Bank runs, with depositors queuing round the block to get their cash, are a familiar occurrence in history. A run on a pension fund is virtually unprecedented. But that is what happened in Dallas, where policemen and firefighters are pulling money out of their city’s chronically underfunded plan.
After Mike Rawlings, the mayor, sued to stop them, the pension board voted to do the same. A meeting in January will talk about short-term measures to help the fund.
At the start of the year, the fire and police pension fund had $2.8 billion in assets. Since then nearly $600 million has been withdrawn from the plan, $500 million of it since Aug. 13. In 2015, total withdrawals were just $81 million.
At the start of 2016, the plan was just 45 percent funded, and was expected to become insolvent within 15 years. When some workers take out their money, they get the full value of their benefits. That leaves a smaller pot to be shared among remaining members. The city estimates that the funded ratio has fallen to 36 percent after the withdrawals.
The crisis is a result of three linked issues: overgenerous pension promises; the flawed nature of public-sector pension accounting in the U.S.; and some bad investment decisions. Dallas counted on an investment return of 8.5 percent a year, absurdly high in a world where the yield on 10-year Treasury bonds has been hovering in a range of 1.5 to 3 percent. Thanks to riskier investments to try to increase the fund that didn’t work, the value of its investments declined by $263 million in 2014 and $396 million in 2015.
Dallas’ situation is not unusual. On average, local government pensions are only 73.6 percent funded, according to the Center for Retirement Research at Boston College.
There are only two solutions to Dallas’ shortfall: Put more money into the fund or cut the benefits. The city has reached its annual contribution limit, which was set by referendum. The pension administrators have asked that the city make a one-off payment of $1.1 billion in 2018, which the city says would require it to more than double property taxes.
Instead, the city has proposed a plan that involves cutting some of the accrued cost-of-living increases and interest payments for recipients. Pension Board Chairman Sam Friar has called the proposal a “nonstarter”; any attempt to reduce past benefits almost certainly will end up in the courts. In the meantime, Band-Aids are being put on a crisis that has been building for decades and that is not confined to Dallas alone.