The event horizon for a black hole is the boundary past which the force of gravity is so much that even light will not be able to escape.
Dallas Police and Fire Pensions has a similar problem, but in this case, it’s what I “like” to call a “death spiral”: the cash flowing out of the plan is so rapid that assets cannot keep up with future obligations and it only gets worse.
STAUNCHING THE FLOW…TOO LATE?
There are multiple angles to this problem. Back in 2014, the issue with Dallas Police & Fire Pension Fund’s investments in “alternative assets” became really well-known:
- Dallas Pension Learns About Concentration Risk
- Public Pensions and Alternative Assets: Dallas Shows How It Can End
But here’s part of the issue: Dallas may not have gone into such foolhardy boondoggles if it weren’t for the liability side:
- Texas Trouble: Pensions in Dallas and Houston
- Texas Update: Houston and Dallas Try to Clean Their Pension Messes
- Dallas Police and Fire: The Pension that Ate Dallas
Let’s look at that last post more particularly:
Because one of the assumptions in the valuation, and I quote the report directly:
7. The market value of assets as of the valuation date is $2.680 billion, based on unaudited financial statements. It should be noted that DROP account balances as reported for valuation purposes account for $1.505 billion (56.1%). It is assumed that participants will draw down these balances over a ten-year period. The System’s solvency will be significantly impacted if these funds are withdrawn more quickly.
RUN ON THE PENSION
I’m going to work backwards, partly.
DALLAS – A judge made a decision Tuesday to allow retired Dallas police and firefighters to make small monthly withdrawals from their pension fund.
Judge Tonya Parker’s decision scales back on a ruling made earlier this month by the pension board to halt all withdrawals from the fund.
The decision doesn’t affect mass withdrawals from the pension fund — something that has been the source of controversy for weeks.
Earlier this month, Mayor Mike Rawlings filed a lawsuit in an individual capacity, asking that police and fire retirees stop making mass withdrawals from Deferred Retirement Option Plan accounts.
Retired police and firefighters then made a run at the bank, making massive withdrawals ahead of a Dec. 6 deadline put in place by the pension board. Lump sum withdrawals had totaled nearly $500 million at the beginning of this month.
The newly-permitted monthly withdrawals only account for roughly $2.1 million of the pension fund.
Joe Thompson, a retired Dallas Police officer, told News 8 he was happy with Tuesday’s decision to lift a ban on monthly withdrawals.
“I am elated at the judge’s decision, and so will a lot of the retirees be,” he said. “We’re still holding on the lump sum, and we do respect [the city] as citizens. We have no intention of bankrupting it.”
But surely that’s not large compared to the plan assets as a whole…
Uh, $500 million out of $2.7 billion in net assets…. that’s a lot. If you didn’t already know.
Earlier stories in this saga:
- Dallas Police & Fire asked to suspend lump-sum DROP payments on liquidity concerns – Pensions & Investments Online, Nov 30
- Dallas mayor files lawsuit to stop pension withdrawals – filed Dec 5, notes the $500 million in withdrawals has been since August
- A Dallas public pension fund suffers a run – from the Economist, Dec 10
- Police and fire pay lawsuits and pension crisis could spell financial disaster for Dallas from Dallas News, Dec 7
- Dallas pension system suspends access to some funds – Dec 8
Contra the headline above from Dallas News, Dec 7, it isn’t the lawsuits that spell financial disaster for Dallas.
It’s the promises that were made in the first place. That they really have and had no wherewithal to fulfill.
But I guess as long at they were promising to pay later… someday… they could have pretended none of this really mattered.
THE BILLS COME DUE
Let’s see: Dallas officials did this website savethepension.com, I watched the short intro video, and I have no dispute with the bad investments & bad management… but it’s not the members of the pension plan who have been hurt by overly generous features… yet.
Of course, early entrants to Ponzi schemes aren’t the victims.
There are so many more problems with that intro video… and rather than make you click through to see it, here it is:
The worst part of the video was referring to a piece of legislation that I have no idea what it is. To be sure, I don’t live in Dallas, but I’m a public pensions junkie, and I have no idea what this CFO is talking about.
I clicked through, seeing if there would be anything more informational… and… nope. Check it yourself. I see no hard numbers, really, nothing I can hang my hat on. I have a pretty good idea how Dallas Police & Fire got to where it is, at this point, and there is barely any meat at all at this site. I might even be on their side, you know, but this thin gruel? Meh.
In the prior post, I showed that Dallas Police and Fire was an outlier re: its disparity between time-weighted asset returns (which is what gets reported publicly) and dollar-weighted returns (which I had to calculate myself):
Now that was using info from Public Plans Database, which doesn’t have Dallas’s most recent info yet. Or, rather, the plan page doesn’t have it, and the full database didn’t have it when I originally pulled info.
