This content is from: Corner Office
Dallas Confidential: How Bad Deals and Bitter Feuds at a Public Pension Pushed a City to the Brink
For years, the Dallas Police and Fire Pension System seemed headed for disaster.
The elevator rises swiftly and almost silently, gliding past floors 35, 36, 37, 38 before the doors open directly into a private apartment. The impeccably designed modern condominium, with views taking in all of downtown Dallas, sits inside Museum Tower, a 42-story building in the heart of the citys arts district.
Completed in 2013, the building features sleek residences that fetch anywhere from $1.2 million for a one-bedroom apartment to $20 million-plus for a 9,350-square-foot penthouse. Amenities include a pool, gym, sauna and spa, a 247 concierge, and valet parking, as well as poolside butler service and on-site dog walking and grooming. Among Museum Towers well-heeled residents: private equity titan Tom Hicks, members of the prominent Bass family, and former Dallas Federal Reserve Bank president and CEO Richard Fisher. They enjoy all this luxury thanks to the buildings financial backer: the $2.1 billion Dallas Police and Fire Pension System.
Museum Tower should have been the crowning achievement of the DPFP and its ambitious former executive director, Richard Tettamant. Instead, it turned out to be a steel-and-glass albatross and blazed a blinding light into the inner workings of a pension system gone badly wrong.
Problems started even before the tower broke ground in 2010. But they erupted into a full-blown crisis with a feud between the tower and neighboring Nasher Sculpture Center. The tranquil, elegant garden and museum is a jewel in Dallass arts crown. But soon after Museum Tower went up, a problem emerged: At certain times on a sunny day, light from the tower beamed directly into the museum, singeing artwork and angering patrons. The ensuing fight pitted firefighters and cops against the citys elite.
Resentment over Museum Tower still smolders. For DPFP, however, far bigger issues have surfaced. The tower dustup caused the city particularly its no-nonsense mayor, Mike Rawlings to take a hard look at what was going on at the pension system for the citys police and firefighters. What he found was alarming. Not only had DPFP engaged in a series of unorthodox, highly risky investments, but the board, with help from the state legislature, had granted overly generous retirement benefits, which the pension, with its finances in shambles, cannot pay. Its unfunded liabilities currently stand at about $3.3 billion; its finances are so bad that rating agencies Moodys Investors Service and Standard & Poors have cut the citys credit rating.
Interviews with more than half a dozen current and former DPFP staffers and trustees and pension fund experts, and a review of hundreds of pages of legal documents, reveal that the Dallas Police and Fire Pension System had all the elements of a pension plan in trouble: poor governance, little oversight by city or state representatives, sweetheart benefits, and a powerful executive director in this case, former Baskin-Robbins franchise owner Tettamant. Adding fuel to the fire: a board that was encouraged to make risky, illiquid investments and trustees who at times appeared more interested in elaborate travel junkets funded by taxpayer dollars than in risk control. The trustees who did ask questions say they were stonewalled or felt intimidated. Now Mayor Rawlings, a handful of trustees and city council members, and the Texas Legislature are scrambling to plug the hole and save the countrys tenth-largest city from going into bankruptcy.
Tettamant, who was booted from the fund in 2014, did not respond to requests for comment. But the crisis he left in his wake has thrown the whole city of Dallas into turmoil because of the pensions billions of dollars in outstanding debt and obligations. Vital questions over what went wrong and who should be held accountable remain unanswered, while those fighting to save the pension plan find themselves at odds not only with the pensions beneficiaries but in some cases with one another.
The reason this makes us so angry is that no matter what happens now, we are still going to see police and firefighters who were promised things things that they relied on who are now not going to get them, says DPFP board member and Dallas City Council member Philip Kingston, who is dismayed that the board has to slash benefits. I am very resentful that I have to be the one to do that.
The police and fire pension system is one of two public plans in Dallas. It counts as its beneficiaries some 10,000 cops and firefighters, and their families. Both the city and the workers pay into the plan, but the city functions as the ultimate backstop if things go wrong. Of the pension systems 12-person board, however, only four members represent the city; they are city council members who are appointed to serve on the DPFP board by the mayor. The rest represent the various police and firefighter unions, and retirees.
Now, to save what money remains, the council trustees have been put in the position of blocking access to crucial benefits specifically, the systems controversial Deferred Retirement Option Plan, known as DROP. The program allows retired members to keep their retirement savings in the fund and earn interest on those savings if they stay on the job past their eligible retirement age. When they choose to redeem their benefits, they can take the assets out in a lump sum. The program was conceived as a tool to entice cops and firefighters to stay on the job; during the 1990s, Dallas had one of the highest crime rates in the country, and the city needed a strong police force.
