Dallas Pension System Suspends Withdrawals*
By Tyler Durden
Two days after the Mayor of Dallas, Mike Rawlings, filed a lawsuit against the Dallas Police and Fire Pension system to block withdrawals, which he referred to as a “run on the bank” of an “insolvent” pension system in “financial crisis, the Pension’s board has finally taken steps to halt further withdrawals. Of course, this delayed action has come only after $500 million in deposits have been withdrawn since just August.
According to the Dallas Daily News, an incremental $154mm in withdrawal requests were pending at the time the decision was made earlier today.
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 $2.1 billion fund.
“Our situation is currently critical, and we took action,” Board chairman Sam Friar said.
While Dallas citizens cheered the decision, even opponents of the Mayor’s admitted that the redemptions had to be halted if the city had any chance of saving the pension system from insolvency.
Rawlings on Thursday afternoon told a crowd gathered at a Dallas Regional Chamber that “the bleeding has stopped. We can turn this ship around.”
The crowd responded with cheers after the mayor’s announcement of the board’s decision.
At the pension board meeting, the mood was more sombre.
Council member Scott Griggs said he couldn’t let the $154 million “go out the door” on Friday.
His council colleague, Philip Kingston, a board trustee, said the mayor “unquestionably” forced the pension board’s hand. He said Thursday was “the worst day I’ve had in public office.”
“Unfortunately, financially, this had to happen,” he said.
The fund has about $729 million in liquid assets. It needs to keep about $600 million on hand, meaning the restrictions could have been coming at some point even without the mayor’s actions. The withdrawal requests this week alone would have meant the fund would dip below that level.
Of course, not everyone was happy with the decision as at least one retired police officer threatened a lawsuit to force the fund to honor redemption requests while another declared that Mayor Rawlings had “successfully screwed over the retirees, the firefighters and the police officers.”
One retired police sergeant, Pete Bailey, suggested a lawsuit could be in the offing if the system didn’t pay out the requests that were made Tuesday. Friar understood that they might deal with more litigation.
“We may just have to deal with that, but that’s what the board decides,” Friar said.
“We acted in the best interest of the pension fund today.”
Retired Dallas police officer Jerry Rhodes, a pension meeting fixture, said he believed the board did what it had to do. Then he sarcastically lauded Rawlings.
“Merry Christmas, mayor,” he said. “Hopefully you have a good Christmas because you have successfully screwed over the retirees, the firefighters and the police officers.”
Perhaps future ponzi schemes pension systems will take note of Dallas’ current situation prior to guaranteeing 8% returns on retirees’ pension balances. Who could have ever guessed that a decision like that could have backfired so badly?
For those who missed it, here is what we recently posted after Mayor Rawlings sued to halt pension withdrawals.
Last week, Dallas Mayor Michael Rawlings sent a scathing letter to the Dallas Police and Fire Pension (DPFP) Board demanded that withdrawals be halted immediately until the “solvency and actuarial soundness of the Pension System is restored.” That said, the Mayor’s request was seemingly ignored as he has now filed a lawsuit with the Dallas District Court to force the pension board to halt withdrawals amid a “run on the bank.”
Within the suit, Rawlings notes that $500 million in lump-sum withdrawals have been made from the DPFP since August 2016 with $80 million of that amount being withdrawn in the first 2 weeks of November alone. The suit continues on to allege that “this mass exodus of DROP funds amounts to a “run on the bank” and is exacerbating the financial peril of the Pension System as a whole.”
In performing these ministerial duties, the Board has a duty to ensure that programs, such as the Pension System’s optional Deferred Retirement Option Plan (“DROP”), which is not a constitutionally protected benefit (or “benefit” at all), do not impair or reduce the Pension System’s core constitutionally protected benefits, e.g., service retirement benefits. The Board is willfully failing to perform these ministerial duties.
The Pension System, which the Board oversees, is in the midst of a financial crisis. In early 2016, the Board was warned by its own actuary that absent radical change, the Pension System would become insolvent within 15 years—irrevocably eradicating the constitutionally protected service retirement benefits (and other constitutionally protected benefits) of police and firefighter personnel of the City and their beneficiaries.
Critically, this 15-year projection of insolvency was based upon two overly optimistic assumptions that the Board has now known to be incorrect for several months. First, the actuary assumed that the Pension System’s $2.7 billion in assets would remain stable, even though approximately 56% of these assets were composed of optional DROP funds, which have historically been permitted to be withdrawn in lump-sums upon demand (even though this option was used infrequently before this year). Second, the actuary assumed that the Pension System would achieve its targeted 7.25% return or more on its investments for the next 15 years.
Publication of this looming insolvency scenario prompted some DROP Participants to withdraw their DROP funds in lump-sum, which created a “snowball”effect, leading a staggering number of other DROP Participants to withdraw nearly $500 million in optional lump-sum DROP funds from the Pension System from August 13, 2016 to present. Over $80 million of these lump-sum DROP withdrawals have occurred within the first two weeks of November 2016 alone. Over this three-month time period, the Board has knowingly allowed DROP funds to continue to be withdrawn at record levels even though it is aware that doing so is irreparably harming the Pension System’s solvency and liquidity.
Lump-sum DROP withdrawals for 2016 are now on pace to be over 15 times higher than their historical average. This mass exodus of DROP funds amounts to a “run on the bank” and is exacerbating the financial peril of the Pension System as a whole.
The DPFP controversy comes as hundreds of police and firefighters have poured millions into “DROP” accounts in which they were guaranteed exorbitant returns of 8% while the pension board has proposed a $1 billion bailout from the city of Dallas.
The city estimates that, as of November, 517 police and firefighters have DROP accounts containing more than $1 million. One, belonging to an unnamed first responder, has $4.3 million in it, city figures show. On average, the city estimates that the average DROP account contains nearly $600,000.
The controversy all comes at a time when the board has asked the cash-strapped city for a bailout over $1 billion. The board’s position is that they legally can’t stop the withdrawals, but the mayor disagrees.
Of course, this all begs the question of whether the Dallas Police and Fire Pension will be the first pension ponzi to burst?
Here is the full lawsuit filed by Dallas Mayor Michael Rawlings:
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