A number of pension systems across the country are facing funding crises, but one is in more imminent danger than most.
The $2.3 billion Dallas Police and Fire Pension System (DPFP) could run out of cash to pay pension beneficiaries as soon as January, according to people briefed on the situation, owing to a run of bad performance and an investment portfolio stuffed with highly illiquid investments.
The pension’s woes are putting pressure on the city’s budget at a time when Dallas should be thriving, observers and the city’s mayor say. Dallas City Council member Philip Kingston, who serves on the board of the troubled pension plan, says the latest report he has received suggests that in a worst-case scenario, the retirement fund will at least have enough cash on hand to pay beneficiaries through the end of 2017, “but that would require selling assets at fire sale prices and we don’t want to do that.”
Kingston is one of a group of city officials, including Dallas Mayor Mike Rawlings, and pension board representatives who are seeking to resolve the Texas city’s pension problem. It is likely that Dallas’ pension woes will be taken up by the state lawmakers when the legislature meets for its biennial five-and-a-half month session in January. Some GOP state lawmakers have indicated that they will push to convert the Dallas pension to a defined contribution system, an outcome which likely would not be greeted favorably by the union supporters of defined benefit plans in Texas and elsewhere. Kelly Gottschalk — the executive director of DPFP, who joined the system in April of 2015, replacing long time executive director Richard Tettamant — told Institutional Investor that no actuarial projections show the plan will be out of liquidity by January and the plan is currently in the process of liquidating investment assets. An FBI investigation into what happened at DPFP is under way; the pension plan is considered to be a victim, and the fund has hired a legal firm to do its own internal investigation.
In her December 2015 report to the Dallas city council and the mayor, Gottschalk reported that if steps were not taken to rectify the situation, the plan would be underwater in 15 years. But with assets tied up in illiquid real estate deals and elsewhere, the plan could be out of cash much sooner than that. Pension beneficiaries are also yanking money out of the system in droves. As much as $260 million had been withdrawn from the system from the start of the year to mid-September, owing to a specific pension benefit — called the Deferred Retirement Option Program (DROP) — that allows members who have passed their retirement date to continue working after that point and transfer their retirement benefits to a separate DROP account that receives a guaranteed rate of return. Retired cops and firefighters have been redeeming these funds, fearful of what will happen to the struggling pension system.
“If there is a run on the bank, it will affect our liquidity greatly,” says Dallas city council member Jennifer Gates, who joined the DPFP board in June.
Generous benefits including the DROP program have contributed to DPFP’s problems, as have its investments. The pension plan’s portfolio contains a number of illiquid, high-risk investments, including a real estate portfolio that currently makes up more than 23 percent of the pension’s investments and has much of its assets tied up in direct deals. These investments have contributed to the poor performance, and the overall illiquidity, of the fund in recent years. For the fiscal year ending June 30, the pension plan, which has a funding ratio of 45.1 percent, has a 10-year annualized return of 2 percent, placing it in the 99th percentile among its peers. A proposal currently before the DPFP membership would require the city of Dallas — which has been making its pension payments all this time — to put in $1.1 billion to fill the pension deficit gap (the city and police and fire employees both contribute to the pension fund). Council member Kingston predicts that will be a no-go for city lawmakers.
“What you will see within the next week is the city council speaking with a unified voice to say if you expect us to contribute anything beyond what we are statutorily required to do, then you will cut benefits to the bone to make that contribution as small as possible,” says Kingston. He has seen figures that suggest the additional payment the city would have to make to plug the funding hole could be as low as $300 million. Any benefit cuts, however, are likely to be challenged through the courts.
Mayor Rawlings testified on November 3 before the Texas Pension Review Board that his city could be facing bankruptcy if something is not done to fix the pension problem. Rawlings is pushing for governance reform at DPFP.