut back on annual contributions because of tight budgets. Such moves kick the costs down the road, and they usually grow significantly.
“There’s no consequence, except that the city accumulates debt that taxpayers will have to pay off,” said Leonard Gilroy, director of the pension integrity project at the Reason Foundation, a libertarian think tank.
Dallas leaders looked at several options for the pension, including switching to Social Security and a direct-contribution plan. They’re sticking with what they have.
Apparently, the city’s leadership prefers the option to stick the bill to Dallas residents by hiking their property taxes by 130%. The more you pay, the more they need.