But DROP proved to be far more expensive than anyone anticipated all the more so after a 2001 DPFP board vote that tied the interest rate paid to employees on their DROP savings to the anticipated ten-year return of the pension plan, regardless of the actual performance of the fund or the economy. As a result, DROP members received an interest rate of between 8 and 10 percent, even when, as in 2008 and 2009, the pension fund was losing money.
Another crucial element: If there was ever an issue with the pension system, DROP members could simply withdraw their money. That is precisely what started to happen in late 2016 as DPFP beneficiaries became aware of the perilous state of their pension systems finances. The pension plan, already low on funds, with many of its investments tied up in illiquid assets of questionable worth, was rapidly running out of cash.
In December, Mayor Rawlings, acting in his capacity as a private citizen, filed suit in Texas state court to halt DROP withdrawals. Then in February, after the 14-member city council voted to cover their legal expenses, the four council members serving on the pensions board Kingston, Jennifer Staubach Gates, Deputy Mayor Pro Tem Erik Wilson, and Scott Griggs joined Rawlingss suit.
The legal action turned up the heat on a situation already close to the boiling point. Samuel Friar, chairman of the DPFP board and a lieutenant in the Dallas Fire-Rescue Department, circulated a resolution among the citys fire and police unions stating that if any DPFP council-member trustee went ahead with a legal claim against the pension system, the unions would implement a lifetime ban on political support of all four city council trustees.
When she heard about the resolution, council member Gates, the newest DPFP board member, contacted Friar to ask what was going on. Friar responded to this request with an e-mail that contained a copy of the document and an explanation of his actions. Friar said that because Rawlings had been able to sue the pension fund as a private citizen, Friar should have the right to provide the document to the firefighter associations of which he was a member. It is unfortunate that events have brought us to this point. I believe all board members want this fund to survive, but bickering and making false accusations in a lawsuit is counterproductive, Friar wrote in his e-mail, a copy of which was obtained by II.
I too am sorry it has come to this, Gates responded via e-mail, adding that after my short time on this board and hearing stories of former trustees I have come to the understanding [that] the system has used bullying tactics in the past to keep trustees silent instead of addressing the financial issues of the fund. When I heard about this resolution my reaction was this is business as usual. Tettamant may have left DPFP three years ago, but the pension system and its board are still mired in the kind of political infighting that has made it much harder to solve the plans real problems.
Aetna Springs is located in northeastern Napa County, California. The estate includes historic, federally landmarked land; 44 luxury-estate lots; two commercial vineyards; and a nine-hole golf course. Once a popular holiday destination for wealthy Californians, Aetna Springs closed in the 1970s, fell into the hands of the Unification Church, and reportedly was used as a kind of brainwashing camp by devotees of Reverend Sun Myung Moons controversial religious group. In 2006 the site was purchased by developers with elaborate plans to create a private club a vision that included not just the Aetna Springs land but a second site at nearby Lake Luciana, for a combined 3,000 acres. That same year they tapped DPFP as an equity investor.
Aetna Springs was only one of many illiquid and esoteric investments that the pension system made. In addition to real estate investments, DPFP made a series of commitments to private equity and natural-resources funds, including energy investments in Texas and elsewhere. The plan also invested in farmland, agriculture, and timber around the world, in such far-flung locales as Australia and South Africa. As of December the fund had a staggering 44.8 percent of its assets invested in a real assets portfolio comprising real estate (25.4 percent), natural resources (11.6 percent), and infrastructure (7.8 percent), along with a 15.8 percent allocation to private equity funds. Even for a pension plan without major liquidity concerns, such an asset allocation is unusual.
Many of DPFPs investments were troubled. In the case of Aetna Springs, just as with Museum Tower, there were problems early on, when entitlement rights for a proposed golf course were not obtained. The issues and setbacks continue to this day. Separately, DPFP invested in a residential development in Hawaii that proved to be a money-loser.
Then there were the losing bets that DPFP made through CDK Realty Advisors. According to the complaint filed by DPFP against CDK in recently settled litigation, CDK put DPFP into a series of high-risk investments [that] have resulted in write-downs and losses of more than $320 million. These investments included land development deals in Iowa and Colorado in which DPFP acted as both an equity investor and a lender.
