So, last time I looked at Dallas, in December, I used an event horizon metaphor.
Let’s change it up.
CRIMINAL INVESTIGATION INTO FUND MANAGERS
This has been a hot topic, going back a couple years now:
30 December 2016 Dallas News Op-Ed: Former police, fire pension managers should face criminal investigation
Mayor Mike Rawlings is right to ask for a state criminal investigation into shady practices by the Dallas Police and Fire Pension System’s prior management.
The fund is on the verge of a potentially catastrophic collapse that could leave public safety workers, taxpayers and the City of Dallas on the hook for billions of dollars. And the reason stems from abuses under the former administrator Richard Tettamant, who was ousted in 2014. (Stunningly, Tettamant is still working in investments in the DFW area, according to his LinkedIn page.) The fund’s former managers bet heavily on risky investments such as luxury homes in Hawaii, a resort and vineyard in California and Dallas’ Museum Tower itself, and promised its hardworking police and fire employees unrealistic returns while enjoying lavish perks.
Those returns didn’t materialize, saddling the retirement fund’s new managers with $2 billion to $5 billion in unfunded liabilities. Frightened police officers and firefighters began a run on the fund, pulling more than $500 million out of it in recent weeks at a pace that would have drained the fund’s cash to dangerous levels.
The state probe – the Texas Rangers have confirmed they’ll investigate – may be the second into alleged criminal acts. The FBI, which doesn’t confirm or deny the existence of investigations, raided earlier this year the offices of CDK Realty Advisors, which worked closely with the pension fund’s previous administration and worked out of the pension system’s building.
The city of Dallas contends it is not legally responsible for the actions of the pension fund’s former managers, in part, because the city doesn’t control the fund, which was set up decades ago by the Texas Legislature. But the city is on the hook nonetheless; a failure of the fund would betray promises made to current and retired public safety workers and would make it much more difficult for the city to recruit new police officers and firefighters.
Too many people are at risk and those who put them there need to be called to account for their actions.
31 December 2016: Mish responds to calls for criminal investigation:
Criminal Witch Hunt
I am not here to defend the investment schemes of the fund managers. And I certainly take exception to alleged lavish perks. But this case is going nowhere.
If one wants to place blame, then blame rests squarely on the shoulders of the legislature that authorized the plan and established the absurd pension assumptions.
Perks did not cause the pension plan to be ridiculously underfunded. Rather, ridiculous plan assumptions steered the managers into risky assets.
In hindsight, it’s easy to say the fund should have thrown it all at Google, Apple, etc. Care to make the same case going forward?
Taxpayers on the Hook?
Taxpayers should not be on the hook for this mess. The promises were bound to fail from the get go.
The fault for this mess is squarely in the hands of politicians, not those running the fund.
Nearly every public pension plan in the nation is severely underfunded. There is nothing special about Dallas.
However, politicians will never point the finger at themselves. So the witch hunt is on.
Most of us have been on vacation, drinking too much whiskey and eating too much noodle kugel (I guess I’ll speak for myself). So let’s recap the Dallas Police and Fire Pension System fiasco as we attempt to undertake a healthier and more fiscally solvent new year.
CDK Realty Advisors sued the Dallas Police and Fire Pension System for not paying $139,479 in fees back in February 2016. Yes, that’s right. The lawsuits seemed to start when CDK sued the pension fund. It would take a couple more months for DPFPS to file a counterclaim, alleging that CDK breached its fiduciary duty by encouraging DPFPS to “enter into a variety of real estate investments that were high risk, speculative, and not typically of the type pursued by pension systems. These high-risk investments have resulted in write-downs and losses of more than $320 million … .” That’s about when the FBI served a search warrant at CDK’s offices.
Fast-forward about eight months. Concerned about a run on DROP accounts (which included about $80 million in withdrawals by panicked retirees at the beginning of November alone), Mayor Rawlings sued DPFPS on December 5 to try to stop people from taking all the money. In response, the DPFPS Board stopped lump sum withdrawals a few days later. They amended that position on Thursday to allow certain small, monthly distributions. On Friday, Mayor Rawlings announced that he had also asked the Texas Department of Public Safety to investigate. That’s the Texas Rangers. Philip Kingston told the Texas Tribune he’s concerned that the Texas Rangers investigation may impact the lawsuit against CDK. Because, you know, people may not want to answer questions if they might go to jail. But that’s kind of always true, whether or not the Rangers are involved (again, I guess I’ll speak for myself).
