The Dallas pension fiasco could happen in your state or city too.
The recent blow-up of the Dallas Police and Fire Pension System and the Dallas pension fiasco was entirely predictable. Furthermore, many other American pension funds are heading down the same road.
The combination of overpriced financial markets, inadequate contributions and overly generous pension promises mean dozens of U.S. local and state government pension plans will end up in their own versions of the Dallas pension fiasco in the coming decade.
So what happened in Dallas and why will it happen elsewhere?
Throughout 2016, the pension board, the municipality and state government bickered over who was responsible and who should pay to fix the mess.
As the funding ratio plummeted, plan participants became concerned that their generous pension entitlements might not be met. Police officers with high balances retired in record numbers. At the same time, they began, pulling out $500 million in four months in late 2016. In November, when faced with $154 million of redemption requests and dwindling liquid assets, the pension board suspended redemptions. The funding ratio is now estimated to be around 36%. It has been forecasted that assets will be exhausted in a decade.
The factors that led to Dallas pension fiasco are all too common. Politicians and their administrations often make decisions that are politically beneficial without taking into account financial reality. It is not until a market crash that the unrealistic return assumptions are exposed and the funding ratio collapses.
Pew Charitable Trusts estimates a $1.5 trillion pension funding gap for the states alone. The most vulnerable are Kentucky, New Jersey, Illinois, Pennsylvania and California.