Dallas Bankruptcy Woes Now National Headlines Via the New York Times: Effect on Dallas Real Estate?

Share News:

dallas-skyline (1)

Above the fold, which means full media attention: the NYT story heads that  “Dallas is staring down a Texas-sized bankruptcy”, and it opines how the city with “the fastest economic growth of the nation’s 13 largest cities” could be, well, Detroit. Yeah, good question.

Its streets hum with supersize cars and its skyline bristles with cranes. Its mayor is a former chief executive of Pizza Hut. Hundreds of multinational corporations have chosen Dallas for their headquarters, most recently Jacobs Engineering, which is moving to low-tax Texas from pricey Pasadena, Calif.

But under its glittering surface, Dallas has a problem that could bring it to its knees, and that could be an early test of America’s postelection commitment to safe streets and tax relief: The city’s pension fund for its police officers and firefighters is near collapse and seeking an immense bailout.

If you live in Dallas, and if you own property here, you should be concerned. Damn concerned. This is like having your house in pre-foreclosure. As the article points out, the city cannot double our property taxes overnight to make up the shortfall, state law prevents that. Mike Rawlings recently went to the state asking for help (money) and the state basically said, um no. He also floated talk of a 130% tax increase to stave off bankruptcy. We can be damn straight sure there will be zero property tax cuts in the future.

What is so amazing to me is that the last City Council meeting I went to, the briefing by Walt Humann for the handover of Fair Park, everyone was sitting around that big horseshoe table talking about a SURPLUS. And in that SURPLUS was enough money to fix up Fair Park, $7 million plus a year. And more high fancy stuff! The house is in pre-foreclosure, I’m going to go jewelry shopping!

Here are the facts: the Dallas Police and Fire Pension Fund is in big trouble. There has had a run on money because, for some reason, the pensioners can do it. (Well, it is THEIR money.) Nervous pensioners have taken out their funds, to the tune of $220 million. The fund is now asking the city for a $1.1 billion infusion of cash because the pension in one of the most thriving cities in the universe has been grossly mismanaged since about 1993.

The NYT piece blames the real estate investments. Meh. In 2012, half the fund’s net worth was in real estate investments, and it was luxury RE, not commercial RE or residential apartments. Might have been too heavy a balance —

The fund’s total real estate assets surpassed $1.5 billion in the middle of 2012 — an investment equivalent to about half of the fund’s net worth. The fund bought many of these properties to resell after developing or improving them. Rather than earning regular income, such properties cost the fund money until they are sold.

The strategy is unusual. Among large public pension funds, the median real estate allocation is less than 5 percent. And these investments are more typically in properties such as office and apartment buildings, which produce steady rental income.

The assets purchased certainly cratered during the recession, but by now, every place the fund invested (Hawaii, Idaho, Napa, Colorado, Arizona and Utah) has recovered fully. Museum Tower will sell out because of OUR hot real estate market if the media will leave it alone. The problem was that maintaining the real estate assets during the downturn was costly, and the pension forked out millions. But that would be true of any RE asset: you could not let an unoccupied apartment complex rot. Coincidentally, the company that advised the pension in their real estate matters was raided by the FBI last April, CDK Reality Advisors.

But the biggest problem with the fund came from some funny accounting and a ridiculous notion to guarantee an 8 to 10 percent return, and let police officers start collecting on their pensions while still working. This DROP — Deferred Retirement Option Plan (DROP), was a job perk, a way to shift the burden of attracting and retaining police officers and firefighters from the departments, pawn it off on the Dallas Police and Fire Pension System.

See, Dallas pays it’s starting police officers less, but they have slightly lower standards less: a bachelor’s degree is not required.

However, as they stay on the job, the City wanted to find a way to retain officers. After all, it’s costly to train them, and then once we foot the bill for training, they leave and go work in the suburbs for more pay and less stress.

The solution to this was DROP. But according to Governing, DROP was really a way for some officers to make a helluvalot of money, and sad to say, no one on the board seemed to be watching the henhouse:

It allows officers and firefighters who have served for at least 20 years to collect a pension even as they continue to work. Instead of going into employees’ pockets, however, the payments are deposited into separate accounts with guaranteed interest rates of 8-10 percent annually that are paid by the pension system. Police officers and firefighters can contribute to DROP for as long as they continue to work.

The plan is certainly a potent incentive for attracting and retaining public-safety personnel. One DROP member has an account of more than $3 million, 13 have accumulated over $2 million and 283 have more than $1 million socked away. The average account contains $422,000.

About that guaranteed return of 8 to 10 percent: guess where it came from? The fund. That’s like paying yourself a bonus out of your retirement plan.

According to the writer, Charles Chieppo, the DROP plan has cost the system about $325 million.  Even worse, the DROP accounts make up almost HALF of the assets.

The $1.35 billion invested in DROP accounts for more than 40 percent of the pension system’s assets.

About $400 million was invested in real estate. Clearly, it’s the DROP plan that has bankrupted the pension plan.

