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.

All of which has hurt the fund's overall position. In 2010, the plan was 80 percent funded — meaning it had 80 percent of the money needed to pay out all the retirement benefits for its members. It would take 21 years to make up the difference, the fund's actuaries figured. Now the plan is 73.9 percent funded, a 30-year gap. As of January 1, 2012, according to the draft report, the plan's total unfunded liability was $1.9 billion, an increase of $304.8 million from 2010.

State regulators say that's all within reason. For the plan to become dangerously underfunded, things would have to go terribly wrong very quickly, says Chris Hanson, executive director of the Texas Pension Review Board. "Those types of cataclysmic events rarely happen," Hanson says.

But for DPFP, funding worries have already made an impact on members. In 2010, the fund quietly cut the benefits of all new members, to a level Tettamant described as what a retiree would have received in the 1970s. For instance: Prior to the cut, a firefighter who made $60,000 a year would collect about $45,000 a year when she retired. Under the new system, the same retiree would get about $30,000.

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."

And even with that cut, taxpayers may have to pony up more. According to a May report from Buck Consultants, the plan's actuaries, the city will have to increase its contribution — from 27 percent of police and fire payrolls to 33 percent — to keep the plan from becoming underfunded.

Tettamant insists that no one project, and no one year's worth of returns, can make the fund second-guess its strategy. "Anything less than five years is just noise," he says. But experts say that missing that 8.5-percent mark is meaningful, even if it's just for a year or two.

"It's more than just a benchmark on the wall," says Ed Easterling, the researcher at SMU's business school. It "is the number that they use to determine their actuarial assets and their funding status." Even if the fund did manage to hit 8.5 percent each year into the future, it would still only have 73 percent of the money it needs for the next 30 years.

The question, then, is whether promising an 8.5-percent return in the first place is responsible.

"They may recognize that a traditional portfolio of stocks and bonds in today's environment going forward over the next several decades has very little chance of achieving an 8.5-percent return," Easterling says. "It will probably be more like half of that."

Easterling says funds could be more secure, and have less need for risky investments, if they moved to lower, more realistic return expectations. But that could create panic.

"It just wouldn't be acceptable to revise to a more realistic number that shows that the plan is 30 or 40 or 50 percent funded. It would create a fiscal crisis. It would lead to a combination of benefit cuts and additional funding, which makes taxpayers and beneficiaries upset."

Also, he says, more risk doesn't always mean more rewards. In fact, it may mean the opposite.

"The reality is the higher the risk, the lower the probability of achieving the return."

Back in the pension fund's conference room, the investment team isn't concerned about a few key things: They certainly don't envision the plan going bust, and they don't foresee asking the city to put in more money. "The contributions have not changed since 1984, and we don't see any need to change them in the foreseeable future," Tettamant says. "We have been steady and static on the contributions." He doesn't mention that police and fire payroll contributions will need to increase slightly, according to the fund's own actuaries.

The fund administrators are also noticeably frustrated by the amount of negative media attention they're receiving. In March, Tettamant sent an email to the fund's lawyer and city staffers complaining that the Nasher had decided to "attack Museum Tower in the press." Just before this interview, they were listening to a radio interview with D Magazine editor Tim Rogers, who wrote the cover story on Museum Tower. Rogers claimed that discussions between the Nasher and Museum Tower had gotten much more civil since the news went public.

"He'd like to think that," says Barbara Shaw, the fund's communications director. She smiles, a little frostily.

"I'm still confident about Museum Tower," Tettamant says, that day in June. As he is about alternative investments as a whole: Although the board voted recently to reduce the fund's real estate and private equity allocations to 15 percent each, it'll still have 50 percent of their assets in alternative investments, including infrastructure and natural resources.

In fact, if they can reverse those odds laid out by Easterling, they may yet surprise their critics. The same Cliffwater analysis that found such disappointing returns found that plans with a high percentage of alternative investments tended to do better than others. The real variable, the consultants cautioned, was selecting good assets and finding competent managers to oversee them.

Tettamant and his team seem certain — truly, unshakably certain, in a way that does not feel forced by the presence of a journalist's tape recorder — that they'll be one of the alternative investment success stories. Just wait and see, they say.

"I think we've done a good job," Tettamant says. "I think we've watched over our ship."

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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.