On October 4, 2016 Dallas Police Chief David Brown retired. Chief Brown became nationally known after the July 7th shooting that killed five police officers. I remember being impressed with his press conference and the emotion he had.
What wasn’t known to me at that time was the scrutiny Chief Brown had been facing before that day. The Dallas Police Department was losing more and more officers to neighboring agencies that pay more. The department has apparently been understaffed as budget cuts have prevented the department from hiring more officers to fill their vacancies. Due to recent increases in crime and being understaffed, Chief Brown had been reassigning officers to different assignments. Many were being reassigned swing and night shifts causing the department to have lower morale and anger towards command staff.
On September 1st, Chief Brown announced he would be retiring in late October and shortly after, he moved his retirement date up to October 4th. Around this time numerous other Dallas Police Officers retired as well. It appears many of these retirements, including Chief Brown’s, were due to projections that their pension system is projected to become insolvent in 15 years. Meaning it will not have enough money to pay retirees their pension payments if changes are not made. So many officers rely on their pension as a guaranteed source of income when they retire and do little other saving. There seems to be two reasons for this.
One, is because new recruits are often times young and don’t think they are ever going to get old so they procrastinate. Also, the forms are not always easy to fill out so some just set it to the side and forget about it.
The second, is because people don’t understand investing. Why put some of your paycheck into something you don’t understand? It’s easy to understand that if you work for a certain amount of time you get a check every month. That’s not complicated. I’ve had officers talk to me about how they don’t trust investing in the stock market and they do everything they can to boost the size of their pension payment. These people don’t understand one very important thing…WHERE IS THE MONEY IN THE PENSION BEING HELD?
It’s held in similar investments that you should be investing in with your retirement account. It’s invested in the U.S. stock market, the international stock market, bonds, real estate, cash and other “fancy” investments. Now, to those officers who say they don’t trust investing in the stock market, so they rely on the pension, do you see how stupid that sounds? I understand that the people managing the pension are professionals at this and you aren’t so they should know how to invest successfully. Well, in 2007, leading up to the Great Recession and the collapse of the housing market those professionals had moved more and more of the money into investments in real estate and the pension lost tons of money.
The professionals aren’t the only reason the Dallas pension system is failing. I’m not trying to blame the professionals, I’m just pointing out the importance of understanding that you may need a back-up plan and being scared of investing is simply not a good reason to avoid it.
The Drop Problem
Chief Brown and so many others have retired from the Dallas Police Department for a common reason. They have been in the Deferred Retirement Option Program (DROP) for years and are worried they won’t be able to withdraw their DROP money if they wait too long. Here is a quick summary of what DROP is for people not familiar. Once you are eligible to retire you can enter DROP. You continue working for the department but your pension payments are now set and won’t increase or decrease. Your pension payments will be paid into an account that is held by your pension plan. Every DROP program is different but they generally pay you a minimum guaranteed rate of return. Once you officially retire and leave, you start receiving your monthly pension payments and you get the chunk of money in your DROP account.
For example, if your pension payment is $4,000 per month and DROP pays 8% per year then after five years you would receive approximately $294,000. Also, you would start receiving your pension of $4,000 per month.
Sounds great but here’s the problem. What if the pension is investing that money and doesn’t make 8% per year? If they guaranteed you 8% then they have to pay it. Even if the pension lost 10% in one year they still had to pay 8%. So, to pay these people their DROP money they have to give them some of the money that was saved for you and your fellow officers. To make matters worse, in Dallas you can stay in DROP for as long as you want. Meaning the pension is stuck paying 8% until those employees decide to leave.
Once news broke that the Chief was retiring and the pension will soon go bankrupt it caused what is called a run on the pension. Meaning tons of officers who have been in DROP for years retired, causing the Dallas pension to pay out over $500 million. They realized that if the pension is going bankrupt all their DROP money will be gone as well.
Think about it like this, if $500 million was actually making 8% a year that would be $40 million a year. Now $500 million isn’t in there to grow, and the pension needs money to make money. This is a big issue that they need to fix, and they have started. They have been gradually reducing the guaranteed rate down from 8%. The DROP in my pension plan only allows you to stay in it for 5 years and they reduced the guaranteed rate from 8% to around 2%. This means that if the pension makes 8% you still get the 8%, but if it loses 10% they only have to pay you 2%. It’s not perfect but it’s a lot better than it was.
Now that I’ve made you very depressed let me shed some positive light on this. First of all, for the Dallas pension plan at least they no longer have to pay all those officers who retired recently 8% anymore. Also, the new guaranteed rate is lower so the people entering DROP now get less. That’s not great for the people going into DROP but would you rather the pension go bankrupt paying you 8% or would you rather it be able to pay you a pension for the rest of your life, and possibly your spouse’s life. There has to be some balance and I think that is moving in the right direction.
The other positive point is about how much I still do like the DROP. I’ll illustrate it with a question. Would you rather have a big pension payment and no money in the bank or would you rather have a smaller pension payment with a big pile of money for just in case the pension goes bankrupt? My answer is to have a pension and a pile, but there is another way to make that pile. START INVESTING. Now that you understand that the pension is not guaranteed and it is invested in exactly what you are scared to invest in you need to do your homework. You need to understand how financially healthy your pension is. If you don’t know how to find the information or how to read the information ask someone, or ask me.
And if you are worried that you will invest and lose money like the pension system has, and yes, I realize I have probably painted that ugly picture for you and now you’re even more terrified of the stock market. You can’t make money without taking some risk. I like to learn what to do with my money from the rich and follow their lead. If you do your research like I have you will learn that they invest. The pension might seem safe but is it? If you still think so then you weren’t paying attention for the past few minutes.