When a firefighter or cop reaches retirement age, he or she can hang up his or her hose or gun, go home, sit by the pool, drink Genesee Cream Ale, and draw money from his or her pension. But oftentimes the organizations don’t want those people to retire. They are good workers. They have a lot of valuable experience. So the Dallas Police & Fire Pension System, like many public pension funds, offers a little carrot to keep those folks on the job. It’s called a deferred retirement option plan, or DROP account. Here’s how Elena Farah, a University of Houston Ph.D. candidate in political science, explains what a DROP account is:
DROP accounts for employees who reach retirement age but choose to continue to work are touted as an important talent retention tool. This tool is expensive however. Initial pensions are deposited into a DROP account which is annually credited with [cost-of-living adjustments] COLAs (3 percent), employee contributions, and a guaranteed interest at 5 percent. At the time of retirement, the initial pension annuity is adjusted for COLAs for the number of years DROP has been active, and an additional lump sum, often in the hundreds of thousands of dollars, is available to the retiree.
Sweet, right? Would you take a guaranteed 5 percent right now? Looking at how my 401(k) has performed recently, I sure would. As Farah points out, “While the broad market has been effectively flat over the last decade, a hypothetical DROP account would have earned 55 percent simply due to the power of the compound interest.” That’s excluding COLAs. Should have studied criminology instead of English.
Well, the Dallas Police & Fire Pension System promises its members an even higher return on DROP accounts than other pensions promise. Employees hired before March 2011 are guaranteed no less than 8 percent (nor more than 10 percent). After I read Farah’s report, I asked the Dallas fund for some numbers on their DROP accounts.
There are currently 1,381 active firefighters and cops in the DROP program, with a balance of $415,259,441. Every one of those 1,381 active first responders is going to expect at least 8 percent on that money. In all, above and beyond the DROP accounts, Farah estimates that the Dallas Police & Fire Pension system has an $885.5 million unfunded liability.
As we argue about how best to fix the heat and glare reflecting off Museum Tower, let’s bear these numbers in mind.
