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.

According to the Kansas City Business Journal, the terms of the deal mandated that RED double the size of its real-estate portfolio within five years. But RED now seems headed in the opposite direction. That same Legends project defaulted on a $137-million refinancing of a construction loan in November 2011, and a federal judge recently appointed a receiver to oversee the property.

Donahue says despite having partial ownership of the company, CDK and the pension fund "have no stake" in the property or the default. The same can't be said for another RED property, the Outlets at Legends in Sparks, Nevada. RED defaulted on a $141-million construction loan at the end of January 2012. The company is calling it a "strategic" default, and said recently it had succeeded in refinancing the property with its partners. Donahue and pension fund officials declined to say how much money the fund contributed toward the refinancing.

Closer to home, CDK and RED worked together on Akard Place, a planned $400-million, two-tower development near the Victory Park area, with 200,000 feet of retail, a luxury hotel, upscale condos and office space. The project was supposed to begin construction in 2009. In 2008, the developers claimed that the retail space was "60 percent committed," with signed lease agreements from those businesses. But Akard Place never went up.

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."

"It's a long-term asset," Donahue says. "Ground-up development can take anywhere from three to 10 years before you pull anything out of the ground. We did just come through one of the worst recessions in history."

Yet despite the stalled project, and despite that recession, investment advisers like CDK have continued to rack up millions in fees from the pension fund — and their share keeps growing. The more risky investments, the higher the fees, so as the fund's alternatives have grown so have those fees.

Fund officials won't say specifically how much CDK has earned. But the pension fund paid around $10 million in outside management fees earlier this decade, when it had about $2 billion in assets. As assets hit $3 billion around 2005 and more or less stayed there, the fees continued to climb, reaching more than $30 million in the past two years. And in a 2011 newsletter to members, board vice chairman Steve Umlor wrote that the fund planned to dole out increased fees again, based on the performance the fund hoped its investment managers would achieve this year. He projected the fees would increase by another 5 percent in 2012, for a record $34 million.

The Texas Municipal Retirement System, which is six times larger than the Dallas Police and Fire fund, pays $9 million in fees a year.

One morning in early June, Richard Tettamant is in a sunny downstairs conference room at its headquarters, along with its investment team: Josh Mond, the pension fund's general counsel; Brian Blake, chief investment strategist; and Mike Taylor, chief financial officer. They're all arranged on one side of a long glass table, looking a little restless. They've been enduring an unusual number of interviews lately.

"We're feeling very well," Tettamant says about Museum Tower, although a mediator's gag order keeps him from elaborating. Staff has been cagey about revealing how many of the 123 units have actually sold, but Tettamant acknowledges that "sales activity declined for about one month" after news of the dispute hit The Dallas Morning News and D Magazine. Still, he insists, "I'm still confident about Museum Tower."

He's similarly confident in his other investments. The fund, Tettamant argues, has the time and ability to invest in projects that may take awhile to come to fruition. It's not uncommon for a project to get snagged in bureaucracy, he says. "A lot of these investments, the city or town might initially throw up roadblocks," he says. "But as times get tougher, they need jobs, income and taxes, and they tend to come our way."

The fund doesn't call their investments "alternatives," he says, but "real assets."

"Agriculture, timber, oil, gas, land, buildings, houses," he explains. "We invest in real assets, not some piece of paper. It's an actual object. We know what it is we're investing in."

They also know that, at least in the short term, those investments aren't performing as well as they need to. The fund's stated goal is an 8.5-percent return on its investments. But a draft of its 2011 annual report, obtained by the Observer, shows that it barely broke even last year, with just a 0.3-percent return. At the same time, its debts jumped from $55,000 to $2.04 million (not including money borrowed for investments such as Museum Tower).

And it was the fund's alternative investments — those specialized plays that cost taxpayers tens of millions in adviser fees — that spearheaded the losses. The fund's stocks and bonds fared comparatively well, outperforming the average return by 8.4 percent, according to the report. But its private equity portfolio returned just .03 percent, underperforming the public U.S. markets by a couple of points. Real estate plummeted, losing 6.4 percent, underperforming the property index by 21 percentage points. The fund's real estate investments have been underperforming for a decade, in fact, netting 7.3 percent against a national average of 8.1.

All told, the fund's average rate of return over the last decade is 4.31 percent — half of its goal, and far short of what it needs to stay on track. That's not uncommon: Public pensions across the state and country are falling short of their goals. But in the last 10 years, most have outperformed DPFP, according to Cliffwater LLC, a consultant company that studied 69 funds across the country. The average rate of return, according to Cliffwater: 5.7 percent, compared to DPFP's 4.3 percent.

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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.

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