City Hall

Dallas Police and Fire Pension System Severely Wounded, Not Dead

The Dallas Police and Fire Pension system is in bad shape, really bad shape. So bad, in fact, that it has affected the city's bond rating, with both Moody's and Standard and Poor's bumping the city's creditworthiness down one notch in recent months. It isn't hopeless, though, and changes are being made to ensure it stays afloat, the fund's Executive Director Kelly Gottschalk told the City Council on Wednesday.

In the century or so the city of Dallas has had pensions for its uniformed employees, that retirement program has become one of the primary recruiting tools for the police and fire departments. Working in Dallas might be hard, and starting salaries might be low, but the city had one of the most lucrative and comprehensive benefits programs in the country for retirees. Through the Deferred Retirement Option Plan (DROP) it was even possible for cops to become millionaires. But, sustaining benefits that large requires consistent, high revenue from the plan's investments, and over the last 20 years, that didn't happen. Under the leadership of the plan's former executive director, Richard Tettamant, the fund made many high-risk investments chasing high returns. A bunch of them were in real estate — Gottschalk described vacant land being purchased in areas with "lots of vacant land" — that the fund is now stuck with, unable to unload without taking a huge loss.

"We have some long-term assets that it is going to take some time to get out of. What we want to do is, we want to maximize the value of those assets. That's going to restrict our portfolio for a period of time," Gottschalk said.

The millstone of real estate around the fund's neck means it will take a loss on its investments in 2015 and miss its targeted rate of return through 2018. Earlier this year, the fund lowered its estimated return from 8.5 percent to 7.25 percent, but reality has turned out much grimmer: In October, the fund estimated a loss of 6.5 percent on its investments for the year. It expects to venture back into positive territory in 2016, 2017 and 2018, but still miss its target, reaching only 5 percent each year. If that happens and nothing else changes, Gottschalk said Wednesday, the fund will be underwater in 15 years. The only good thing about that is 15 years gives the fund some maneuvering room.

"I don't believe that it's hopeless," Gottschalk said. "The reason that I don't believe that it's hopeless is that we have time. We have 15 years, and the city of Dallas and members of the pension plan have shown willingness to make changes when changes are necessary. I believe that everybody, including the [pension fund] board, is doing what it needs to do at this point, so, no, I don't believe it's hopeless."

One of those seemingly necessary changes, brought up in public for the first time Wednesday, is cutting the 4 percent cost-of-living increase members receive each year they draw their pensions. Council members universally agreed that it was too much, and Philip Kingston, who is a member of the fund's board, suggested that a cut could go a long way toward extending the fund's solvency. If the fund can hang on long enough, it will then begin to reap the rewards of changes that were made to the benefits offered new police and fire recruits in 2011. Hanging on is the hard part.

“Our ship will turn if we don’t run out of money,” she said. “The problem we have is the funds aren’t sufficient to get us to that time.”

As for how the ship got headed in the wrong direction in the first place, we got some information about that on Wednesday, too. Gottschalk and the pension fund board have hired the Diamond McCarthy law firm to look into what exactly went wrong with the real estate investments and potentially attempt to recover any money that might have been misused instead of just invested badly.

Any changes the board wants to make to the plan, to the cost of living adjustment, benefits or anything else, have to be approved by 65 percent of the fund's members. Sometimes though, even when that happens, there's trouble. Take the DROP program, for example. It lets pensioners who reach retirement age keep working while they invest their pension checks in accounts with guaranteed interest rates. The board and membership agreed to lower the interest rates on the accounts, but the move was blocked after DROP recipients sued. The case is on appeal, but the initial trial judge agreed with the plaintiffs that the modifications were unconstitutional. 

Whatever happens in the DROP case, the fund will still have a deep well of red ink unless something changes — somewhere between two and five billion dollars, depending on who's doing the accounting. If the fund goes belly up, it isn't clear who's on the hook. According to an opinion issued by Dallas City Attorney Warren Ernst, it's not the city. Ernst says that as long as the city continues to make its state-mandated contribution to the fund — it hasn't missed a payment so far — it isn't obligated to do anything else. Josh Mond, the fund's general counsel, said Wednesday that he believes just the opposite: If the fund goes bankrupt, the city will have to pay retirees itself. (When two lawyers disagree, the likely outcome is litigation, but if the fund goes broke, that's inevitable anyway.)

Universally, the council expressed faith in Gottschalk. Dallas Mayor Mike Rawlings emphasized that, although the mismanagement might be over, the pain for the fund, the city and the fund's members was just beginning.

"I get the sense that time's a wastin', and that, if we don't deal with this now, it's going to cost us more," the mayor said. "It's tough for this council and for the members to be dealing with the pain of things they didn't do. ... I am rooting for the younger members of this pension fund, the middle and younger members. This has been a top-heavy deal. This is a Bernie Madoff sort of thing where the guys at the front got their money and now the guys at the back are having to pay the price. However we do it, we're going to have to make sure that it's fair, that it's right."
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Stephen Young has written about Dallas news for the Observer since 2014. He's a Dallas native and a graduate of the University of North Texas.
Contact: Stephen Young