STUMP » Articles » Texas Trouble: Pensions in Dallas and Houston » 27 September 2016, 06:15

Where Stu & MP spout off about everything.

Texas Trouble: Pensions in Dallas and Houston  


27 September 2016, 06:15

Calpers was sucking up too much attention last week. Let’s spread the love around!


I’ve written about Dallas’s pension woes before.

Long story short: Dallas shoved too much money into questionable investments. It wasn’t just hedge fund stuff, but also real estate holdings.

Well, that was two years ago. What’s up now?

Charles Sizemore at Forbes revisits the alternative assets issue:

At one point, the fund had over half of its investments in alternatives. Now, in a vacuum, that’s not necessarily a bad thing. The Harvard University endowment fund has famously kept about half of its portfolio in alternatives for years. It’s the particular choices of assets that the DPFP [Dallas Police and Fire Pension fund] held that should have been a major red flag. Among other questionable assets, the fund owned interests in the American Idol production company, luxury homes in Hawaii, a Napa vineyard and Uruguayan timberland.

I think there might have been some oceanfront property in Arizona in the mix too.

Not All Alternative Investments Are Created Equal

Apart from sheer strangeness (Uruguayan timber?), the alternative investments owned by the Dallas police pension had some other aspects in common. To start, all were extremely illiquid. Now, illiquidity is not necessarily a deal breaker. I’m comfortable with an asset being somewhat hard to sell so long as it is relatively safe and throws off consistent income. For example, the Dallas police would have probably been perfectly fine owning a diversified portfolio of rent-producing apartments or warehouses… but instead their managers bought them glitzy luxury properties and raw land held for speculation.

Along the same lines, the assets they owned, in general, did not have observable prices. Now, again, that is not necessarily a deal breaker by itself. It’s silly and cost prohibitive to get real estate appraised every month, and appraisals might not be accurate in the absence of reliable comps. And investments in private equity or private individual businesses also lack observable prices. But this is why you keep investments like these as a small piece of your portfolio and, again, make sure that they throw off a reliable stream of current income.

I, like Sizemore, am not knocking the use of alternative asset classes. We are knocking have large investments in them, where “large” depends on the size of your portfolio.


Let’s take a look at the Dallas Police & Fire plan.

Let’s look at contributions:

Not too bad. Yes, the ARC is high, but they had been pretty good at making full contributions.

Let’s look at the funded ratio:


And what about that asset allocation?

That was from FY 2014, so that huge yellow pie slice indicating the investments in alternative assets… may be quite a bit smaller now. Yowza, that’s bad.

Zerohedge has an interesting graph of the asset allocation:

Keep in mind that the large shift seen in 2007 is mainly recategorization of the assets. But keep an eye on that chartreuse area representing real estate. That’s one of the big underperformers. Also, the private equity represented by the orange areas.


So, given the asset losses, what’s up?

Dallas’ broken police pension threatens streets, parks promised in 2017 bond package:

The ever-growing line of city departments and public-private projects needing and wanting dollars out of the May 2017 bond package forms on the right. But if Mayor Mike Rawlings had his way, there would be no bond election.

Rawlings told the City Council on Wednesday that he’d prefer to push the bond election into fall 2017, if only because of the billions of question marks surrounding the city’s beleaguered and broken police and fire pension fund. That fund is woefully underfunded — between $3 billion and $7 billion, depending on how it’s calculated.

The pension board wants the city to pitch in hundreds of millions of dollars. But with no tangible, all-encompassing solution in sight, City Manager A.C. Gonzalez told the council Wednesday, the city could wind up having to fill much of that hole using either general funds that pay for the city’s day-to-day operations or a tax hike.

Rawlings said he would prefer the council “slow our roll, figure out what’s happening with the pension and do it in fall rather than May.”

Yeah, slow your roll, councilmembers. How dare you try to deal with a financial disaster.

Because this behavior isn’t indicative of things going well:

DALLAS (CBSDFW.COM) – The leader of the largest police group who represents 80% of the department’s officers is turning in his badge.

Ron Pinkston, the President of the Dallas Police Association says he’s worried about the pension system that many say is on the brink of failure.

Sources say the Dallas Police and Fire Pension Board could, as soon as next month, freeze all money from being moved out of the failing fund, causing a mass exodus before that happens.

“I’ve had several calls saying, hey do I need to leave now? I don’t know anything they don’t,” Pinkston says. But his concern about the stability of the city’s police and fire pension have reached a point where he needs to go.

