Dallas Police and Fire Pension Needs More Than a Staggering Taxpayer Cash Infusion

Pouring more taxpayer money into a mismanaged public pension is no solution.

Pouring more taxpayer money into an underfunded pension without addressing mismanagement of investments will not fix the problem.

Last week Dallas city leaders received options from actuaries on how to fix massive unfunded liabilities in the Dallas Police and Fire Pension Fund. A $1.3 Billion cash infusion from taxpayers would set the fund on a much better course, they were assured but the total unfunded liability is still $3 Billion. Where will the city can find the amount of cash recommended? Nobody knows.

As I explain in my book, Who Stole My Pension, pouring more taxpayer money into public pensions, or slashing benefits promised to retirees are common approaches for fixing public pension underfunding. However, forensic investigations I have undertaken indicate neither of these two strategies works.

Pensions are extraordinarily complex and understandably most people are intimidated when the subject arises. Fortunately, the fundamentals of pensions that you need to grasp are easy to understand.

There are three components to the health of a pension:

1. Money In: How much money goes into the pension “pot” (aka “contributions”);

2. Money Invested: How the money in the pot is managed or invested over, say, a worker’s 30-years of employment; and

3. Money Out: How much money is paid out of the pot (aka “benefits”).

Money in, money well managed and money out are the three components of pension health.

Likewise, simply put, there are three ways to fix a failing pension.

1. Put more money in the pot;

2. Invest the money in the pot better; or

3. Pay less out of the pot.

• Why Putting More Money In the Pot Usually Won’t Work

Unless taxpayers in Dallas are flush with cash and feeling exceptionally generous, a $1.3 billion infusion is unlikely to happen.

When pensions are running out of money, or have already collapsed, there is often a lot of debate about whether enough money was put into the pot annually over the prior decades and whether to put more money in the pot immediately to fix the problem.

In other words, people assume the cause of the problem is not enough money went into the pot. 

That makes some sense because often over the decades money that was supposed to be put into the pension pot to pay for retirement benefits, wasn’t. The state, county or city failed—for one reason or another—to make the annual required contribution.

That’s a legitimate complaint for workers or retirees who are involved in an imperiled pension.

On the other hand, chances are the state, county or city that chose not to put more money into the pot when the pension was healthy is even less inclined to come up with the cash when the pension is near-death.

Putting more money into the pot when it comes to failing state and local pensions rarely is an option for two reasons.

First, since most taxpayers today generally don’t have adequate retirement savings of their own, the last thing they’ll vote for is to put more of their money into a failing state or local pension. Some call it “pension envy.”

Second, in light of “pension envy,” it’s political suicide to campaign for greater taxpayer contributions to shore up state and local pensions.

So unless taxpayers in Dallas are flush with cash and feeling exceptionally generous, a $1.3 billion infusion is unlikely to happen.

• Why Cutting Benefits to Workers Rarely Works

A reduction in benefits already happened as part of the 2017 pension fix approved by the Texas Legislature. Even when coupled with a major increase in employee contributions, the underfunding problem remained.

The money paid out to workers is also commonly focused upon when pensions falter because many critics believe pensioners receive lavish benefits that should be cut.

To be sure, there are examples of government workers who have received outrageous pensions.

Those abuses should be addressed.

For example, according to Forbes:

No one has hit the pension jackpot quite like the sworn officers of the California Highway Patrol (CHP). Of the 1,066 six-figure retirees, their average pension is $10,192 per month or $122,304 annually. On top of that, there are the 6,350 active employees at CHP averaging $115,000 in pay with taxpayers chipping in another $48,300 in pension contributions. Therefore, each officer costs $163,000 in pay and pension costs alone.

Meanwhile, Riverside County has 461 six-figure retirees and the top 12 retirements each exceed $200,000 per year. Last year, the assistant sheriff made $653,025 by cashing in banks of unused benefits, i.e. leave.

But, cases of lavish pensions for state workers are rare, in my experience.

For example, the American Federation of State, County, and Municipal Employees, the nation’s largest trade union of public employees which represents 1.3 million public sector employees and retirees, including healthcare workers, corrections officers, sanitation workers, police officers, firefighters, and childcare providers, states that public pensions are “modest.” AFSCME notes that its average member “receives a pension of approximately $19,000 per year after a career of public service.”

Even if you believe workers benefits should be cut, this approach is rarely feasible.

For example, state laws generally provide that “promises” made by the state must be kept.

Further, in Dallas, a reduction in benefits already happened as part of the 2017 pension fix approved by the Texas Legislature. Evidently, even when coupled with a major increase in employee contributions, the underfunding problem remained. Hardly surprising.

• Better Management of Money in the Pot Most Likely to Succeed

Every forensic investigation I’ve undertaken has concluded that had the money in the pot been prudently managed, the pension would not have failed.

That leaves us the primary focus of my book-- the least understood, least discussed cause of, and fix to, the pension crisis: mismanagement of the investments.

In every forensic investigation of a dead or dying pension I’ve undertaken, I have concluded that had the money in the pot been prudently managed, the pension would not have failed. That is, enough money had been put into the pot to pay out all the benefits promised—had the money been managed properly.

Likewise, in every case I’ve witnessed where a so-called pension “fix” or “reform” has been undertaken, mismanagement of the investments was neglected and, not surprising, the “fix” flopped. That is, within a few years the pension was no better off than pre-fix.

If anyone in Dallas is seriously interested in ensuring the police and firefighter pension is prudently managed and will be able to pay retirement benefits promised, stop playing politics and take a close look at investment of the assets over time. The Dallas pension has a problem but money alone is not going to fix it.