Texas's tough pension laws may not apply in other states

One by one, Pete Bailey, Clint Conway, Julian Bernal and a half dozen other retired police officers and firefighters stood up in December and told the Dallas Police and Fire Pension Board that they had been counting on their deferred retirement accounts to supplement their pensions. They had medical bills. They had mortgages. They had college tuition to pay. And they had played by the rules of the fund.

Now they faced severe restrictions on fund payments after a number of officers retired and fears spread that a generous provision allowing retiring workers to take a large lump sum payment would be stopped. In about four months last year, more than $500 million — or about 20 percent of the fund — was withdrawn, pushing it within a decade of insolvency. Dallas police staffing fell below 3,000 officers even though there is funding for 3,600 positions.

A run on a bank, when account holders rush to withdraw funds, occasionally happens during economic distress. But a run on public pension fund is "very unusual," said Caroline Crawford, assistant director of state and local research at the Center for Retirement Research at Boston College. This is because pension funds rarely allow so much of assets eligible for withdrawal in deferred retirement accounts — 56 percent for Dallas.

The Dallas pension fund is a worst case example. But experts say the crisis was no surprise amid a national malaise of public pension funds. The unfunded liability — amount that pension fund assets fall short of commitments to workers — surpasses $1 trillion, according to several recent studies.

Since the 2008 financial crisis, 74 percent of state pension plans and 57 percent of the largest local plans had cut some type of benefits or raised employee contributions, according to a January study by the Center for Retirement Research.

That's exactly what the state of Texas did with the Dallas plan, passing bills through the Legislative session that just ended to stabilize the fund and another in Houston. The bills decrease benefits to future retirees and reduce access to deferred retirement funds accumulated for retirees such as those who stood up at the December meeting. The bills boost the contributions employees must make to the plan and increase the retirement age.

"We had to be sure that we saved those pensions. No one should work for 10, 30, 35 years believing they had a pension and then have it not be there," said Republican state Rep. Dan Flynn, chairman of the House Committee on Pensions.

The tough cure applied by Texas may not be possible in many other states. Only Texas and Indiana can adjust past and future benefits for current employees, according to the Boston research group. The state constitutions of Alaska, Illinois and New York specifically prohibit past or future changes to current employee benefits. Sixteen other states prevent such changes through contract, property or other laws. All other states bar reductions in past benefits, and some have ambiguous language about reducing future benefits in their laws.

"The most common and easiest change to accomplish from a legal perspective is to lower the benefit for future or newer employees," said Tom Aaron, vice president and senior analyst at Moody's Investor Services. "For some states that is effectively the only option. Texas has more flexibility legally."

Illinois has the worst-funded public pension system of any state, with an unfunded liability approaching $127 billion. Like Texas, legislators tried to create a plan that sought to reduce benefits, put a cap on pensions for the state's highest paid employees and limit future cost of living increases. The Illinois Supreme Court ruled the changes violated a state constitution provision that benefits cannot be diminished. So the state's pension system limps on while lawmakers there try to figure a way out of the dilemma.

States and cities may be able to learn from some major errors Dallas made in designing and managing its pension fund. The pension invested in risky real estate ventures that didn't pan out — this week its board voted to sell several properties in Idaho and Napa Valley. The Dallas pension also approved unsustainable benefits including a guaranteed 8 percent return on deferred retirement funds. Deferred Retirement Option Plans, commonly called DROPs, allow employees eligible to retire to continue working but accumulate benefits as if they are retired. When they decide to retire they get the money plus interest on top of the benefits they would otherwise get. During the rush to withdraw money from the Dallas fund, some beneficiaries were able to take out millions of dollars each in DROPs earned over time, with interest.

"I think most of the younger officers see it as the old plan was a Ferrari that was unaffordable," said Mike Mata, president of the Dallas Police Association, the city's largest police union.

Mata said that because of the benefit cuts, some members who retired early have told him they are going back to work in the private sector and some current officers are planning to work more years. Others are considering quitting the force.

"It's the steps we had to take to fix this," he said.