We’ve written several times over the past couple of months about the epic meltdown of the the Dallas Police and Firefighters Pension (DPFP) (see here, here and here for background). It all started when the Pension Board discovered that one of their real estate managers had been consistently overmarking illiquid real estate investments. That discovery resulted in an FBI investigation of the manager and a $1BN write down for the DPFP. In the wake of the writedowns, Dallas policemen and firefighters rushed for the exits and withdrew over $500mm in assets.
Fearing a “run on the bank” that could push the whole city of Dallas into bankruptcy, Mayor Mike Rawlings has just sent a scathing letter to the DPFP Pension Board demanded that withdrawals be halted immediately until the “solvency and actuarial soundness of the Pension System is restored.”
As the Board is well aware, at the beginning of this year, the actuarial value of assets under your supervision and control were reset to market value, resulting in a $1 billion valuation loss. This significant markdown was the result of years of mismanagement and abuse.
Critically the Pension System’s actuary warned that the Pension System would become insolvent even sooner if Deferred Retirement Option Plan (“DROP”) funds are drawn down in less than a ten-year period.
Despite this clear warning, you have inexplicably paid out nearly $500 million in lump-sum DROP withdrawals over a matter of mere months – notwithstanding your power to unilaterally restrict or limit DROP withdrawals. In doing so, you have knowingly allowed DROP funds to be withdrawn at record levels, cognizant that doing so is irreparably harming the Pensions System’s solvency and liquidity.
Already, as a result of your actions, the Pension System’s ability to pay its members’ future benefits has been irreparably reduced from a period of 15 years to 10 years. Further, both the City of Dallas and the Pension System have projected that DROP withdrawals, if unabated, will lead to a liquidity crisis in the Pension System with the next 90 days, causing a forced sale of illiquid assets. Your Board Chairman summed it up best when referring to the payment of DROP withdrawals: “- the continuation of this practice would be financial suicide.” And yet the practice continues.
Given the urgency of this matter, I request a response within 48 hours as to whether the Board will immediately cease DROP payments until such time as the solvency and actuarial soundness of the Pension System is restored.
As the Dallas Morning News points out, the DPFP’s previous management refused to believe that a “run on the bank” was possible and feared any efforts to limit withdrawals would have just resulted in “backlash from police and firefighters when the restrictions were lifted.” Instead of limiting withdrawals, in fact, the Pension Board proposed a $1BN, taxpayer funded bailout.
The previous administration didn’t believe the run on the bank would ever happen. When The Dallas Morning News asked then-administrator Richard Tettamant about the possibility in 2012, he replied that it wouldn’t happen.
“This could happen to Bank of America or Fidelity Investments as well, but as with them, there would be no reason for people to do that,” Tettamant said in an email. “The pension system has sufficient liquid assets to cover all DROP distribution requests.”
More than $500 million has been withdrawn from the $1.5 billion fund this year. Most of it came after Aug. 11, when the pension fund proposed benefit cuts to help save it from insolvency caused by overvalued and risky real estate investments made by the previous administration.
Still, the current pension board, which includes four City Council members, unanimously decided not to restrict DROP withdrawals this year after hours of deliberations and legal advice given behind closed doors.
Pension board members believed they couldn’t restrict the withdrawals forever and feared the backlash from police and firefighters when the restrictions were lifted. And they hoped that keeping DROP open would boost confidence in the fund.
Meanwhile, Rawlings didn’t earn any new friends among police or firefighters with his letter, as the President of the Dallas Fire Fighters Association lashed out at the Mayor for throwing “gasoline on the fire.”
Dallas Fire Fighters Association President Jim McDade also blasted the mayor for the letter. He said the city needs to step up instead of throwing “gasoline on the fire.”
“If the mayor believes that his letter will stop the ‘run on the bank’ he is wrong,” McDade said in a written statement. “He just created a SPRINT to the bank.”
Alas, while Dallas police and fire fighters may ultimately endure some short-term pain if redemptions are temporarily halted, we suspect that the real long-term losers, as per the usual, will be taxpayers who will be forced to pony up whatever amount of money is required to keep the whole farce going just a little longer.
Here is the full letter from Dallas Mayor Mike Rawlings:
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