By David E. Hubler
Contributor, EDM Digest
Some 10,000 Dallas, Texas, active and retired police and fire fighters fear for the future of their pensions, the Dallas Morning News reports.
“Poor decisions and bad investments by its management led to financial crises that threatened the fund with insolvency,” the newspaper said. Now, “taxpayers and first responders must pour hundreds of millions more into the fund to try to save it over the coming decades.”
As Interest Rates Dropped, Growth Slowed Down
In the 1970s and 1980s the Dallas Police and Fire Pension (DPFP) fund assumed an 8.5 percent return every year. But as interest rates dropped in the 2000s, that growth slowed down. Nevertheless, the fund kept its anticipated 8.5 percent return. And to reach that high figure, the fund had to invest in riskier ventures beyond traditional sticks and bonds.
In the early 1990s, the fund introduced an option designed to retain police and firefighters from retiring after 20 years of service. It was called the Deferred Retirement Option Plan (DROP). The fund put the pension checks of the police and firefighters who stayed on the job into a DROP account that guaranteed at least an 8 percent return.
That guarantee would come back to haunt the fund years later.
Around 2005, the pension fund began investing in real estate including a vineyard resort in Northern California, farmland in Australia and mansions in Hawaii. The fund also put money into private equity ventures. The fund borrowed $200 million to finance the construction of Museum Tower in downtown Dallas.
By 2011, the fund had more than $1.3 billion in alternate investments compared to less than $300 million in similar investments in 2003. Fund managers valued their real estate not according to market appraisals, but by how much the fund spent of the property’s purchase and upkeep. That valuation put the 8.5 anticipated return on investment (ROI) increasingly out of touch with the market.
In the Great Recession the Fund’s Real Estate Portfolio Bottomed Out
Then came 2008 and the Great Recession. The fund’s real estate portfolio “bottomed in value. But the fund’s estimated value didn’t reflect that fact,” the Dallas Morning News explained. To keep the real estate projects afloat the DPFP pumped more money into them.
When the newspaper exposed the gap between the actual and claimed values of some investments, city officials began demanding changes in practices and DPFP personnel. In 2014, the fund’s longtime director, Richard Tettamant, was ousted.
In 2015, the fund lowered its expected rate of return to 7.25 percent. Consultants warned that the fund could go broke in less than 25 years.
Adding to the ROI problem were the DROP obligations, which ballooned from about 30 percent of the fund in 2010 to nearly 55 percent in 2015. To stop DROP’s fiscal bleeding, fund managers allowed retirees to withdraw their DROP funds at any time.
That prompted retirees to withdraw about $500 million from their DROP accounts within five months. Financial experts now said the fund could go broke within ten years.
“DROP is now closed to all but minimum withdrawals as legislators and city officials debate how to fix the fund,” the newspaper said.
According to current proposals, police and fire fighters’ retirees’ benefits will be cut. No one knows for sure how deep the cuts will be. But “hundreds of millions of additional dollars” will be required over time from police, firefighters and taxpayers. And any DROP money left in the fund will be paid out in annuities over retirees’ projected lifespans.
But, as the newspaper warned, “more legal and financial challenges still could lie ahead.”
About the Author
David E. Hubler brings a variety of government, journalism and teaching experience to his position as a Quality Assurance Editor at APUS. David’s professional background includes serving as a senior editor at CIA and the Voice of America. He has also been a managing editor for several business-to-business and business-to-government publishing companies. David has taught high school English in Connecticut and at Northern Virginia Community College. He has a master’s degree for Teachers of English from the University of New Hampshire and a B.A. in English from New York University. David’s 2015 book, “The Nats and the Grays, How Baseball in the Nation’s Capital Survived WWII and Changed the Game Forever,” was recently published in paperback by Rowman & Littlefield Publishers.