How did the pension plan come to be in this situation? Many point the finger at Tettamant, who was appointed the funds administrator in 1992, having previously worked for the city. These critics accuse Tettamant of promoting an investment strategy that included high-risk, illiquid assets that put the fund in the role of real estate developer a role for which it was not qualified.
Tettamant did not respond to requests for comment for this story, but he provided lengthy comments to D Magazine in response to a January article titled Why Richard Tettamant Could Cost Dallas $1 Billion.
In the early 2000s the DPFPS Board voted to invest in separate account real estate investments to improve its returns, Tettamant said in his comments. It is not the responsibility of the DPFP staff, including myself, to recommend investment strategy or investment decisions, but rather to assist the Board as directed by its Trustees. All investments were vetted by the DPFPS Investment Advisory Committee wholly consisting of Trustees and reviewed by outside investment consultants. Prior to the purchase of almost every investment, the Board reviews the financials and in almost every case performs a site visit, including meeting and interviewing the investment managers. The role of the administrator, Tettamant insisted, was merely to provide assistance.
Board members who served during Tettamants time paint a different picture. City council member Lee Kleinman, who was a pension trustee from 2013 until his resignation as vice chairman of the board in 2016, says it was almost impossible to get information on investments out of DPFP staff, including Tettamant, and that when information was provided, it sometimes seemed to be inaccurate or incomplete.
Other council member trustees recall similar experiences. It is very difficult when you are sitting on a board and the professional staff are telling you everything is fine, Kingston says. It is very difficult to exercise your fiduciary duty as a board member if you are confounded with a professional staff that is trying to deceive you.
Trustees say board members who raised questions could be subject to harassment. Scott Griggs was Mayor Rawlingss first appointment. I went on in 2011, he says. I was the only board member at the time asking questions. In particular, Griggs asked about the Museum Tower project. As a result of his questioning, Griggs says, the pension system hired a PR person and a private investigator in an attempt to find evidence that could be used against him. He says Tettamant and Gary Lawson, the pensions former outside counsel, were among those who oversaw the effort. Lawson, who no longer works for the pension fund, insisted in an e-mail to II that there was never an investigation of Griggs of any kind, saying, I have the highest regard for Councilman Griggs but he is incorrect on this issue.
For trustees who decided to go along, the perks of a position on the DPFP board could be enormous. For starters, there was foreign travel: Trustees went on extensive and expensive trips, all on the taxpayers dime. Under the auspices of due-diligence trips, some trustees visited Australia, China, Dubai, Hawaii, and elsewhere.
All three of the city council trustees who served on the board while Tettamant was still active and who spoke to II for this story said that within a month of their appointment to the board, they were approached about going on a due-diligence trip.
On my first day I was offered an iPad and a trip to Australia for me and my family, says Griggs. Kleinman adds, Within a week or two, I was offered to take a trip to South Africa via Amsterdam. Griggs and Kleinman declined these offers. Kingston was offered a due-diligence trip to look at forestry assets outside London and Cape Town, South Africa. What the hell forestry assets do we have outside of London? wonders Kingston, who also turned down the trip. Did we buy St. Johns Wood?
Almost all of the DPFP board has turned over in the past few years, but Kleinman describes a deal-happy environment early in his tenure, with trustees voting to invest in transactions he deemed too complex for cops and firefighters to fully understand. All they ever did is chase deals and look at how they could travel, he says. They got suckered into a bunch of stuff.
The party came to an end in 2014 with the ousting of Tettamant after he had lost the confidence of the fire and police board members. The new executive director, Kelly Gottschalk, who joined in 2015, is widely regarded as being good at her job. But the pension system is still struggling with the aftermath of earlier bad decisions.
The parking lot behind the squat, four-story office block at 4100 Harry Hines Boulevard in Dallas home to the DPFP began filling up with pickup trucks at about 1:00 p.m. on Tuesday, February 14. Retired cops and firefighters hunkered down in their vehicles, sheltering from the rain and waiting for pension system officials to open the buildings doors. A special meeting of the DPFP board of trustees had been called for 1:30 p.m. to discuss, among other urgent items, the city council member trustee lawsuit. ?
The restless cops and firefighters probably did not know it, but 4100 Harry Hines Boulevard itself is a testament to their pension plans folly. DPFP owns the building, which the plan says it invested in at the recommendation of CDK; in turn, CDK managed the property for DPFP. But according to the pension plans lawsuit against the real estate firm, CDK did not operate the property in a satisfactory and efficient manner. Instead, the firm charged other tenants in the building, including its own attorney, below-market rents. CDK sold the top floor of the building to itself, in what the pension system alleged was a clear instance of self-dealing. CDK did not respond to requests for comment.
