Is the Dallas Police and Fire Pension Typical of Texas Plans?
Alicia H. Munnell is a columnist for MarketWatch and director of the Center for Retirement Research at Boston College.
A quick comparison suggests most Texas plans do not suffer from same problems.
In the wake of the flap about the Dallas Police & Fire Pension System, many have questioned whether other Texas plans face similar problems. My sense is that the Dallas situation is extraordinary and not likely to be repeated elsewhere.
The Dallas Police & Fire Pension System story is one of wild investments – Dallas had nearly 70% of its assets in alternatives and real estate compared to an average of 22% for our sample of 160 state and local plans – and those investments produced very large losses. At the same time, Dallas has a very large and generous Deferred Retirement Option Program (DROP). (A DROP is an arrangement under which employees entitled to retire continue working and have their monthly benefit deposited in a notional DROP account where it earns interest and can be taken out as a lump sum.) The DROP balances accounted for 55% of plan assets in January 2016, meaning that more than half of plan assets were available for immediate withdrawal, which seriously exacerbated the plan’s financial problems.
Although I did not expect to find similar problems elsewhere in Texas, it never hurts to look. In fact, public plans could learn a lot by regularly comparing their status along a few dimensions to other plans nationwide – the data are readily available in the Center’s Public Plans Database (PPD).
Table 1 uses the PPD data, supplemented by data for the smaller Texas cities, to see if other cities appear to have the same combination of reliance on alternative investments and a large DROP program. The results show that Dallas had the lowest funded ratio, the highest share of assets allocated to alternatives, and the highest ratio of DROP assets to total assets of any plan in the state. Dallas is unique in Texas.
That said, plans in several other cities – City of Austin Police Officers, Fort Worth City Employees, San Antonio Police &Fire, and all the Houston plans – are above the national average in terms of their reliance on alternatives. This may be a good time to check whether those investments are being managed effectively.