Rawlings had held out some hope that the state of Texas might bail out the pension fund. That looks doubtful. In addition to a scathing letter from Rep. Dan Flynn to Rawlings back in November, the House Committee on Pensions issued a report in early December. It’s pretty clear that they are telling the City of Dallas to stop trying to get someone else to solve the problem, find some paper clips and double-sided tape, and figure out how to MacGyver this situation. Because the cavalry isn’t coming.
Over the last few months, the Dallas Police and Fire Pension System has tanked, with reports saying the fund turned into a catastrophe after a string of bad real estate investments. To make matters worse, participants attempted to withdraw hundreds of millions of dollars, forcing Dallas Mayor Mike Rawlings to take legal action to stop the bleed off. Now Rawlings is asking for a full-blown criminal investigation led by the Texas Rangers.
Tristan Hallman, reporter for the Dallas Morning News, says the Texas Rangers have also expressed that they’re ready to start the investigation, which is unusual. The FBI is looking into transactions related to the pension fund. And the pension fund hired a law firm to look into what went on.
“Some people think this might be redundant, others say what’s one more law enforcement agency at the party here,” Hallman says. “But this also comes right before [the city] wants to go to the state legislature and propose their own solution on how to fix the pension fund.”
The legislature has ultimate control, Hallman says. The fund isn’t governed by the city, so they don’t get to make the decisions in terms of how to fix it. The legislature can’t force the city to bail out the pension fund but can impact the solution.
Hallman says there’s a benefit to Rawlings drawing attention to the pension fund’s previous actions. It’s possible that he’s pulling out all the stops so he can avoid saddling the city with the burden of having to cover massive losses and avoid bankruptcy.
“The mayor has made clear in the past that the city should not be on the hook, should not be liable for this, but will participate in the solution,” he says. “That seems to fit with what he’s doing here.”
The problem with the fund that exacerbated some of the overly generous benefits paid out over the years was that they invested heavily in non-traditional real estate, Hallman says. The fund had to write down some very significant losses within in the past few years.
“They had massively overvalued it,” Hallman says. “They didn’t follow accounting standards so the criminality, you would think, would be somewhere in there if it exists.”
Dallas Mayor Mike Rawlings has requested that the Texas Ranger Division investigate the $2.1 billion Dallas Police & Fire Pension System for potential criminal offenses.
Texas Rangers is the criminal investigative arm of the Texas Department of Public Safety.
“The past administration of the Dallas Police & Fire Pension System committed a grave breach of trust with our first responders with serious ramifications impacting current and former police and fire personnel and their families, as well as all Dallas taxpayers,” Mr. Rawlings said in a statement Dec. 30. “As I have learned more in recent years and months about how the pension fund reached its current crisis, I have come to believe the conduct in question may rise to the level of criminal offenses.”
The mayor’s office declined to provide further information, including specifics on the conduct in question.
Kelly Gottschalk, the pension fund’s executive director, said the Texas Ranger Division had not yet reached out to the pension fund, but the fund would cooperate if asked. The FBI has already been investigating matters related to the pension fund for about a year, Ms. Gottschalk wrote in an e-mail.
In a previous interview, Ms. Gottschalk estimated that about a third of the pension plan’s underfunding (roughly 36% funded currently) came from its investment decisions, while the remainder came from generous benefits like DROP, an aging population, unrealistic return assumptions and other plan design issues.
For years, the pension fund invested in speculative real estate deals. A failure to obtain regular appraisals concealed the properties’ true value, and losses are estimated at $545 million. In 2014, after the magnitude of the losses began to be realized, the pension fund’s administrator, Richard Tettamant, resigned at the request of the pension fund board.
In April, the pension fund filed a lawsuit against one of its former real estate managers, CDK Realty Advisors, for allegedly advising the pension fund to enter into high risk and speculative real estate investments, resulting in write-downs and losses of more than $320 million.
CDK filed its own lawsuit against the pension fund in February over $139,479 in alleged unpaid money management fees.
So, good luck with that criminal investigation.
There might be fraud. But there might just be a high-cost asset management system because that’s the only way they could hit the 8% they were “guaranteeing” not only on the overall fund assets, but the discretionary amounts in the DROP benefit that retirees could pull out as lump sums.
Reminds me of the “good ole days” of Elliot Spitzer, who found ugly (but legal) practices in various asset management systems, and used that bad publicity to twist asset managers’ arms over something completely different.
Yes, having assets lose value, and paying high fees on top of that, really didn’t help the pension.
But that sort of result doesn’t require any criminality at all. But who knows — maybe there’s some fraud in there.
TEXAS LEGISLATURE UNAMUSED
So, while that stuff is going on — and if criminality is actually unearthed, it still won’t help the Dallas Police & Fire pension (though it would be a nice distraction) — the legislature is being asked to do stuff.