In 2016, the Federal Bureau of Investigation raided CDKs offices as part of an inquiry into the pension plans investments. (The FBI also visited the DPFPs offices.) The investigation is ongoing. A federal grand jury also is reported to be weighing evidence against the fund, and Rawlings has called in the Texas Rangers to review its actions.
As the cops and firefighters streamed into the boardroom for the special meeting of the pension board on that February afternoon, they seemed less concerned about where their money had been invested although at a meeting the previous week there had been anger over this than they were with what was happening to their retirement benefits and DROP money. As they waited for the meeting to start, they clustered in groups. Almost to a man they were dressed in jeans and sweatshirts; many wore baseball caps. They talked about retirement savings (I just want my money) and health care costs, and worried about what it is like to grow old in a system that they feel does not have their backs.
This Valentines Day their anger was very clearly focused on the city council board members. One cop who got up to speak objected to the fact that the council members were having their legal bills paid for by the city. Brad, a cop with 47 years of service, said the council members were being offered unlimited funds to fight their case. He told the council members in the room, I feel like you are hiding behind a super-PAC.
The city, however, does not have unlimited funds. Speaking before the Texas Pension Review Board in December, Rawlings warned that Dallas will be forced to file for bankruptcy if it doesnt get a solution to its problem soon. The city council DPFP board members also are worried about the state of the citys finances: A separate pending legal dispute could add even more billions of dollars in back pay. Its like jumping off a cliff and stabbing yourself on the way down, says Deputy Mayor Pro Tem Wilson.
Most expect that there will be governance changes to the pension system. But although the city is reluctant to pay any more money into the system until such reforms have been agreed upon, Dallas, in a very real sense, is not in charge of its own pension destiny. Any changes must come from the Texas Legislature, which meets every other year and is currently in session. In late February the DPFP board voted to put a proposal to the legislature: Drafted by Texas House Pensions Committee chairman Dan Flynn and passed with a 90 vote, the plan would raise the retirement age to 58 from 55, eliminate cost-of-living adjustments, and roll back the DROP program. In a statement e-mailed to Institutional Investor by a spokesman, DPFP chairman Friar said, DPFP remains totally focused on a plan that will address and put in place a long-term fix for the DPFP funding issues.
Not everyone is convinced the proffered solutions are going to be enough. We have to be ready if the system fails, warns council member Gates. Nobody is telling us if it goes insolvent what it is going to look like.
The city council board members recently voted against making a major payment on a loan from Bank of America Corp.
No more large-sum payments should leave the system, so we can stabilize the fund, says Griggs, who led the objection to the loan payment. The fund is currently liquidating assets, including a number of its poor real estate investments, to make payments something Griggs also objects to, saying, I want to call a time-out.
As for Museum Tower, exactly how much DPFP has invested to date in the project is not known. The building is currently at 70 percent occupancy.
In March 2016, Kingston told local TV channel WFAA that the pension fund should sell its remaining stake in the tower for $100 million. The ensuing firestorm was epic even by DPFPs standards. The board sought to chastise Kingston and attempted to oust him. Friar called a special meeting. In an e-mail obtained by Kingston, Friar told Gottschalk that he had great ammunition that he threatened to fire at Kingston at the right time during the meeting.
Kingston filed an objection in court, saying he had been repeatedly blocked from receiving information that would help him make important investment decisions in his capacity as a trustee and fiduciary. In particular, he alleged that information pertinent to the sales of properties in Museum Tower was withheld despite repeated requests. Kleinman did not agree with Kingstons approach, but feeling that he lacked the boards support when it came to publicly confronting Kingston, Kleinman resigned. Kingston later dropped his legal proceedings.
Today everyone involved with DPFP staff members, city council members, and union representative trustees is fighting for the pension plan to get out of its dangerous downward spiral. But the Kingston spat suggests that old ways die hard. The pension plan would prefer that some information remain hidden from public scrutiny.
Meanwhile, Kingston, Griggs, Gates, and Wilson continue to serve on the DPFP board. They know that digging out of the current mess will not be easy. It may not even be possible.
We are at the point where we have kicked the can down the road long enough to where we cant kick it any more, says Wilson. Even if we come up with a plan, what are the investments? We cant invest our way out of this.