A few months ago we wrote that the Dallas Police and Fire Pension Fund was on the verge of collapse after a series of shady real estate investments resulted in massive markdowns of pension assets, the ouster of the fund's CIO and an FBI raid of it's largest real estate investment manager (see "Dallas Cops' Pension Fund Nears Insolvency In Wake Of Shady Real Estate Deals, FBI Raid"). We summed up the fund's dilemma as follows:
The Dallas Police & Fire Pension (DPFP), which covers nearly 10,000 police and firefighters, is on the verge of collapse as its board and the City of Dallas struggle to pitch benefit cuts to save the plan from complete failure. According the the National Real Estate Investor, DPFP was once applauded for it's "diverse investment portfolio" but turns out it may have all been a fraud as the pension's former real estate investment manager, CDK Realty Advisors, was raided by the FBI in April 2016 and the fund was subsequently forced to mark down their entire real estate book by 32%. Guess it's pretty easy to generate good returns if you manage a book of illiquid assets that can be marked at your "discretion".
The rampant fraud at the DPFP left the fund over $3BN underfunded and its board of directors with no other option but to seek a $1.1BN infusion from taxpayers to keep the fund afloat. Even worse, a review of the pension's financials revealed $2.11 of annual benefit payments to members for every $1.00 contributed to the plan by members and taxpayers (mostly taxpayers)...the typical pension ponzi whereby plan administrators borrow from assets reserved to cover future liabilities (which are likely impaired) to cover current claims in full.
Now the Mayor of Dallas, former Pizza Hut CEO Michael Rawlings, and members of City Council are slowing coming to terms with the fact that the enormous police pension may be too large a burden for the city to overcome absent substantial benefit cuts for members. According to the New York Times, Dallas is second only to Chicago in terms of its pension underfunding relative to financial resources....and, as our readers know well, with a 38% funding ratio, Chicago is not a city you want to be compared to when it comes to the health of you public pension plans.
Now, the Dallas Police and Fire Pension System has asked the city for a one-time infusion of $1.1 billion, an amount roughly equal to Dallas's entire general fund budget but not even close to what the pension fund needs to be fully funded. Nothing would be left for fighting endemic poverty south of the Trinity River, for public libraries, or for giving current police officers and firefighters a raise.
“It’s a ridiculous request,” Mr. Rawlings, a Democrat, said in testimony this month to the Texas Pension Review Board, whose seven members are appointed by Texas governors, all Republicans for the last 20 years.
The mayor — who defeated a former Dallas police chief to win his office in 2011 — added that he had nothing but respect for the city’s uniformed safety workers, five of whom were gunned down by a deranged sniper during a protest against police shootings in July.
But that does not change the awful numbers. This month, Moody’s reported that Dallas was struggling with more pension debt, relative to its resources, than any major American city except Chicago.
“The City of Dallas has no way to pay this,” said Lee Kleinman, a City Council member who served as a pension trustee from 2013 until this year. “If the city had to pay the whole thing, we would declare bankruptcy.”
Of course, the city's problems have been exacerbated by the fact that panicked retirees have rushed to withdrawal $220 million of funds as news spread of the pension's potential collapse. Moreover, the city has limited ability to halt the "run on the pension" as the fund is controlled by state lawmakers in Austin.
Over six recent weeks, panicked Dallas retirees have pulled $220 million out of the fund. What set off the run was a recommendation in July that the retirees no longer be allowed to take out big blocks of money. Even before that, though, there were reports that the fund’s investments — some placed in highly risky and speculative ventures — were worth less than previously stated.
This month, the city’s more than 10,000 current and retired safety workers started voting on voluntary pension trims, but then five people sued, halting the balloting for now.
The city is expected to call for an overhaul in December. But it has no power to make the changes, because the fund is controlled by state lawmakers in Austin. The Texas Legislature convenes only every other year, and Dallas is preparing to ask the state for help when the next session starts in January.
One state senator, John Whitmire, stopped by the pension building this month and urged the 12 trustees to join the city in asking Austin to scale back their plan.
“It’s not going to be pleasant,” said Senator Whitmire, a Democrat in the statehouse since 1973. But without some cuts, “this whole thing will come crashing down, and we’ll play right into the hands of those who would like 401(k)s or defined contribution plans.”
Like many ponzi schemes public pensions around the country, Dallas' problems are not a recent phenomenon. The foundation of the impending collapse started over 20 years ago when Dallas just assumed they could offer sweetened deals to policemen and firefighters and then cover up the financial implications of those decisions with ridiculous return assumptions on their assets.
To many in Dallas, the hole in the pension fund seems to have blown open overnight. But in fact, the fuse was lit back in 1993, when state lawmakers sweetened police and firefighter pensions beyond the wildest dreams of the typical Dallas resident. They added individual savings accounts, paying 8.5 percent interest per year, when workers reached the normal retirement age, then 50. The goal was to keep seasoned veterans on the force longer.
Guaranteed 8.5 percent interest, on tap indefinitely for thousands of people, would of course cost a fortune. But state lawmakers made it look “cost neutral,” records show, by fixing Dallas's annual pension contributions at 36 percent of the police and firefighters’ payroll. It would all work as long as the payroll grew by 5 percent every year — which it did not — and if the pension fund earned 9 percent annually on its investments.
“The Legislature clearly ignored that,” Mr. Kleinman said. The plan’s current actuary, Segal Consulting, reported in July that 23 years of unmet goals had left Dallas with a hidden pension debt of almost $7 billion.
Alas, the problem with ponzi schemes is that eventually "actual returns" trump "assumed returns" and you simply exhaust your ability to raid the cash reserved for future benefits to pay current claimants.