Let’s look at the commentary:
Hmmm. Tell me what you really think.
Fine. Any day now Dallas is going to go hat-in-hand down to the Texas Legislature, that famous factory of therapeutic thinking, and ask it to cure the city’s police and fire pension problems. Me, I’d just as soon walk into the bus station and ask if anybody could help me count my money, but then it’s not my say-so, is it? So down to Austin we go, heigh-ho.
A study by the Kinder Institute for Urban Research, a think tank housed at Rice University, found that Houston’s three pension systems had a total unfunded liability of $7.8 billion. Comparing that to our own unfunded liabilities in Dallas is a bit of an apples/oranges problem, because we haven’t been lumping our civilian employees pension fund in with the two uniform funds, police and fire, in talking about shortfalls. But if we did, our total unfunded liabilities would be about $5.92 billion.
I get that number by taking the unfunded liability amount described in the mayor’s lawsuit against the police and fire pension fund, $3.77 billion, and adding it to the unfunded liability amount for our civilian fund, $2.15 billion. We took care of the civilian fund in November by voting to approve a reform package, but – stick with me – I’m just making a point: total liabilities in Houston are substantially higher than ours. We have to fill a $3.77 billion hole. Houston must fill a $7.8 billion hole.
So the therapeutic thinking committee should be happy to see us, right? We have way less of a problem. Heck, they could fix two of us for one of Houston.
No. Wrong. Houston doesn’t have a problem. In Houston, Mayor Sylvester Turner, an experienced politician, has crafted a fix for the city’s pension funds that looks as if it won’t cost Austin a nickel. Houston is taking total responsibility for its own issues, fixing its own pension funds, and people at Houston City Hall are not suing each other or calling the cops on the cops the way they are at Dallas City Hall. We’re the ones with a City Hall process that looks like Sarah Palin’s family picnic, while the process in Houston so far, by comparison, looks like church.
Under the Turner deal in Houston, the unions have agreed to take a haircut on pension benefits that will amount to $2.6 billion or exactly a third of the unfunded liability. Turner has agreed to back a special bond election to produce a $1 billion cash infusion for the fund. That will take Houston’s total unfunded liability down to $4.2 billion, which the city says it can get rid of over 30 years within the amount it spends now to maintain the fund.
You will recall that Dallas police and fire officers rejected a similar haircut deal in a union election last month. But that was in the context of the mayor suing them over lump sum withdrawals. The vote to reject the deal also came after the mayor, speaking to the State Pension Review Board in Austin, said the idea that Dallas City Hall should kick in $1.1. billion to help fix its own pension mess was a “ridiculous suggestion.”
So let’s say it’s Rawlings and Turner representing their cities, and Turner gets to go first because his city is bigger. He puts his deal on the table, tells the committee his city is on the hook for $1 billion, tells them it’s taken care of, maybe shows them the note for the bond issue, tells them they don’t have to put in a nickel, and asks them to sign off at the bottom of the last page.
Scratch, scratch, scratch. Signed, sealed and delivered. “Next!”
Rawlings goes in, puts his deal on the table, tells them he’s suing his own cops and firemen, plus he sicc’d the Texas Rangers on them, plus they got pissed and rejected a compromise, plus he needs the committee to give him a check for a billion dollars … please.
See what I mean?
In this world, you don’t just ask for a billion dollars in a vacuum. It turns out that lots of people would like a billion dollars. I personally would accept much less than that. If Rawlings succeeds in getting that billion, I’m going to down there and find that same committee and ask for $100. My argument will be that it’s not that much.
To be halfway serious about this, I can’t imagine how Dallas could even allow itself to get into its current situation knowing what kind of compromise package has been put together by Houston, the city’s closest peer and competitor. It’s an example of a peculiar persistent disinclination on the part of the city’s old leadership to look beyond the city walls for guidance and context.
We got here the same way Houston did. We screwed up. We made some mistakes. The whole question now is how we fix it. And that will require real political wisdom and true political leadership, not bully-pulpit posturing.
I guess there’s always the chance I’m just wrong about Austin and somebody down there will shrug and say, “Yeah, what the hell, give Rawlings his billion. It won’t break us.” But if that does happen, I’ll tell you what: I’m going to change my mind and ask for a full $200 for myself.
There was already messages from the state attorney general saying “No bailouts”. Here it is from September 2016.