Tim Rogers at D Magazine asks a great question: who was on the pension board, and who was in City Hall, when this disastrous DROP notion was passed?  To finger point:

Here are the seven trustees, then, who sat on the board in 1992 and approved that disastrous plan:

Council member Charlotte Mayes
Council member Mattie Nash
Council member Charles Tandy
Lieutenant Gerald Brown (fire)
Sergeant Larry Eddington (police)
Lieutenant Charles Luedeker (fire)
Sergeant John M. Mays (police)

Who was Mayor? Steve Bartlett. Who went on to head the Financial Services Roundtable, a lobbying org also known as the Bankers Roundtable. FSR “represents 100 of the largest integrated financial services companies which provide banking, insurance and investment products and services to American consumers.” This in 1999. We all know what happened seven years later.

Drain the swamp?

Rogers then published a whole list of Pension trustees, especially because many of them never made it to meetings:

But some of these people, it is obvious, failed in a very big way. They didn’t show up to meetings, and, when they did, they made decisions that benefitted their own pensions to the detriment of the long-term health of the pension system as a whole. The list of culprits…

He’s right. These people were thinking of the moment, themselves, their own bank accounts, basically cheating future beneficiaries. And taxpayers.

So what happens now? We cannot say no to the police, because that will paint Dallas as the worst employer in the U.S. We can have a bond election, which will cost more due to our lower credit rating, suck it up and pay. Put off the repairs and maintenance that is not emergent. Get rid of that DROP program. And start being realistic about pensions: I read not too long ago that our accounting practices for most US pensions is screwy and not realistic. If you or I or anyone in the private sector invest our 401K in the stock market or a REIT, we don’t have any guarantees should those investments go belly up.

There are no guarantees in life!

But a taxpayer bailout should come with some major sacrifices and concessions, I think, from the pension. And the city of Dallas. Maybe some city employees, too.

Dumb question 1: why don’t we just pay police officers more from the beginning to encourage them to stay and not leave for the ‘burbs?  Pay police more, City Managers etc. less?

Dumb question 2: When one sits on a board, they usually carry insurance to protect them in case they get sued for negligence or mismanagement. Is anyone looking this way? Ditto any accountant or actuaries who failed to see this coming on the books?

(‘Nother Dumb question: why do we spend money fighting conferences like EXXXOTICA when maybe we really need the revenue? I mean, we can be all sanctimonious about sex while our police and fire pensions get ripped off?)

OK, one more: Why doesn’t the State Fair of Texas pay more to keep up the buildings at Fair Park?

Sigh. Is this going to hurt Dallas real estate? Are buyers going to read that NYT story and say,” hey, let’s buy OUTSIDE of Dallas! I don’t want to be on the hook for that pension fund or risk crappy police patrol? Take me to the burbs!”

Perhaps we can take comfort in knowing we are not alone. Seems the screwy accounting standards of yesteryear are forcing everyone to sharpen their pencils in employee retirement systems…

 

 

 

mm

Candy Evans

A real estate muckraker, Candy Evans is one of the nation’s leading real estate reporters. She is also the North Texas real estate editor for Forbes.com, CultureMap Dallas, Modern Luxury Dallas, & the Katy Trail Weekly. Candy has written for Joel Kotkin’s The New Geography, Inman Real Estate News, plus a host of national sites. Constantly breaking celebrity real estate news, she scooped former president George W. Bush's Dallas home in 2008. She is the founder and publisher of her signature CandysDirt.com, and SecondShelters.com, devoted to the vacation home market. Her verticals have won many awards, including Best Blog by the venerable National Association of Real Estate Editors, one of the nation’s oldest and most prestigious journalism associations. Candy holds an active Texas real estate license but does not sell. She is on the Board of Directors of Braemar Hotels & Resorts (BHR).

Reader Interactions

Comments

  1. CRITIC says

    Dallas might be closer to becoming a Detroit, Chicago, or Washington DC than imagined
    What a mess
    BIG D becomes a little d ?

  2. Susan Knape says

    Excellent post Candy. And your questions are not dumb at all. How can you get the powers that be to address these?

  3. KP says

    Let’s not forget that Laura Miller was also derelict in her duties as mayor by ignoring this issue and allowing it to worsen the city’s financial condition; instead, she was too busy killing the proposal to keep the Cowboys here in Dallas. Anyone with half a brain in their head knows you can’t guarantee an 8-10 percent return annually for an extended period. When will citizens realize we should entrust our city’s financial affairs to irresponsible managers and council members?

  4. LonestarBabs says

    I think that perhaps the crisis may be contributing to the recent retirement of some DPD police officers — get the lump sum option while it’s there and don’t stick around to wait for a payout. Time sensitive indeed!

  5. Clay Conn says

    This is what Dallas is and has been for some time. An irresponsible, unintelligent, hyper-sensitive political correctness climate gone amuck with more front page news regarding epic city council fights and corrupt figures like John Wiley Price and the only city council in the world that would pass on the Cowboys Stadium. All they had to do was go west 40 miles to see how a big city should be run. It’s embarrassing. Recall that while our Firefighters and Police pensions are going bankrupt, this is the SAME COUNCIL that approved and erected over $200 million worth of damn fancy bridges over the Trinity River!!!! INSANITY!

Leave a Reply

Your email address will not be published. Required fields are marked *