Presumably "in the red" here means it's underfunded with respect to meeting existing pension obligations, not that the fund has a literal negative balance. If I'm wrong then please disregard the second part of this comment.

The idea is collective punishment. Settlements would make the pension fund deeper in the red, meaning cops wouldn't get their promised pensions due to the actions of the abusive cops who caused the settlement payouts.

The hope is that the threat of losing your retirement security because your coworker fucks up is enough to break the thin blue line and cause cops to police themselves.