You ask whether the State of Texas must assume liability in the event that a specific group of municipal retirement systems created pursuant to title 109 of the Texas Civil Statutes cannot meet its financial obligations. You explain that “[r]ising pension and health care 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.” Request Letter at 1. Citing the potential for municipal default, you ask whether “the oversight role played by the State Legislature in these specific municipal retirement systems cause[s] the State to assume some or all of the liability[.]” Id
In no instance does the constitution or the Legislature make the State liable for any shortfalls of a municipal retirement system regarding the system’s financial obligations under title 109. The Texas Constitution would in fact prohibit the State from assuming such liability without express authorization.
There is more to the letter, but the point is this: the state is not required to bail out the cities’ pensions. They can if they want to.
We’ll see if they want to.
Because… well, just look at the behavior.
RUCKUS IN DALLAS
I’ll put these pieces in chronological order.
City officials offered an explosive proposal Wednesday in their effort to save the Dallas Police and Fire Pension System: Don’t save it at all.
Chief Financial Officer Elizabeth Reich told the Dallas City Council that officials could create an entirely new retirement system called the Public Safety Employees Retirement Fund. Younger active employees would have the option to transfer to the new pension system, where they would get a traditional pension benefit as well as a 401k plan with a 5 percent city match on top of it.
Police and firefighters who transfer would take lower guaranteed benefits, but would be able to escape a system that is heading toward insolvency within the next 10 years.
And if city officials went that route, taxpayers would continue to pay a share of the pension contributions for police and firefighters who elect to stay in the existing system. But retirees who draw money from that pension system and many cops and firefighters would be left in limbo, and possibly without future payments once the fund runs out of money.
“In terms of the solution over the long term, the city would have to work with the pension,” Reich said. “But it would really be up to the pension to determine how to close out that plan.”
Reich presented the outline of such a plan as negotiations with the pension system’s board have stalled. But Reich said that creating a new system is only an alternative option, and that city officials are committed to reaching a deal to save the current pension system.
Pension Board Chairman Sam Friar could not be reached for comment. But Max Patterson, executive director of the Texas Association of Public Employee Retirement Association, believes it’s the city’s responsibility to pick up the tab for retirees who can’t work anymore and don’t have Social Security to fall back on.
“The city can go out and create a whole new plan for future employees, but they’re still on the hook for the old plan,” Patterson said. “They can’t just say ‘I have no responsibility for the old plan.’”
Some of the responsibility would be mitigated by allowing active employees to transfer to the new plan, which would create a better financial situation for City Hall than the current mess.
Those who transfer would give up any claim to benefits accrued under the old pension system. The new system’s formula would determine their benefits instead.
The total cost to the city to bring over all the employees who qualify would be about $200 million, Reich said. The city would then pay a contribution rate of 14 percent of salaries into the pension system. Police and firefighters would also pay 14 percent.
Currently, the city is paying 27.5 percent on top of the police and fire salaries, which totaled about $124 million last fiscal year.
Even after the city paid the 5 percent match on the 401k accounts, taxpayers could save millions every year.
And City Hall could control the new system. Currently, the Dallas Police and Fire Pension System is governed by state law and a board of 12 trustees. Four are City Council members, but the rest are police and firefighters, both active and retired.
City and pension officials have spent weeks haggling over the details of that plan. The two sides are trying to reach a compromise and present a united front to the Legislature. But neither side is budging much, and they plan to go through mediation.
The executive director of the Dallas Police and Fire Pension System blasted city officials for unveiling an alternative plan that would cast off the failing retirement fund — and thousands of retirees and active workers — and create a new plan.
Kelly Gottschalk said in an email to pension trustees Wednesday that she was shocked by the city’s latest move. She laid the blame on Chief Financial Officer Elizabeth Reich and City Manager A.C. Gonzalez.
“I have to say, that in my more than 25 years in the public sector, this is by far, the worst display of public administration, public integrity, and ethics I have ever seen,” Gottschalk wrote.
And she said Gonzalez, who will retire in two weeks, is hampering the negotiations. She said Gonzalez “wants to check something off of his list and doesn’t seem to care about the ongoing operations of the city.”
The email was sent during a stalemate in talks between the pension system and City Hall. Both sides are trying to find a way to save the pension fund from insolvency within 10 years.
The two sides had made some progress in negotiations but must try to sort out their differences over some major sticking points with a mediator this weekend.
But the city’s alternative solution, unveiled days before the mediation, angered Gottschalk. While pension officials were aware of city officials’ idea, which Gottschalk referred to as the “ICE FLOW plan,” they didn’t know it would be discussed publicly at the City Council.
Gottschalk said in an interview that she felt blindsided and has been “very open to the city, probably actually to our detriment.” But city officials have felt similarly surprised about pension board decisions, too.
An earlier version of the city’s presentation that was posted online before Wednesday’s council briefing did not include the proposed alternative.
