No One Knows Who's On the Hook for the Failing Dallas Police and Fire Pensions

Hopefully, this story won't matter. Hopefully, figuring out who's on the hook should Dallas' massively underfunded Police and Firefighters Pension Fund go broke won't matter because the fund never goes broke. It's something that would be good to know though, considering the fund is currently sitting on an unfunded liability to future retirees of between $1 billion and $5 billion, with the spread depending on whose actuarial measures one wants to use.

Last week, the city of Dallas took one of its first real looks at how bad the DPFP situation actually is. The fund's executive director, Kelly Gottschalk, told the Dallas City Council and Mayor Mike Rawlings that, if something isn't done to rectify the fund — buried under high, defined benefits and bad real estate investments made under the leadership of Gottschalk's predecessor, Richard Tettamant — the DPFP could be underwater in as few as 15 years. 

Gottschalk and the DPFP board have plans to fix the coming shortfall, namely waiting for some of Tettamant's real estate investments to be worth something close to what was paid for them. (Gottschalk described some of these investments as vacant land in areas where there's "lots of vacant land.") The other trick will be to get the pension's members to agree to lowering the fund's annual cost of living adjustment, which is currently 4 percent.

So, what if Gottschalk is unsuccessful in turning the fund around? Dallas City Attorney Warren Ernst — who did not return a request to comment for this story — took a shot at answering at last week's meeting. "The city has made all contractually required contributions and has previously taken the position that it is not legally obligated to fund any additional amounts," he said. "Contributions to the Police and Fire Pension System are governed by state statute. The contributions are dependent on the level of member contributions and are unrelated to unfunded accrued liability amounts."

Ernst's statement not surprisingly dovetailed nicely with comments made by Rawlings in late November. The mayor told The Dallas Morning News' editorial board the Dallas' taxpayers would not be on the hook for any potential DPFP shortfall. “I believe, after legal advice, the citizens are not liable for the fiduciary mistakes that board made. So we need to start with that premise,” he said.
 
Not so fast. Josh Mond, the DPFP's general counsel, disagreed with Ernst later at the same meeting, saying that he believed that benefits for DPFP members are constitutionally protected, thanks to a constitutional amendment passed in 2003.

Here's how the key provision reads: "The political subdivision or subdivisions and the retirement system that finance benefits under the retirement system are jointly responsible for ensuring that benefits under this section are not reduced or otherwise impaired."

Unpacking exactly what that means is no easy feat. There hasn't been a court case yet to test what exactly "joint responsibility" is and nobody we contacted for the story —  Mond; Keith Brainard, a member of the Texas Pension Review board; Sherri Greenberg a former member of the Texas House and a professor in the University of Texas LBJ School of Public Affairs; and Jon D. Lowe, one of the best pension attorneys in San Antonio — was willing to even hazard a guess on the record. The closest thing we've got is Mond's public statement, that the fund's attorneys believe the constitutional provision means Dallas is on the hook.

If and when Texas does get a test case that would solve the riddle, that case may very well be Dallas itself. When the amendment to the constitution was passed in 2003, cities were given a one-time chance to opt out of the law via an election. Houston, a city that also has a pension fund that's in dire straits did so. Dallas didn't even put it on the ballot.