A Run On The Fund

A sad and scary drama has been playing out in Dallas over the last few days.  The drama was a run on the reserves of a public pension fund, and the latest act was a lawsuit and a resulting decision to suspend lump-sum withdrawals from the fund.

5994513The fund is the Dallas Police and Fire Pension Fund, and the actors included the mayor, who brought the lawsuit seeking to stop the withdrawals that were depleting the fund’s liquid assets, and the board of trustees of the fund, who finally voted to stop the withdrawals in the face of a possible restraining order.  The run began when the board announced proposed benefits cuts in August.  At that point, some retirees began taking advantage of an option that allowed them to take lump sum payments from the fund, and more than $500 million was withdrawn, leaving only $729 million in liquid assets.  With the fund needing at least $600 million in liquid assets on hand, and requests for another $154 million in lump sum withdrawals pending, the math was irrefutable and the result was inevitable.  The trustees had to act if the fund is to be salvaged.

And now the fund is asking the city for a $1.1 million bailout.  No one wants to leave police and firefighters without pensions they were promised, of course, but how many taxpayers are going to be willing to fund a bailout of a pension system that pays far richer benefits than they are earning in their 401(k)s . . . if they have any retirement savings at all?

The Dallas Police and Fire Pension Fund is not unique.  Its problems — overly rich benefits in view of increasing life expectancy, guaranteed interest returns that were hopelessly out of whack with market returns, overvalued assets and risky investments, underfunding, public officials and boards that kick the actuarial can down the road, hoping that the magic pension fund fairy will somehow help the fund to avoid a crash, and ultimately a request for a public bailout — are found or will be found in many public pension funds.  The Dallas situation is likely to be a precursor of what we may see in many other towns, counties, and states, as decades of neglect, mismanagement and ill-advised guarantees finally come to a choke point.

We can hope that the Dallas fund will make changes to restore sanity to its benefit structure and allow the fund to survive, and we can hope that pension fund boards and officials elsewhere in America take note and take necessary action to address their own situations.  We can hope — but I doubt it’s going to happen.  Too many of those boards and officials are themselves hoping that the curtain doesn’t get pulled back to reveal just how dire their underfunding situations actually are.  We’re going to hear a lot more about public pension funds in the coming years, and it isn’t going to be pretty.

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