Gottschalk said the city’s plan, as it was proposed, would leave 7,300 retirees, active workers and survivors without a safety net. She accused Reich of acting in bad faith.
Kingston said the City Council, as trustees of taxpayers who could be on the hook for a fix, should explore other options, especially less expensive ones.
He said saving the pension system remains the first option. And he faulted his fellow trustees, saying the board has “demonstrated it lacks either will or power to create a positive outcome from this crisis.”
Gottschalk said in the interview she didn’t believe she overreacted considering the stakes for retirees and older police and firefighters.
Council member Jennifer Staubach Gates, who is also a board trustee, said she understands Gottschalk’s frustration. And Gates also wants to take care of retirees.
But she said having other options will help move the conversation forward because right now, “we’re just trying to stay afloat, which I don’t see as a solution.”
The pension system is in something of a no-man’s land. Officials don’t have a solution that has the backing of their members. The members had rejected a proposal, which would have required a taxpayer bailout to work, in a December vote.
25 January 2017: No deal. Pension mediation talks break off; lawsuit looming
The Dallas City Council unanimously approved a resolution Wednesday laying the ground work for legal action against the failing Dallas Police and Fire Pension Fund.
News 8 has learned that four city council members will likely file a lawsuit against the pension system contending, among other things, that it is violating its fiduciary duties by agreeing to release money held in high-interest savings accounts known as DROP.
“This is not a step that the four (council) pension trustees have taken lightly,” Council member Philip Kingston said during the council meeting. “There is a severe problem at the pension. We need the help of a court, I believe, in order to sort it out. The idea is not to damage the system, but to save it.”
Earlier this month, all four council members who sit on the board – Erik Wilson, Philip Kingston, Scott Griggs and Jennifer Gates —voted against the board’s plan that would create an orderly withdrawal process from what’s known as DROP – or Deferred Retirement Option Plan — accounts. These are special high-interest savings accounts and a big reason the pension is going broke. The fund has a nearly $4 billion shortfall.
The resolution approved by the city council Wednesday encourages the council members who serve on the pension board to “take all available actions to address the system’s dire financial situation.” It authorizes paying any costs arising from “those actions.”
“We’re in uncharted waters right now,” Gates said, “and it’s really important to us for those that are putting ourselves out there as trustees for the pension that we have our support of our council and that if we find ourselves in legal issues that we are indemnified by the city.”
Armando Garza of the Dallas Hispanic Firefighters Association was critical of the prospect of the council board members filing a lawsuit.
“It brings up more questions and more turmoil and instability,” he said. “We need to be working together, not dividing on this issue.”
The looming legal action comes as city officials, pension officials and representatives of police and fire associations came together for marathon mediation sessions Monday and Tuesday. They were trying to come to an agreement on a plan to take to state legislators.
In Kingston’s view, legal action is needed to give time to restructure the pension to save it and to stave off a looming liquidity crisis.
“There is every chance that unless we are able to liquidate illiquid assets at fire sale prices that we are looking at the possibility retirees not receiving their checks in a year or so and that’s a terrifying prospect,” Kingston said during the meeting.
Kingston pointed out that there are 1,300 retirees who live on less than $2,500 a month. He says the board’s plan to continue DROP withdrawals – “even on a limited basis mathematically shortens the period of time that we can pay benefits to some of our oldest and most vulnerable retirees.” He contends says violates the board’s fiduciary duty to treat all beneficiaries equitably.
If no changes are made to the pension, it could become insolvent in as soon as 2028. That would mean that it would not be able to pay benefits.
Tensions have continued to escalate after the city’s chief financial officer Elizabeth Reich presented a proposed plan last week that would set aside the failing retirement fund and create a new fund. The alternative would let many police and firefighters transfer over to the new city-run pension with reduced guaranteed benefits. The pension system would then be left with the job of figuring out how to pay the remaining money to the workers and retirees not covered by the new plan.
25 January 2017: The DPFP Statement on Dallas Council Resolution 1.25.17
The city of Dallas has a long, expensive and unsuccessful track record of litigating disputes rather than working with others to resolve conflict. Even now, city officials are begging the Legislature for sovereign immunity to save the city from a potential $4 billion liability from back-pay lawsuits dating back to the 1990s.
Most of the accusations in the City Council resolution are related to decisions and actions by a previous Dallas Police & Fire Pension System board (DPFP). Other than in recent history, Dallas City Council members on that board rarely, if ever, bothered to attend any meetings. The new DPFP leadership started in 2015 and has worked closely with city officials, members and the public (through the news media) to provide transparency into DPFP.