Dollar-weighted return: 4.21%
Time-weighted return: 4.87%
This is over the period 12/31/2001 – 12/31/2015, a 14-year period. Digging further, I see my calculated time-weighted return doesn’t match the Public Plans Database, so I’ll let them know about that. It may be the disparities in my IRR calculation and the time-weighted return I was taking from PPD are more from their own approach, and not between time- vs. dollar-weighted.
This is a bad result, but more to the point, the cash flow is just plain awful:
I did my own calculation, extending it one more year, and it dipped below -5%. That’s before $500 million out of <$3 billion was withdrawn… which is a wee bit more than 5%.
EXTRAVAGANT PROMISES HAVE CATASTROPHIC CONSEQUENCES
So, we can pretend it was just the bad assets that drove the problem, but the argument is easily made that the bad assets were pursued to try to support fantastical promises: guaranteed returns on deposited cash at 8%?
A proposal was put forth, but it has been rejected:
The proposed changes to Dallas Police and Fire Pension benefits have been rejected by a significant margin.
Voting in the 2016 plan amendment election ended Saturday at 12 p.m. producing the following results on three ballot items.
Ballot Item 1 – Plan Changes Related to Benefits – NOT PASSED – 45.0% In favor, 55.0% Not in favor
Ballot Item 2 – Plan Changes Related to Service Trustee Board Positions – PASSED – 66.9% In favor, 33.1% Not in favor
Ballot Item 3 – Requirements to Receive Credit for Additional Compensation Upon the Award of Back Pay – NOT PASSED – 64.8% In favor, 35.2% Not in favor
Sixty-five percent of police and firefighter would have had to agree to the changes that would cut benefits and increase contributions.
The election results are not considered final until certified by the Board. The Board’s review of election results is scheduled for a Special Board meeting on December 29.
If no changes are made, the $2.39 billion dollar fund would be bankrupt by 2028.
Well, if the DROPs continue, it will be out of cash (which is far worse than bankrupt) before 2028.
Pension Collapse in Big D
The retirement fund for Dallas’s public-safety workers is nearly ruined.
December 13, 2016
Dallas created the police and fire plan in 1916. The system’s trustees eventually persuaded the state legislature to allow employees and pensioners to run the plan. Not surprisingly, the members have done so for their own benefit and sent the tab for unfunded promises—now estimated at perhaps $5 billion—to taxpayers. Among the features of the system is an annual, 4 percent cost-of-living adjustment that far exceeds the actual increase in inflation since 1989, when it was instituted.
The system also features a lavish deferment option that lets employees collect pensions even as they continue to work and earn a salary. Moreover, the retirement money gets deposited into an account that earns guaranteed interest. Governments originally began creating these so-called DROP plans as an incentive to encourage experienced employees to keep working past retirement age, which in job categories like public safety can be as young as 50. In Dallas, the pension system gives workers in the DROP plan an 8 percent interest rate on their cash, at a time when yields on ten-year U.S. Treasury notes, a standard for guaranteed returns, are stuck at less than 2 percent. According to the city, some 500 employees working past retirement age have accumulated more than $1 million in these accounts—on top of the pensions that they will receive once they officially stop working.
To make all of this seem reasonable, the state legislature placed a cap on contributions. Under the cap, cities can budget up to 28 percent of payroll to funding pensions every year. It’s a high price, but not nearly high enough to fund Dallas’s generous plan, whose officials lately predicted that investment returns would stay above 8 percent forever. Trying to hit that crazy target, the system’s trustees began investing in increasingly risky assets. At one point, a startling 50 percent of the fund’s money was invested in private equity, real estate, and other volatile assets. Since 2010 alone, the pension system has had to write off nearly $200 million in bad bets, and the system’s funding level has slipped below the mark that experts say dooms a pension plan.
(FWIW, slipping below 80% or even 50% fundedness does not mean a plan is doomed, necessarily)
So I guess we’ve solved the mystery of the “write your rep about the blah blah blah bill” – they definitely didn’t want to point out they were asking constitutuents to have a contribution cap removed so that the city could be drained more heavily to fund the pensions.
As an aside, I remember a variety of pension actuaries telling me how defined benefit pensions were cheaper than defined contribution plans — well, that’s easy if the DB plans lower their contributions and try to wish returns into existence. If I had a 28% contribution of my salary into my DC plan, I would be just fine.
Mind you, the cap bill is idiotic without any mechanism to automatically reduce pension benefits when their cost exceeds 28% of payroll. I guess the politicians, as is their wont, assumed the magic money fairy would arrive to make up the gap between 28% and what the real costs were.
So, good luck to Dallas and Dallas Police & Fire. It’s unlikely that the hole will be completely filled, but perhaps they’ll figure something out.
Or perhaps they won’t.
I’m not making book on this.
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