By Any Other Name, Pension Fund Claw-Back Is Still a Default

Whether or not the city can really get away with this new move — browbeating the police and fire pension fund into shutting down lump-sum withdrawals for Dallas cops and firemen — let’s be honest and name it for what it is. This is a default. It’s bankruptcy-lite.

Yesterday, the board of the Dallas Police and Fire Pension Fund blinked and did what the mayor was demanding. The pension board slammed the door shut on retirees who want to take all their money out of a special fund called DROP.

The mayor and the city manager want the board to agree not to open that door again until the pension board has taken a big chunk out of what DROP owes. And guess whose hide that chunk comes out of.

The city wants the pension fund to go back into the DROP fund and retroactively strip out all of the interest and cost of living increases that the pension fund originally promised to pay cops and firemen when they put their money into it in the first place however many years ago.

Think about that one for a minute. The cops and firemen put their money into the DROP fund because the fund promised to pay them interest and cost of living. Now the city wants the fund to claw that money back.

You’re at the bank window, and the guy behind it says, “Sir, we’re not allowing withdrawals, and if and when we do, we will be keeping some of your money.”

Is that a banana republic deal or what?

The mayor and the city manager are saying it’s fair because DROP was always too sweet a deal for the people who put money into it. Maybe it was, but it was a deal.

I don’t know about you. I have been on the short end of some deals. I always thought a deal was still a deal, good, bad or ugly. I don’t remember being able to call the plumber and say, “Hey, that was way too sweet a deal for you. Bring me back my $1,500.”

It’s more complicated than I make it. There is an implied accusation of inside dealing here. The city and a lot of people think the cops and firefighters who had a voting majority on the pension fund board agreed to pay depositors in the DROP fund way too high a guaranteed interest rate and way too high a guaranteed annual cost of living increase.

Looks like it, in retrospect. Eight percent interest and a 4 percent COLA. Wow. In this age of sub-1 percent returns on savings, a combined 12 percent annual pay-off looks pretty juicy.

But look at it another way. That was the deal. The vast majority of cops and firefighters aren’t on the pension board. They’re cops and firefighters. They catch crooks and put out burning buildings. It keeps them busy. Maybe you’re good at computing actuarial tables. They’re good at catching crooks and putting out burning buildings. Most of them are like me — not financial geniuses. They get a brochure.

I read it. The brochure tells them they can “retire” on the books, keep working, have all their pension benefits paid into the DROP plan and then get those big annual returns on their money while it stays in the fund. Plus, the brochure promises that at any time for any reason they can really retire and take every nickel home in a paper bag.

For a long time it worked like a gumball machine. Cops and firefighters took the deal in droves. And you know who it really worked for? The pension fund. In fact it looks now like the DROP fund is what kept the overall pension fund afloat, in spite of some bad investments.

Before the recent run on the bank began, DROP money accounted for 56 percent of the pension fund’s total value of $2.7 billion. But then a run on the bank did start. In recent months, pensioners have pulled out half a billion dollars in lump sum withdrawals.

But guess why! In that same period, the mayor has been up and down the landscape from Dallas to Austin screaming, “Bankruptcy! Bankruptcy!” If you had your life savings in a bank and the president of the bank was leaning out an upstairs window screaming “Bankruptcy!” don’t you think you might sharp-elbow your way into the lobby and try to get your bacon back?

The mayor’s lawsuit demanding that the fund shut off DROP withdrawals includes a handy chart showing how withdrawals have spiked since an August pension board meeting where the board voted against a shutdown. And, yes, it shows some definite spikes.

But when I look at it, I can hook up most of those spikes with the mayor shouting bankruptcy. In early August the daily lump sum withdrawals from DROP spiked from under $2 million a day to $20 million. That was right after the mayor testified in Austin that a police pay lawsuit and the pension fund problems could put Dallas into bankruptcy.

