The Dallas Police & Fire Pension (DPFP), which covers nearly 10,000 police and firefighters, is on the verge of collapse as its board and the City of Dallas struggle to pitch benefit cuts to save the plan from complete failure. According the the National Real Estate Investor, DPFP was once applauded for it's "diverse investment portfolio" but turns out it may have all been a fraud as the pension's former real estate investment manager, CDK Realy Advisors, was raided by the FBI in April 2016 and the fund was subsequently forced to mark down their entire real estate book by 32%. Guess it's pretty easy to generate good returns if you manage a book of illiquid assets that can be marked at your "discretion".

To provide a little background, per the Dallas Morning News, Richard Tettamant served as the DPFP's administrator for a couple of decades right up until he was forced out in June 2014. Starting in 2005, Tettamant oversaw a plan to "diversify" the pension into "hard assets" and away from the "risky" stock market...because there's no risk if you don't have to mark your book every day. By the time the "diversification" was complete, Tettamant had invested half of the DPFP's assets in, effectively, the housing bubble. Investments included a $200mm luxury apartment building in Dallas, luxury Hawaiian homes, a tract of undeveloped land in the Arizona desert, Uruguayan timber, the American Idol production company and a resort in Napa.

Despite huge exposure to bubbly 2005/2006 vintage real estate investments, DPFP assets "performed" remarkably well throughout the "great recession." But as it turns out, Tettamant's "performance" was only as good as the illiquidity of his investments. We guess returns are easier to come by when you invest your whole book in illiquid, private assets and have "discretion" over how they're valued.

In 2015, after Tettamant's ouster, $600mm of DPFP real estate assets were transferred to new managers away from the fund's prior real estate manager, CDK Realty Advisors. Turns out the new managers were not "comfortable" with CDK's asset valuations and the mark downs started. According to the Dallas Morning News, one such questionable real estate investment involved a piece of undeveloped land in the Arizona desert near Tucson which was purchased for $27mm in 2006 and subsequently sold in 2014 for $7.5mm. Per the DPFP 2015 Annual Report:

In August 2014, the Board initiated a real estate portfolio reallocation process with goals of more broadly diversifying the investment manager base and adding third party fiduciary management of separate account and direct investment real estate assets where an investment manager was previously not in place. The reallocation process resulted in the transfer of approximately $600 million in DPFP real estate investments to four new investment managers during 2015. The newly appointed managers conducted detailed asset-level reviews of their takeover portfolios and reported their findings and strategic recommendations to the Board over the course of 2015 and into 2016. A significant portion of the real estate losses in 2015 were a direct result of the new managers’ evaluations of the assets.

Then the plot thickened when, in April 2016, according the Dallas Morning News, FBI raided the offices of the pension's former investment manager, CDK Realty Advisors. There has been little disclosure on the reason for the FBI raid but one could speculate that it might have something to do with all the markdowns the pension was forced to take in 2015 on its real estate book. At it's peak, CDK managed $750mm if assets for the DPFP.

With that background, it's not that difficult to believe that DPFP's actuary recently found the plan to be in serious trouble with a funding level of only 45.1%. At that level the actuary figures DPFP will be completely insolvent within the next 15 years. Plan actuaries estimate that in order to make the plan whole participants and/or the City of Dallas would need to contribute 73% of workers' total comp for the next 40 years into the plan...seems reasonable.

According to an article published by Bloomberg, a subcommittee of the pension's board recently submitted a proposal that would at least help prolong the life of the fund. The subcommittee proposal calls for cost of living adjustments to be reduced from 4% to 2% while participants would be expected to increase their contributions to the plan. Of course, taxpayers were asked to also provide "their fair share" equal to roughly $4mm in extra plan contributions per year, a request that would likely require the approval of the Texas legislature. If approved, the proposal is anticipated to keep the plan solvent through 2046...at which point we assume they'll go back to taxpayers for more money?

A quick look at the plan's 2015 financial reports paints a pretty clear picture of the plan's issues.

Starting on the asset side of the balance sheet, and per our discussion above, DPFP was forced to mark down it's entire real estate book by 32% in 2015. Private Equity investments were also marked down over 20%.

This came as over 50% of the assets were diverted into illiquid real estate and private equity investments back in 2006.



But asset devaluations aren't the only problem plaguing the DPFP. As we recently discussed at great length in a post entitled "Pension Duration Dilemma - Why Pension Funds Are Driving The Biggest Bond Bubble In History," another issue is DPFP's exposure to declining interest rates. Per the table below, a 1% reduction in the rate used to discount future liabilities would result in the net funded position of the plan increasing by $1.7BN.

And of course the typical pension ponzi, whereby in order to stay afloat the plan is paying out $2.11 for every $1.00 it collects from members and the City of Dallas effectively borrowing from assets reserved to cover future liabilities (which are likely impaired) to cover current claims in full. This "kick the can down the road" strategy typically ends badly for someone...like most public pension ponzis we suspect this one will be most detrimental to Dallas taxpayers.

All of which leaves the DPFP massively underfunded...an "infinite" funding period seems like a really long time, right?