The Dallas Police and Fire Pension's Big Real Estate Gamble

Museum Tower isn't the only troubled real-estate deal that the pension fund has gone all in on. But so far, only its investment advisers are winning big.

The Dallas Police and Fire Pension's Big Real Estate Gamble
Illustration by Christopher Short

Things have gotten so bad, someone went and made a sticker out of it.

One of the biggest feuds Dallas has seen in years has everything except sex: art, money, power, police and the looming threat of litigation. That's why people have been hanging on every detail of the dispute between the Nasher Sculpture Center, the downtown sculpture museum built by the late developer Ray Nasher, and its neighbor, Museum Tower, a $200-million condo development whose mirrored glass is, according to the Nasher, directing damaging light, blistering heat and awkward, art-muddying shadows into the museum's garden and galleries.

Museum Tower's developers admit nothing of the kind, and the two sides have been in mediation since mid-April. Then, last month, the stickers showed up. They emerged first at Anvil Pub in Deep Ellum: a cowering stone sculpture of a man, engulfed in flames shooting from a teetering building.

The Police and Fire Pension Fund sunk $200 million into Museum Tower, only to become the museum world's archenemy.
Brandon Thibodeaux
The Police and Fire Pension Fund sunk $200 million into Museum Tower, only to become the museum world's archenemy.
Councilwoman Ann Margolin: "They were expecting they were going to sell the units at $700 a square foot. Their prime competition was the Ritz Carlton, which wasn't even selling at that."
Dylan Hollingsworth
Councilwoman Ann Margolin: "They were expecting they were going to sell the units at $700 a square foot. Their prime competition was the Ritz Carlton, which wasn't even selling at that."

"Museum Tower," the text read. "Setting the art world on fire!"

The stickers were quickly, gleefully snapped up by patrons, evidence of how this story has seeped into lives of everyday Dallasites. And as the story has spread, more attention has been focused on the owners of the tower, who previously were barely mentioned at all: the Dallas Police and Fire Pension System, which collects and invests the retirement savings of the city's 9,000 retired and active police officers and fire fighters.

In 2010, the $3 billion pension fund borrowed $160 million — the equivalent of more than 5 percent of the fund's entire portfolio — to purchase and revive the stalled development. "This is an investment in Dallas by the people that protect and serve this community," Richard Tettamant, the pension fund's administrator, said at the time.

But that bright optimism has given way to arguments over literal brightness and the question of whether the project can survive the PR nightmare of owning a building whose target demo is now its mortal enemy. In the process, some of the tower's light and heat has been turned on the fund's overall investment strategy, which is heavily focused on "alternative investments" — higher-risk plays that include private equity, natural resources and real estate.

Museum Tower, it turns out, is just one of a few shaky real estate projects the fund has invested in over the past decade, throughout which the fund has increased by millions of dollars the amount it pays in fees to advisers. It's done all of this while entrusting a whopping 70 percent of its real-estate investments to just one company, with whom the fund happens to share an office building. Meanwhile, the fund recently slashed benefits for new hires to levels unseen since the 1970s.

There will be no sticker for any of that. The dispute over Museum Tower will eventually be resolved, the sexiness of the argument dissolved into some kind of pedestrian solution — new glass, maybe, or a "skin" on the outside of the tower to cut the glare. But the police and firefighters of Dallas will still have a large chunk of their nest eggs wrapped up in property that no one else wanted, a project that's now surrounded with doubts about its future. And that project will still be one of many.


At the foot of Arizona's Tucson Mountains, 10 minutes or so from the heart of downtown Tucson, there's a hilly, steep 300 acres, densely studded with saguaros, some of them more than 150 years old. It's one of the largest remaining stretches of saguaros for miles, and it's teeming with animal life, too: mule deer, javelinas, screech owls, rattlesnakes.

The people who live nearby have long wanted to keep it that way. Pima County residents voted in 1997 and again in 2004 to have the county buy the privately owned parcel, hoping to make it part of a nearby nature preserve. But the county never found the money, and the land's owner didn't want to sell — at least not for the land's appraised value, around $4 million.

Then, in 2005, the cops and firefighters from Dallas showed up. And they came wielding a checkbook.

At the time, the Dallas Police and Fire Pension System worked like most other public-employee pension funds, and in most ways it still does. Every active-duty cop and firefighter contributes 8.5 percent of each paycheck. That money is supplemented by City Hall, which kicks in an amount equal to 27 percent of police and fire payrolls — around $108 million last year. The average retiree collects $39,000 from the fund every year.

Until relatively recently, the fund invested those contributions the way pensions traditionally have: in stocks and bonds. Almost 80 percent of its portfolio was in stocks and bonds in 2000. But around the time the pension fund showed up in Tucson, and accelerating around 2007 and 2008 as the worst of the recession hit, fund officials began leaning heavily on those "alternative investments."

Forays into alternative investments are common for public pensions these days, as cash-strapped governments and a sluggish economy make traditional investments less likely to keep fund levels steady. But Dallas' police and fire pension has dived into these riskier investments at a rate unmatched by almost any other fund, with alternative investments now making up about half of its total assets.

