In case you missed it, The Dallas public pension system, which supports pension funds for policemen and firemen, is amid a financial crisis. A year ago, even, the plan was estimated to become insolvent within 15 years. Now, because of the mass exodus of funds, that number has shrunk to a measly five to eight years. That’s what exacerbated the situation, but what caused it?
The Causes of the Pension Fund Debacle
- Reckless pension promises – The pension scheme depended on investment returns of around nine percent a year. This number is unwisely high, considering the thirty-year yield on treasury bonds has been about two and a half percent. By itself, though, this risky scheme wouldn’t have caused the fund to be any more underfunded than the average local-government pension fund.
- Poor investment decisions – Investment problems began back in 2006, when the Board attempted to reduce risk on equities by diversifying its investments. The investments were mostly in student housing, luxury homes, and land. By 2014, the value declined by $263 million. By 2015, $396 million.
- Flawed pension system – The Dallas pension fund operates on a DROP plan, a deferred-retirement option plan. This allows firemen and policemen to keep working after qualifying for retirement. All the while, their benefits continue earning an interest rate of about nine percent a year. Only 16 percent of all state plans allow for DROPs, and virtually all Dallas Police and Fire employees are on the DROP. This lead to DROP balances accounting for 56 percent of all assets in the fund. They are available for immediate withdrawal, which many rightly took advantage of.