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.

That board oversees a 25-person staff whose salaries total $3.68 million, or an average of about $147,000 per person. Each trustee reportedly has a $15,000 expense account per year, and there's a $110,000 line item in the fund's budget too for "continuing education," which allows trustees to travel to various conferences and look at potential investments. (Pension fund staff cut that amount by 25 percent this year, after complaints from membership that it was excessive.)

Ann Margolin, the North Dallas city councilwoman, served on the pension's board for eight months in 2010. It was during that time that the board voted to buy Museum Tower. Margolin voted against it, as did Councilman Sheffie Kadane; Steven Shaw, a former DPD officer and the board's vice chairman at the time; and John Mays, a retired police officer who's still on the board.

"I thought as an isolated investment it was too risky," Margolin says. "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."

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."

Margolin says it was important for her to decouple her feelings as a councilwoman from what she knew was wise as a trustee. "As a council member, you could go, 'Oh wow, that would be great for the city, a fabulous building downtown, we should do it,'" she says. "But as a pension board member, voting, I had to be clear.

"The decision to go ahead with it was very much from the management of the pension fund," she goes on. "There was a lot of desire to do it from their point of view. It certainly didn't come from the council members."

Other board members didn't return phone calls seeking comment. An atmosphere of skittishness pervades the conversation around the tower these days. "I'm not wading into this one," said one former state official, an expert in Texas pensions.

Then, though, he couldn't help himself.

"There are plenty of people who looked at that tower and said, 'Bullshit,'" he said. "What gives the police the particular confidence that it's gonna succeed?"

The pension fund's headquarters sit on a little hill on Harry Hines Boulevard, in a surprisingly hip, LEED-certified building, full of big windows and curving walls. The fund moved into the building in 2010 along with CDK Realty Advisors, a seven-person firm that has overseen some of the pension fund's real-estate investments for 15 years. Today, a whopping 70 percent — $519.8 million — of the fund's real-estate assets are with CDK. The pension fund is the firm's "primary client" says Jon Donahue, one of CDK's founders, although it claims 14 others, including other pension funds and a few "high net-worth individuals."

But for a fund that prides itself on diversifying its assets, parking 70 percent of anything with one adviser seems odd.

"Certainly that's a subjective decision," says Ed Easterling. He's the founder of Crestmont Research, a financial analysis firm, and a senior fellow at the Alternative Investment Center at SMU's Cox School of Business. "But generally diversification does reduce the concentration risk of having a significant portion of your investments concentrated with one adviser."

Then there's the matter of sharing the building. DPFP owns the first three floors, Donahue says, while CDK owns the fourth. "We condoed the office," he says. "We basically took an abandoned building and created this project."

But entering into a business venture with CDK, as well as sharing an office, seems to afford the fund less freedom to switch advisers, lest things get awkward in the elevator. (Brian Blake, the fund's chief investment strategist, wrote in an email that "the fund does not think a reduction in real estate holdings would affect our relationship.")

CDK maintains a comprehensive list of projects on its website, but it's not clear how many are owned by the pension fund. In general, answers from the fund about specific assets can be frustratingly vague. Despite repeated public-records requests, officials refused to provide a comprehensive list of its alternative investments and gains or losses to date. At a board meeting in mid-July, Tettamant, the fund's administrator, told the Observer that the fund has been "inundated" with records requests and lacks the staff to fulfill them.

His inundated staff did, however, find time to provide a list of seven "successful" investments. It included a $20-million loan made to NorthPark Center for its expansion in 2005, when the mall added a Nordstrom, the AMC movie theater and a food court. The fund invested $20 million and got a 22.9 percent return, according to the documents provided.

Among the other successes listed are the 2006 sale of the Landmark building in Dallas' West End, which brought a 27 percent return; the Fountains at Fair Oaks, a Sacramento apartment complex; and the Legends Outlets at Village West, a Kansas City retail center into which the fund invested $15.75 million back in 2005. The fund sold its share of the Kansas City property to JP Morgan in 2007, netting a 67 percent rate of return.

That last deal was orchestrated through a partnership with RED, a Kansas City-based developer that has worked with CDK and the fund over the years. And last year that partnership strengthened, when the fund bought half of RED.

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


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 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.


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!


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 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 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.


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.  


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.



 @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.




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


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

mavdog topcommenter


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


 @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.