In the wake of the flap about the Dallas Police and 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 and 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.