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18 comments
chennaiapartments.in
chennaiapartments.in

Yes We are lucky that they are back in the "private sector" where as the pension stuck in bad decision.. 

Velociraptisha
Velociraptisha

Ms. Merlan missed a wonderful opportunity to show how this plan could bridge disparate groups and find common ground, in that both NWA and the GOP would love what is going on here.

primi_timpano
primi_timpano topcommenter

The City's contribution rate seems extremely high.  I think if you look at other public and private defined benefit plans you will find the Dallas percentage of contributions relative to salaries to be about twice the norm.

 

Wylie H has quite accurately mentioned the high fees for stocks and quoted 0.25% for index funds.  Actually, Vanguard even offers the riff raff of the investment world (me and you) funds with fees below 0.10%.

 

Last, the concentration of alternative assets in a handful of managers is just plain stupid.  So stupid one wonders whether there is a lot of pay to play going on.

 

It would be interesting to see what the ratings agencies have to say about these liabilities.

procket
procket

Remember the late former city mgr. John Ware had all the employee pension funds deep in the red probably 10 years ago.  He then was aligned with Tom Hicks.  I wonder if Hicks is still collecting commissions from the poor police and fire pension funds?  Follow the money trail, $34 million pays a lot of people.  The police and fire should hire their own actuary and CPA firms and get a real accounting of this mess or they will be like Stockton, CA, San Bernadino, CA and Scranton, PA.  Sorry you don't have a pension anymore, we tried!

WylieH
WylieH

Anna, Thanks for an outstanding article. At best, the Trustees seem to be breaching their fiduciary duties to the Fund's beneficiaries; at worst, one or more crimes may have been committed. I really hope you continue to dig deeper into the Fund's operations-- my sense is that you have just revealed the tip of the iceberg. A "deeper dive" may well end up yielding some far more fascinating and disturbing information. One thing is certain-- the Fund's condition will become much worse over the next five years; mark my words.

holmantx
holmantx topcommenter

Just so long as the Dallas taxpayer does not have to underwrite (insure) the pensions out of tax revenues should the Fund not be able to meet its obligations.  In other words, if the fund managers so mismanage the Fund to where it becomes insolvent (under-funded), the citizen must be held harmless.  Paying for pensions cannot come out of current tax revenues.  We've already paid in 27% of salaries.  That has to be the cap on our exposure.  

 

Or as Groucho Marx is want to say,

 

"I refuse to pay for a retirement system that will not have me as a member."

 

The retirees can only look to the remaining assets held by the Fund for their retirement.

mavdog
mavdog topcommenter

the realtionship with CDK is way too close. the amount of fees being paid to the fund's advisor's is way too high, especially when looking at the fund's performance

 

Either the board is either not paying attention or they are failing in their fiduciary duty to the pensioners.

 

As for the decision to put the money in Museum Tower, it's flat wrong. no pension fund should take that much risk by going solo on an investment of that size.

MisterMean
MisterMean

In 2010, the $3 billion pension fund borrowed $160 million — the equivalent of more than 5 percent of the fund's entire portfolio — to purchase and revive the stalled development. "This is an investment in Dallas by the people that protect and serve this community," Richard Tettamant, the pension fund's administrator, said at the time.

Somehow this does not strike me as a prudent investment.    It strikes me as a city that is so hell bent on doing what ever it takes to create a so called arts district regardless of if it is needed, wanted or sustainable that it would risk the retirement funds of the police and fire fighters.

 

Again it is yet another example of how short the attention span is of our elected officials (and their staffs et. al. that never seem to change despite elections) and their inability to connect the dots to see the bigger picture.

 

Well not to worry the tax payers are there to bail this mess out when the whole mess goes belly up.  

jameshairston
jameshairston

tell nasher's people to move his gallery! the high rise is gorgeous and created jobs for dallas,

commissions for realtors, tax money for dallas county, utility bills for power companies.

sales of home furnishings, security jobs and maintenance jobs.

grocery, restaurant, parking and so many other revenues to so many different vendors.

what does the nasher bring?

Did not think so. Move it to fair park. That are is bereft of culture! Or move it frisco.

 

WylieH
WylieH

 @MisterMean As you may recall, Leppert was an enthusiastic backer of Museum Tower...his closest ally on City Council, Dave Neumann, cast a vote in favor of this project while sitting on the Pension Fund board.

MikeDunlap
MikeDunlap

 @jameshairston 

 

A high-quality sculpture garden in Frisco... funny.  How long would it take before they turned it into a paintball field?

plsi
plsi

 @jameshairston maybe you should move to frisco and the the glass monstrosity with you...

mavdog
mavdog topcommenter

 @jameshairston

 cocktail hour must have started a little early and bit heavy...

MisterMean
MisterMean

 @WylieH We are lucky that they are back in the "private sector" where they belong.  Regretfully we (and the pension) are stuck with the bad decision.

 
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