The new DPFP leadership had been making real progress until Mayor Rawlings and other city officials helped create a panic in 2016 among police and fire retirees. The Mayor’s litigation and bankruptcy threats helped create a $500+ million run on the pension fund and led to mass retirements of senior police and firefighters. The Ma yor’s December lawsuit against DPFP —timed to occur when members were voting on significant cuts in benefits—played a large role in defeating the proposal for benefit reductions. That plan would have reducedDPFP’s funding shortfall significantly.
Through its glitzy PR and marketing campaign, the city states its intention to provide a secure and stable retirement for Dallas’ first responders. But the city’s latest proposal in the pension debate would strip constitutionally protected benefits from all current retirees and most of the active Dallas police and firefighters. These dedicated first responders have devoted their lives to serve and protect Dallas residents, workers and visitors. Already underpaid in comparison to other cities in Texas, Dallas first responders have no social security and no safety net. And if the city gets its way, the majority of them will have no retirement—or one that only lasts for a few years.
Under the city’s plan presented on January 18, Dallas first responders become a cost-reduction target. The city’s new contribution rate would be significantly less than any other major city in Texas and approximately half its current contribution. Meanwhile, the city proposes that Dallas police and firefighter contributions increase 55 percent over the current rate, resulting in employee contributions higher than nearly any other major city in Texas.
The city’s proposal clearly fails the Legislature’s goal of “shared sacrifice” by placing the bulk of the burden on the backs of police and firefighters. Under this proposal, nearly 7,300 pension members would be stranded in a pension plan abandoned by the city. Based on the City Council resolution from today’s meeting, it appears that the city will continue to litigate to try to get its way. Efforts by the new pension board and the city to present a unified bill to state legislators have all but collapsed as a result of the city’s resolution.
But the Dallas Police & Fire Pension System cannot support any plan that leaves a single retiree or future retiree without a retirement. We will continue to work with Texas legislators on an equitable and legal solution that provides a secure and stable retirement for Dallas’ first responders.
25 January 2017: Dallas could scrap troubled pension plan if legislation fails
Dallas city officials and representatives of the troubled police and fire fighter pension have been meeting in 12- to 14-hour long sessions this week to fix a multi-billion-dollar funding gap that could threaten the city’s finances and economy.
The two sides have been consulting with a mediator in recent days to resolve their issues and present a unified proposal to the state legislature in the coming weeks. The talks between officials who have spent the past several months mired in dysfunction are still very much up in the air with no guarantee of an agreement.
At issue is whether certain fixes to the pension’s finances should be tied to a legal change the city is pushing. That would relieve Dallas of liability for a $4 billion lawsuit over emergency worker back pay.
The lawsuit and the pension system’s $3.3 billion in unfunded liabilities could throw the city into bankruptcy, jeopardizing the booming local economy.
“The city has taken the opportunity to tie the two together,” Dallas Police and Fire Pension Executive Director Kelly Gottschalk said in an interview Monday morning. “It’s attractive to the state legislature to kind of make this Dallas issue too big to fail.”
The city wants to put the current pension system into receivership if the legislation package fails, but pension officials have refused, Gottschalk said.
Legislation on the “fast-track”
Ted Lyon, a former Texas state senator and now a lawyer representing emergency workers in the back-pay lawsuit said he doesn’t believe the state legislature would approve a measure that would wipe out the city’s liability.
He suggested such a move could violate their constitutional protections.
“I have serious concerns over whether or not they can legally do that,” Lyon said.
In addition to the lawsuit problem, there are lingering disagreements on the part of the proposal that would fix the pension’s issues.
Pension officials have included a provision in their version of the bill to claw back interest from retirees in order to fill the funding gap.
The city wants this “equity adjustment,” but pension officials believe it’s illegal and don’t support it.
But by including it in the proposal, Gottschalk said the process would be sped up, and that provisions would ultimately be left up to a court to decide.
Any legislation once submitted is expected to be put on a “fast-track” in Austin.
The point man is potential House Pension Committee Chairman Rep. Dan Flynn (R-Van Zandt), who has criticized Dallas Mayor Mike Rawlings’ handling of the pension situation.
The pension and the city have presented draft bills to Flynn, Gottschalk said.
A spokesperson for Flynn’s office said they could not confirm whether a low bill number has been reserved, which would put a proposed fix near the front of the line for consideration once it’s ready.
Democratic Sen. Royce West of Dallas is expected to run the legislation on the state senate side.
It’s unclear, however, how a legislation package including both the pension fixes and the so-called “sovereign immunity” change wiping away the back-pay lawsuits could be bridged between the two chambers.
