City Hall

Dallas Police & Fire Pension Fund Decides Maybe Not Quite So Much of Their Money Should Be in Real Estate

At the ungodly hour of 8:30 a.m. today, the Dallas Police & Fire Pension System board of trustees held their monthly meeting. We decided to join them, both due to our love of waking up in what was basically the middle of the night to sit in a conference room, and because of the presence of one tantalizing phrase on the agenda: "Museum Tower options for Board consideration."

The debate, if you haven't been paying attention for the past few months, is whether the pension fund-owned Museum Tower is reflecting an obnoxious and/or art-destroying amount of sunlight into the Nasher Sculpture Center's galleries and garden. The two sides have been in mediation for months and a gag order has kept both from talking to the press. But the pension fund did recently send us a statement denying a Morning News report that the talks had "all but broken down." A source familiar with the fund also reports that the staff has assured the board that a solution is close at hand. The trustees have reportedly been shown drawings of the proposed fix, along with a cost estimate.

But there was no further illumination today, as the trustees filed into the room and promptly went into executive session over the Museum Tower issue two minutes later. Everyone but the trustees was asked to go into the hallway, and to kindly take any electronic devices with them.

"Should we protest this?" said one of the Morning News guys. He meant, Should we insist that we have a right to stay in the room? There's no lawsuit yet, and open meetings rules say you can't actually kick the public out to talk about potential litigation.

But none of us ultimately protested, probably because we were too damned tired. Out into the hall we went, where we all regarded ancient pictures of police and firefighters for over an hour. Buildings rise and fall, but the oversized cop mustache grows eternal.

After they returned, the board also voted to approve their new asset allocations, which, as Jim rightly points out, sounds really boring but is actually a significant step. After several years of having 20 to 24 percent of all their money in real estate investments, the board's new goal is to cap real estate at 15 percent. They're also reducing their private equity stake from 20 percent to 15 percent (though that's still more than twice the national average for U.S. public pension funds.) The pension fund is also going to increase the amount of money they put into infrastructure, to 10 percent from about three percent right now.

So why is the fund pulling away from real estate now? Recently we obtained an early draft of their unreleased 2011 annual report. It shows that the pension fund as a whole underperformed badly last year: though they set always set a goal of achieving an 8.5 percent return on their investments, last year the draft shows they made only 0.3 percent.

Last year was a terrible one for financial markets, and some of the fund's investments, including stocks, bonds and natural resources, did relatively well. Not so for real estate and private equity, which underperformed badly. Real estate returned about 6 percent, while the national average, as measured by a property index called NCREIF, was 20.7 percent. Private equity returned just .03 percent, where the average was 2.07. (Keep in mind that this was a draft, and these numbers may change when the annual report is actually released.)

We asked pension fund staff about the apparently disappointing real estate performance via email earlier this week. Is that why they're looking to reduce that allocation? Chief investment strategist Brian Blake replied, "We have a broadly diversified portfolio where most of the asset classes underperformed in 2011. The recovery from the Great Recession has been slow and uneven and has affected most investors including pension systems."

The asset reorganization "is going to take awhile," pension fund administrator Richard Tettamant said at the board meeting today, adding that staff anticipates it will be around 24 months. "It's not overnight. These are targets."

Scott Griggs and Delia Jasso, two of the four city council members on the trustee board, asked when the pension fund would look at their asset allocations again. Typically, Tettamant replied, a big reorganization is considered every five years or so.

"I wouldn't want to wait five years," Jasso said. "There are so many things changing and things are so volatile." The new allocation, she added, "is a very telling picture of where we are, compared to where we're supposed to be."

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Anna Merlan
Contact: Anna Merlan