DALLAS – Since mid August, participants in the Dallas Police and Fire Pension System have withdrawn nearly $500 million in funds, causing a “run on the bank” that the city’s mayor fears is exacerbating the financial peril of the Pension System.
Mayor Mike Rawlings, individually and as a resident of Dallas, filed a petition for writ of mandamus and application for a restraining order against the Board of Trustees of the Dallas Police and Fire Pension System on Dec. 5.
Rawlings brought the mandamus action to compel the Board to safeguard the state constitutionally protected benefits of the system’s 10,000 members.
The benefit plan provides the city’s police officers and firefighters with a monthly pension, known as “service retirement benefits,” after they retire. The Texas Constitution protects service retirement benefits.
However, Rawlings maintains the board has a duty to ensure that programs, such as the Pension System’s optional Deferred Retirement Option Plan (DROP), which is not a constitutionally protected, do not impair or reduce the Pension System’s core benefits.
“The Board is willfully failing to perform these ministerial duties,” the suit states. “The Pension System, which the Board oversees, is in the midst of a financial crisis.”
In early 2016, the Board was warned by its own actuary that absent radical change, the Pension System would become insolvent within 15 years—irrevocably eradicating the constitutionally protected service retirement benefits of police and firefighters and their beneficiaries, according to the suit.
“Critically, this 15-year projection of insolvency was based upon two overly optimistic assumptions that the Board has now known to be incorrect for several months,” the suit states.
“First, the actuary assumed that the Pension System’s $2.7 billion in assets would remain stable, even though approximately 56% of these assets were composed of optional DROP funds, which have historically been permitted to be withdrawn in lump-sums upon demand.
“Second, the actuary assumed that the Pension System would achieve its targeted 7.25% return or more on its investments for the next 15 years.”
Rawlings says publication of the looming insolvency scenario prompted some DROP Participants to withdraw their funds in lump sum, which created a “snowball” effect, leading a staggering number of other DROP participants to withdraw nearly $500 million since Aug. 13.
Furthermore, more than $80 million of lump sum DROP withdrawals have occurred within the first two weeks of November.
“Over this three-month time period, the Board has knowingly allowed DROP funds to continue to be withdrawn at record levels even though it is aware that doing so is irreparably harming the Pension System’s solvency and liquidity,” the suit states.
“Lump-sum DROP withdrawals for 2016 are now on pace to be over 15 times higher than their historical average. This mass exodus of DROP funds amounts to a ‘run on the bank’ and is exacerbating the financial peril of the Pension System as a whole— including the constitutionally protected benefits.”
Rawlings argues every time a DROP withdrawal is made, every other member is being deprived of a constitutionally protected benefit, in favor of an optional program that does not even rise to the level of a benefit.
“The Board has the power to limit the withdrawal of the constitutionally unprotected DROP funds so that the Pension System does not experience a massive liquidity event, which would accelerate the Pension System’s descent into insolvency and further destroy its actuarial soundness,” the suit states.
“Despite this imminent danger, the Board has recklessly failed to take the required action to avoid this cataclysmic event.
“Worse, instead of taking measures to restrict DROP withdrawals in order to safeguard the Pension System’s constitutionally protected benefits, the Board has begun to cannibalize the Pension System’s assets by liquidating its investments in order to fund continuing DROP withdrawals…”
DROP withdrawals have reduced the Pension System to no more than ten years of remaining solvency, according to the Pension System’s actuary.
Rawlings argues mandamus is appropriate to compel the board to comply with its “ministerial duties” and to cease “engaging in a clear abuse of discretion.”
A TRO to stop the immediate withdrawal of DROP funds was not on file as of Dec. 7, court records show.
Rawlings is represented by Michael Gruber and Brian Hail, attorneys for the Gruber Elrod Johansen Hail Shank law firm in Dallas.
Filed in Dallas County District Court, case No. DC-16-15431.