Toward the end of September the daily takeouts spiked again from under $5 million a day to almost $32 million, right after the mayor brought up bankruptcy again in a discussion of police and fire pay in the new city budget. And this is all against the backdrop of the mayor's repeated vows that city taxpayers will do nothing to bail out the pension fund.

In his citizen lawsuit filed this week against the fund, Mayor Mike Rawlings did say two things that cannot be disputed. The first was this: If cops and firemen keep pulling their money out of DROP at current rates, the entire pension fund will run out of cash next February and begin having to cash in investments at fire-sale rates. In fact Rawlings’ lawsuit suggested the fund may already be doing just that.

The second big contention in the mayor’s lawsuit is this: The DROP money is not “constitutionally protected.” The lawsuit makes a big distinction between what it calls “state constitutionally protected benefits” — regular pension payments — and the money in the DROP fund, which the lawsuit claims over and over again is not protected by the state constitution.

Well, sure, hardly any of the money that trades hands in Texas is specifically singled out in the state constitution for protection the way public pension payments are. There is no mention in the constitution of my car payments or the money I owe the plumber. But I still owe it. If I signed a contract to pay it then those payments are protected by that contract.

The last I heard, the only kind of law or judge that can abrogate contracts on a wholesale basis is bankruptcy law and a bankruptcy judge. So if the mayor can really jaw-bone the pension board into clawing back money that the board has agreed by contract to pay, isn’t that really an act of bankruptcy? I think the legal phrase is “sounding in.” It sure “sounds in” bankruptcy to me.

And while we’re on the subject, I think I am going to throw up right on my iPad if I read one more reference in The Dallas Morning News to “DROP fund millionaires.” They keep saying it over and over again: “Hundreds of officers and firefighters became millionaires from the accruals.” “Some police and firefighters became millionaires from DROP.” “DROP made hundreds of retired officers and firefighters millionaires.”

It’s a drumbeat, as if all these ex-cops and firefighters are living on yachts. I spent about 10 minutes yesterday online with a few of those “retirement calculators,” mainly depressing the socks off myself about what kind of savings you need to have to survive retirement in this world.

In thinking about this, remember that cops and firefighters get no Social Security, zip, zero, unless they get it from some very good side job. (And how many side jobs in this world pay into Social Security?)

They do get their pension. From what I was able to figure out from their brochure, their pension comes out somewhere north of Social Security but not by a lot. So, wait. Let’s turn it around. Let’s say it’s you or me, and we do get Social Security, but we don’t get a pension.

As I reported here a month ago, about half of Dallas senior corporals make between $90,000 and $100,000 a year by the time they reach the top of their pay rank. So let’s say that’s you, and you get a hundred grand a year.

You plan on taking a haircut when you retire. You’re going to dial down those expenses. Fine. According to the CNN calculator, if you do get Social Security but you don’t have a pension, then when you retire at age 67 you need to have savings of $963,365. Does that make you a millionaire?

According to another calculator I found, if you make $70,000 a year, start getting Social Security at age 67, dial back your expenses to 85 percent and have a million bucks in the bank, you will be bust by age 85.

Remember this, too: Other cities have resolved pension problems with special bond issues. We could do that, but the mayor has said he doesn’t like that idea because it might impair the city’s ability to do “transformational projects.” So doing it with the claw-back from cops and firemen is a choice, not an absolute necessity.

According to the mayor’s lawsuit, there are 46 DROP accounts with over $2 million and 517 with over $1 million. Is that too rich? Maybe. But as I said, that was the deal. And while it was the deal, we did talk these people into possibly getting shot or burned up while acting in our service and protection. Does that count?

Let’s say you say it does not count. Let’s say you’re a reasonable person. Let’s say you have your reasons. OK. But I’m going to tell you this: If this city makes this stick, if this city gets away with clawing back money that police and firefighters were promised by contract and have already earned, then that is going to be read elsewhere as one thing. A public default.