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Texas Supreme Court affirms ruling that DROP changes at pension fund are constitutional

The Texas Supreme Court affirmed an earlier state appeals court ruling that changes to the DROP interest rate and distribution policy at the Dallas Police & Fire Pension System that were approved in 2014 were constitutional.

The opinion issued by the state high court on March 8 affirms the December 2016 decision by the court of appeals for Texas' fifth district. In October 2014, the $2.1 billion pension fund's board and 88% of active participants approved reducing the future interest rate paid on DROP accounts to 7% from 8% in 2015, 6% in 2016, 5% in 2017 and potentially lower thereafter. Changes to the DROP distribution policy were also approved to prohibit members from maintaining their accounts indefinitely.

Shortly thereafter, a group of active and retired Dallas police officers sued the pension fund, arguing the changes violated the state constitution's clause that retirement system benefits should not be reduced or impaired. A trial court ruled in favor of the plaintiffs in 2014, but a year later reversed that decision, ruling the changes were constitutional.

In December 2016, the appeals court affirmed that decision, one that came almost a week after the pension fund board voted to halt withdrawals from the Deferred Retirement Option Plan. High withdrawals from that program helped reduce the pension plan's funding ratio to 36% and led to a pension reform package signed by Texas Gov. Greg Abbott in June 2017. That package included changes to DROP, including limiting participation to 10 years when it was previously unlimited, and no longer allowing retirees to defer payments.

Kelly Gottschalk, executive director of the pension fund, said the fund was "obviously pleased" about the decision since the changes were an "important piece in the solvency of the plan."