“I look at what is happening within our police department and what the future looks like for the next couple of years and it doesn’t look rosy.” says Pinkston.

Dallas Police Chief David Brown recently moved up his retirement date and Pinkston will retire the same week.

They’ve got what’s akin to a run on the bank:

But the pension fund is in trouble and in danger of going bankrupt. That’s causing some officers and retirees to begin withdrawing their retirement funds and rolling it into their 401Ks.

News 8 has learned a that one assistant chief recently withdrew more than $1 million, and sources say nearly $300 million has been withdrawn throughout the department.

“We are in a serious situation and I think everyone needs to be concerned right now about where we are and where we need to go to get out of this.”

The panic that has set in forced the chairman of the pension board Sam Friar to issue a letter to members.

“I would strongly urge all members not to act rashly and without full information,” he wrote. “You may make decisions that, after all the changes are made, are not in your best interest.”

The board was so concerned it voted to stop current officers from withdrawing any money from their pensions, and sources say the board will soon vote to no longer allow retirees to take their money out.

“This may be the only way the pension can limit the cash outflow because we are in a bad situation that right now the existence of system is at stake.”

The board is looking and ways to help or save the pension fund… and is asking officers and firefighters to be patient.

But in the end experts believe the City may have to pay $600 million of tax payer dollars to help bail the fund out.

Allowing pension participants to pull out lump sums of cash, instead of taking it as life annuities (i.e., the normal type of pension benefit) is generally not a good idea. That’s its own special kind of asset death spiral.

Reason on the rush to the exits:

Dallas Cops Get Wise to Impending Public Pension Catastrophe, Start Yanking Their Money Out of the System
Dallas’ police and fire pension fund is $5 billion in debt, so officers are making the smart decision to invest privately.

With their pension fund teetering on the edge of bankruptcy, Dallas police officers are grabbing what they can before the whole thing crashes down.

Panic has set in and dozens of officers are pulling their retirement money out of the system as quickly as possible, WFAA reported over the weekend. One assistant police chief recently pulled $1 million out of the retirement fund and more than $300 million has been withdrawn in recent years, the Dallas ABC affiliate reported, citing unnamed sources.

Like most public pensions systems, the Dallas Police and Fire Pension System gives members the option to withdraw a lump sum when they retire or to collect an annual payment for the rest of their lives. Think of it as the difference between taking the payout or the annuity in a lottery—the lump sum is probably less than what you’d get with the installment plan (depending on how long you live, of course) but at least you know how much money you’re getting.

It seems that many newly retired officers believe that its better to get some money today instead of being promised more money tomorrow. That’s because tomorrow might not come for a pension system that has been badly managed for decades and is now $5 billion in the red. According to Moody’s, the system will be completely broke in about 20 years.
The city poured $29.3 million into the fund this year, but members of the pension board told the city council in May that an immediate infusion of $600 million—equal to 20 cents of every dollar the city spends this year—would be required to keep the fund solvent.

The pension fund expects to earn 7.5 percent annually—a figure that many experts say is too high a target in the current investment environment—but the bigger problem for Dallas is it’s Deferred Retirement Option Plan. The DROP system allows retired officers to reinvest their pension checks in the system and comes with a guaranteed return of 8 percent to 10 percent. Though the city has now closed the DROP program to new members, it continues to accumulate more than $300 million in annual losses, the Dallas Observer reported earlier this year.

More than 200 retired Dallas police officers have collected more than $1 million from the DROP program, the Observer found.

One more: Dallas Police and Fire Pension in Crisis, Retirees Concerned


Houston has its own issues:

Experts Weigh in on Houston Mayor’s Pension Proposal

Experts organized by the Kinder Institute for Urban Research weighed in Houston Mayor Sylvester Turner’s newly-unveiled pension reform proposal at a panel discussion Tuesday — the same say ratings agency Fitch concluded that Turner’s proposal “could improve the sustainability of the city’s pensions.”

Several measures in the proposal will produce significant cost-savings, according to Turner, but without buy-in from all three pension boards, warned the panelists, challenges to any reforms could be hard to avoid down the road. Notably, while the city’s police and municipal workers have backed Turner’s plan, the city’s firefighters plan has not.

Each of the city’s three pension funds are underfunded, to some degree, and their funding levels have worsened since 2000, in large part due to lower-than-expected investment returns and underfunding by the city, according to a report from the Kinder Institute for Urban Research.

Yeah, we’ve heard those reasons before.

