Dallas Freezes Deferred Retirement Option Plan (DROP) Withdrawals
The Dallas Police and Fire Pension System (DPFP) has received a lot of press attention recently. As a result of poor investment performance and consistent underfunding, the Dallas Police and Fire fund went from having enough assets to cover 82% of its liabilities in January 2010 to having only 45% in January 2016 (which means that DPFP’s pension assets are sufficient to pay less than half of future anticipated benefits). Obviously concerned that retirement benefits could be impacted and/or modified due to the steep decline in asset values, many participants in Dallas’ Deferred Retirement Option Plan (DROP) started withdrawing their money, exacerbating the problem. Between August and December, DPFP’s participants withdrew approximately $500 million in DROP funds, representing 23% of the plan’s total net assets of approximately $2.2 billion.
On December 5, 2016, Dallas Mayor Mike Rawlings sued to have DROP account withdrawals frozen and the Dallas Police and Fire Pension Board of Trustees took their own action on December 8, 2016 to temporarily cease all DROP distributions. These measures were taken to prevent further insolvency of the DPFP fund.
As the financial situation unfolded in Dallas over the last several months, LAFPP has received many inquiries by our membership about the status of the City of Los Angeles Fire and Police Pension Plan’s (LAFPP) DROP program. Given the status of Dallas Police and Fire Pension System, many negative news articles have been written in general about DROP programs.
LAFPP’s DROP Program was established in 2002 and was designed to be cost neutral, improve employee morale and retention, and lengthen the careers of public safety personnel. The Program has been reviewed twice since its inception and was determined to be actuarially cost neutral. The following are just some of the key factors that differentiate LAFPP’s DROP Program from other DROP programs:
LAFPP’s DROP program is designed to be cost-neutral. The City of Los Angeles must complete an actuarial study of DROP every 5 years to determine if it continues to be cost neutral and is meeting the City’s goal of lengthening the careers of police and fire sworn personnel.
LAFPP does not allow members to enter DROP retroactively – you cannot backdate your entry effective date. Only active members with at least 25 years of service (and age 50, depending on the tier) are eligible to enter DROP.
Participants continue to pay mandatory member contributions until they reach the maximum years of service for their tier. This contribution goes into the fund and is not part of the member’s DROP account.
The DROP account interest rate of 5% is lower than the LAFPP fund’s assumed investment earnings rate of 7.5%. Other pension systems may pay interest on DROP accounts at rates ranging from 6% to as high as 8%.
Participants can remain in DROP for a maximum of 5 years. At the end of the 5-year period, participants must retire and take distribution (total withdrawal from LAFPP) of their entire DROP account. Interest does not accrue after a member exits DROP.
As of March 1, 2017, total DROP account balances make up less than 2% of LAFPP’s total assets of approximately $20.0 billion.
In terms of the overall health of our Plan, the most recent actuarial study determined that, as of June 30, 2016, our pension plan is 93.9% funded, a 2.4% increase over last fiscal year. In addition, the City consistently makes its Annual Required Contribution (as determined by the Plan’s actuary) to LAFPP. An asset/liability study is conducted periodically which carefully monitors the cohesion between the benefits the Plan is obligated to pay to our pensioners and the long-term investment strategies in place. The most recent study of the Plan concluded that LAFPP’s funding level was “unquestionably strong” relative to most other public pension plans.
For more information on LAFPP’s DROP program, please visit the Member’s page for Active/DROP Members, under Plan Details.
The Dallas Police and Fire Pension Board of Trustees (DPFP) released a statement that a revised DROP policy was adopted on January 17, 2017 to provide Dallas’ retired DROP members with equitable and impartial monthly access to some funds. The DPFP Board’s approval was conditioned upon a receipt from DPFP’s actuary that the revised policy, together with approximately $11 million in additional DROP distributions authorized, does not accelerate the insolvency of DPFP based upon current assumptions. Monthly minimum distributions are expected to begin on March 31, 2017. Additional pro-rata monthly distributions to members with outstanding DROP lump sum requests will only be permitted if the total liquid assets exceed the reserve amount for a given month.
On March 9, 2017, the DPFP Board adopted a resolution certifying the reserve amount resulted in no excess liquidity for the month of March. Pro-Rata DROP distributions would not be permitted for March. However, monthly minimum distributions will proceed uninterrupted as installments with the March 31, benefit payments.
The DPFP Board and staff continue to work with City of Dallas officials on proposed legislation to provide a long-term solution to secure retirement funds for Dallas’ first responders.
For more information on the Dallas DROP program, visit their website at https://www.dpfp.org/.