Proposal to replace plan
Dallas Chief Financial Officer Elizabeth Reich unveiled a proposal at a city council meeting last week that would replace the existing pension plan with a new one that provides traditional benefits to younger officers who transfer over, plus a 401(k) and some matching contributions from the city.
According to new analysis provided by the pension board this week, such a plan could cut off benefits from as many as 6,900 current pension members once the money under the old plan runs out. Reich has said it is up to the pension to sort out how to close the old plan under the proposal, but Gottschalk said she does not know how they could carry that out.
Credit raters already have downgraded the city’s debt several times and have warned about complications once state lawmakers propose changes to a bill – however carefully crafted between local officials. Moody’s has the city on alert for another potential downgrade.
In the near term, the pension board approved a plan earlier in the month that would once again allow members to take lump-sum payments restricted above a minimum reserve held by the system. These withdrawals into an interest-bearing account were blocked after a run on the pension last year.
Rawlings has threatened to block lump-sum distributions in court once they are paid out under the new plan in March, about the time when the state legislature could be taking up a proposal to fix the issue if one is ever agreed to.
We’ll see what happens in the legislature.
- 5 January 2017: Dallas Police and Fire pension members may have to pay back funds
- 12 January 2017: Dallas Police and Fire Pension System to reopen DROP withdrawals, maybe
- 16 January 2017: a href=“http://www.dallasobserver.com/news/rawlings-vows-to-continue-suit-after-pension-board-votes-to-allow-increased-drop-withdrawals-9083824”>Rawlings Vows to Continue Suit After Pension Board Votes to Allow Increased DROP Withdrawals
- 13 January 2017: In The Dallas Pension Fund Debate, Police And Fire Retirees Say They Haven’t Been Heard
- 17 January 2017: The Dallas Pension Fiasco Is Just the Beginning
- 19 January 2017: All Roads Lead to Dallas? – Leo Kolivakis, Pension Pulse
- 6 January 2017: Whitmire may avoid some pension votes amid conflict-of-interest concerns – has to do with a senator in the Texas legislature, who had been at a law firm that represented pension boards
IT’S ALL THE ASSET SIDE FAULT!
19 January 2017: Pension problems trace back to lax leadership, lavish trips
Four years ago, the Dallas Police and Fire Pension System billed itself as one of the premier in the country.
Today, the fund is going broke.
Accounts have been frozen, investments have failed, and taxpayers are being warned of a billion dollar bailout.
But few are discussing the actions of the man at the top of the pension system all those years, the man many say is largely responsible for the system’s failures.
If you have seen the sleek Museum Tower in northern downtown Dallas then maybe you’ve also heard the phrase, “all that glitters is not gold.”
The Museum Tower is perhaps a fitting metaphor for its owner, The Dallas Police and Fire Pension System. Stylish on the outside, but inside, a half-empty, financial drain.
Just weeks ago, panicked pensioners were scrambling to withdraw their savings from the pension system that was going broke.
Just days ago, Dallas Police and Fire Pension System Trustee Scott Griggs made the sobering revelation. “We got from an actuary the letter that says we can’t afford to keep the lights on,” said Griggs.
The Police and Fire Pension Fund has lost $1.5 billion dollars since 2013, partly from inflated interest rates on pension benefits but also from risky private equity and real estate investments such as the $200-million Museum Tower.
The Pension System’s Chief Administrator for 20-years was Richard Tettamant. He and other top administrators plowed a half-billion dollars into speculative real estate projects, much of it in 2005-2006, at the top of the real estate market.
Resorts in Napa Valley, luxury homes in Hawaii, Aspen, Colorado, Park City, Utah and Scottsdale, Arizona. Dallas Mayor Mike Rawlings says he saw trouble immediately after taking office in 2011.
“I was concerned about the real estate, private equity, issues that have a high beta to them,” Said Rawlings. “I realized right then that’s not what most pension funds do.” Rawlings says when he started questioning Tettamant and his staff for specifics, they snubbed him. “They were not giving me the information I was asking for,” said Rawlings. “That’s when I said there may be more than smoke here.”
Rawlings took action.
He appointed four fiscal watchdog Dallas City Council Members to the Pension System Board.
Among them, Scott Griggs who says his eyes were opened to a culture of entitlement and waste. “Initially I was offered a new I-Pad,” said Griggs. “Then I was offered a trip with my family to go see Australia and to check on some investments over there.” Griggs says not only did he decline, he and fellow city Council member Phillip Kingston dug deeper.
They, along with fellow City Council members Lee Kleinman and Tennell Atkins questioning the investment portfolio as well as Tettamant’s claims of success. “Tettamant misrepresented the value of the real estate assets,” said Kingston. “He misrepresented the performance of many of these investments including the private equity investments. And he had fully 50 percent of the fund in alternative investments. That’s a recipe for financial suicide.”