Now, that doesn’t look that bad, when compared against the national average (except for the HMEPS pension fund) but, that’s keeping in mind the national average isn’t that great, either.

Back to the piece:

The mayor’s proposal includes both cuts to some retiree benefits and a lower assumed rate of return, as well as a set 30-year schedule to pay off the unfunded liability, which today is around $7.7 billion, according to the mayor’s estimates.

The city would also commit to paying the full contribution amount each year — something it hasn’t done for all three funds in over a decade. It includes $1 billion in pension obligation bonds, and a system of thresholds — right now, not publicly defined — that would trigger further negotiations between the city and the pension boards in the future, depending on changing financial conditions. Notably, the plan does not include a switch to the type of defined contribution plan that is offered to many private-sector employees.

The lack of support so far from the firefighters’ pension board is a potential roadblock that could prove critical for the plan, said Max Patterson, the executive director of the Texas Association of Public Employee Retirement Systems, during the Tuesday night panel.

Lots of skepticism to say the least. Houston Firefighters Association not all in just yet with Mayor’s Pension Reform Plan:

HOUSTON, TX — The day after Houston Mayor Sylvester Turner announce a major reform plan for city employees, at least one organization may not be completely on board with the plan.

Alvin White, the President of the Houston Firefighters Association told KPRC that, “Overall thoughts, I think, his announcement may have been a little premature, since the firefighters pension board is not in complete agreement with this.”

Turner followed through with his pledge to reform pension under-funding for city employees, with the roll-out of his proposed $7.7 billion pension reform plan on Wednesday.

The plan, which is designed to eliminate $5.6 billion in unfunded pension liability within 30 years, would also reduce benefits avoiding more than $2.5 billion in future costs, and include the issuance of at least $1 billion in bonds.

“We are closing the amortization, having a 30 year ammituization, reducing the rate of return expected rate of return down to seven percent, reducing the unfunded liability by one-third, and it’s not increasing your taxes.”

The kind of thing supporting the mayor’s plan is this: Houston mayor offers half-serious pension plan:

The pension plan that Houston Mayor Sylvester Turner announced last week is about as realistic as Houston can handle right now.

In other words, it’s far from straightforward, but still horrifying enough to scare both the left and the right, neither of which is ready to face the abyss, known technically as the city’s unfunded pension liability.

The truth is that there are still massive property tax hikes to come, along with vicious benefit-slashing for retirees; the alternative is bankruptcy.

Just a year ago, under former Mayor Annise Parker, the city was still claiming that its pension debt was $1.2 billion. Now Turner says it’s really $7.7 billion (hey! That’s just what we said back in January!), so long as the city’s pension funds earn 7 percent returns forever.

Even that’s leaving out $600 million in outstanding pension obligation bonds and $1.5 billion in retiree health care obligations. And Turner’s solution to balance the books involves putting another $1 billion in pension obligation bonds in the leave-it-out category.

Turner’s plan could get the city out of debt if it’s followed scrupulously for 30 years, according to the number crunchers at the Kinder Institute for Urban Research at Rice University. That is, aside from that aforementioned $1 billion in new pension obligation bonds that the Kinder Institute was generous enough to leave out of its calculations, if the city actually comes through with all the heavily backloaded funding the Turner plan requires, it’ll be pretty square in three decades.

That is of course a dubious assumption, given that the city has failed for 15 years in a row to come up with the minimum pension payments required to keep the system sound.

On the negative side, Turner is calling for $1 billion in pension obligation bonds, which he said he thinks he can get at interest rates of 3 to 4.5 percent. That’s unlikely.

Ugh. Don’t do it.

Remember: pension obligation bonds are of the devil and more explanation of why POBs are evil.

A few more news stories:

Houston mayor rolls out $7.7 billion pension reform plan

Houston Mayor Sylvester Turner followed through on his timeline to roll out a pension reform plan this fall with his Sept. 14 announcement of a $7.7 billion plan that will pay off the city’s debt in 30 years.

To do that, significant benefit plan changes will occur across all three pension funds: the Houston Police Officers’ Pension System, the Houston Municipal Employees Pension System and the Houston Firefighters Relief and Retirement Fund.

The plan has almost received tentative approval from representatives from each pension fund, Turner said. However, it still needs to be approved by each fund’s board. From there, it will go to city council, as well as the state legislature before it becomes effect.