Some investments, Tettamant and his staff managed themselves, mainly the boutique resort properties in Napa Valley and Hawaii. In 2012, News 8 asked for staff and board members travel records. We found $185,000 in travel expenses for that one year. $21,000 of that has spent by Richard Tettamant.
From 2009 to 2012, Tettamant traveled the globe to attend conferences, meet with investment managers or, as he explains, to check up on real estate investments.
London, Brazil, Zurich, Uruguay, Florence, Milan, Amsterdam and Abu Dhabi where airfare alone was $13,000. At the same time, Tettamant paid a consultant more than $100,000 to wage a secret public relations campaign to monitor and shape new coverage. An inspection of the consultant’s billing records showed the expenditure of $75 on and item labeled “what to do about (Brett) Shipp”.
In 2013, Tettamant, paid the consultant, former NBC5 news anchor Mike Snyder, $5,700 to orchestrate and secretly video tape a meeting in which News 8 had requested an accounting for all of Tettamant and the Board’s travel. It was at this meeting that News 8 discovered and questioned Tettaman about multiple trips to the Calistoga Ranch, California resort and the Pension System’s other Napa Valley properties.
Records also show the consultants were billing for putting “a forensic trace” on adversarial board member Scott Griggs and others.
“It was completely arrogant,” said Griggs. It was reckless, it was a misappropriation of resources.”
20 January 2017:Federal grand jury probes Dallas police and fire pension fund
A federal grand jury is weighing evidence in a criminal case relating to Dallas’ troubled police and fire pension fund, according to the fund’s lawyers.
Federal investigators have been looking into the Dallas Police and Fire Pension System for at least a year. In April, FBI agents streamed into its headquarters to serve a warrant on an investment firm, CDK Realty Advisors, that managed many of the fund’s investments and shared its building.
But this is the first indication that authorities have been giving information to a grand jury, which federal prosecutors sometimes use to aid investigations. The grand jury can call witnesses, ask questions and subpoena records. Ultimately, if prosecutors decide to go forward with a case, it’s up to the grand jury whether to indict.
The pending grand jury came to light after The Dallas Morning News requested copies of correspondence the fund received from federal investigators. The fund’s lawyers said such correspondence exists but argued that disclosing it would hinder the grand jury’s work.
Releasing the document “while the investigation and prosecution are pending would unduly interfere with law enforcement,” fund lawyers wrote to the Texas attorney general, whose office issues decisions on open-records issues. The lawyers argued that “investigative strategies may be revealed” and “witnesses may be unwilling to speak for fear of retaliation.”
Last month, Mayor Mike Rawlings announced that the Texas Rangers also are investigating the fund’s previous leaders, who he said “committed a grave breach of trust with our first responders” and must be held accountable. A spokesman for the mayor said Thursday he was unaware of the grand jury and couldn’t comment.
Dallas taxpayers put more than $120 million a year into the pension fund, yet the city has only four seats on the fund’s 12-member board. City leaders are trying to negotiate a deal to help rescue the fund while getting more control. This would probably involve changing the state law under which the fund is organized.
No one expects the criminal investigations to help recoup the fund’s huge losses. But pension and city leaders say it’s important to unearth any wrongdoing that helped lead to the crisis.
The prosecutors could opt not to seek an indictment, or the grand jury could decide against it. Three years ago, a federal grand-jury subpoena demanded that officials at the pension fund for Arizona police and firefighters hand over documents. The case, involving questionable accounting in real estate deals, did not result in charges.
Officially, they had been pay ARC or close to ARC for years… so the problem could only be from the asset side, right?
Yeah, we’ll see about that.
ONE SPOT OF GOOD NEWS: THE OTHER DALLAS PENSION SEEM OKAY
10 January 2017: City of Dallas Employees’ Pension Had a Pretty Decent Year, I Guess
The pension for the city of Dallas employees (aka the Employees’ Retirement Fund) put out a press release a bit ago crowing about their 2016 numbers. You can read the full release below. Net of fees, the ERF did 9.08 percent last year. Pretty good little year. Of course, if they’d taken the entire $3.2 billion fund, bought an ETF tied to the the Dow Jones Industrial Average, and reinvested the dividends, they would have gotten about a 16 percent return. [checks 401(k) statement from last year, decides to shut mouth, just post ERF press release]
Don’t say I never give you good-ish news.
Introducing this Week's State Pensions Example: Nevada
Kentucky County Pensions: 60 Percent Fundedness and Decreasing is Awful
Around the Pension Blogosphere