The first step was to establish what the actual unfunded liability for the city was. Previous estimates have put it around $5.6 billion, but that does not include $900 million in unreported losses across all three pension funds, as well as an overly optimistic discount rate of 8.5 percent. The discount rate represents the expected rate of return for the funds, and while the current rate reduces the unfunded liability, many have said the rate is too high and creates unrealistic expectations. The mayor has proposed lowering the rate to 7 percent, the national average for state and municipal funds is around 7.6 percent, which increases the unfunded liability by another $1.2 billion. Therefore, the city’s total unfunded liability is $7.7 billion.

Then, the mayor asked each pension fund to restructure their benefits packages so that the unfunded liability will decrease by one-third. Turner declined to elaborate on how the plans were being restructured, adding that he left it up to each fund to figure it out themselves. He added in a Sept. 14 press conference that specific aspects of the pension packages such as cost of living adjustments, future benefit accruals and the city’s deferred retirement option program, are likely to be targeted. The restructuring resulted in a combined $2.5 billion reduction in the unfunded liability. That amount comes from roughly $1.1 billion from the Houston Police Officers’ Pension System, $700 million from the Houston Municipal Employees Pension System, and $802 million from the Houston Firefighters’ Relief and Retirement Fund.

Good luck with the valuation.

Pension possibilities: Mayor Turner pulled off an impressive feat – now let’s hear from the experts

Mayor Sylvester Turner last week announced that he’s reached a tentative agreement with the city’s three pension funds – representing police, firefighters and municipal employees – to drag our city out of the $8.3-billion-dollar hole threatening Houston’s financial stability. Give this mayor credit: Sylvester Turner has made more progress on this problem than his predecessor achieved in six years. But until there’s a solid plan on paper that experts can analyze, this is hardly a point to stop and celebrate.

As outlined by the mayor, the deal would eliminate underfunding of the pension plans over the course of 30 years, cut benefits to reduce the unfunded liability by about half or $2.5-billion, lower the Pollyanna projection of future returns from 8.5 percent to 7 percent and borrow $1 billion in bond money. Most important, the mayor says this plan will definitively cap Houston’s pension liability in the future, essentially closing the bottomless pit that threatens to swallow our city’s financial solvency.

Pension fund leaders for the police and non-uniformed city employees have accepted all of the major terms of the deal, but the notoriously intransigent firefighters fund has yet to agree to a key portion of the agreement. The mayor calls this the “thermostat” that he claims will cap Houston’s future liability, essentially setting a limit on what percentage of the city’s annual payroll will go to paying for pensions. If the payments hit that limit, state law would obligate the city and the pension funds to go back to the negotiating table and either raise employees’ contributions or lower their benefits.

What’s the limit Houston should pay into pension funds? Right now, roughly one-third of the city’s payroll expenses go into pension funds. This deal would lower that amount, but pensions would still suck up a substantial part of the city budget.

Is a 7 percent rate of return realistic? If this number is wrong, the results could be catastrophic. A disastrously faulty assumption about the rate of return Houston’s pension funds could expect is the main mistake that got us into this mess.

That last question is interesting. Are they intimating that 7 percent is too high or too low? I think they mean it’s still too high, but they don’t explicitly write that.

One more: Mason: Mayor’s pension reform plan is a good try, but misses core problem


Texas AG opinion: State not ‘liable’ for municipal pension shortfalls:

AUSTIN – On Sept. 6 the Office of the Texas Attorney General issued an opinion finding that a court would likely conclude the state is not required to assume liability when a municipal retirement system is unable to meet its financial obligations.

On March 10 State Rep. Jim Murphy, Harris County, requested Attorney Gen. Ken Paxton’s opinion on the matter.

“Rising pension and healthlcare costs, unpredictable revenues, aging infrastructure, high debt load, and increasing costs for the delivery of city services threaten municipalities’ ability to balance budgets and maintain strong credit ratings,” the representative writes in his request.

“When these challenges put municipalities at risk for defaulting, does the oversight role played by the State Legislature in these specific municipal retirement systems cause the State to assume some or all of the liability?”

Murphy specifically asked if a municipal retirement system fails to meet its obligation, is the state then responsible for ensuring that agreed upon payments are made.

“With respect to the size of these pension systems and their impact on city budgets, and the role played by the State Legislature in their creation and maintenance, it is imperative that the Legislature have a clear understanding of the consequences of decisions made in regards to these municipal retirement systems,” the request states.

In his opinion, Paxton found the state’s constitution prohibits the creation of debt, except in “limited circumstances not present here.”

You’re on your own, Dallas and Houston.

In any case, the state has its own large pension problem, in the form of the teachers pension.

Compilation of Dallas posts

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