Wall Street Journal’s Take on Dallas Pension Crisis: Average Percentage of Large Pension Plan Assets in Real Estate 17.6%

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The Wall Street Journal’s take on the Dallas Police and Fire pension crisis was way more accurate than what the New York Times ran. The Times blamed the fund’s real estate assets too much. They are peripheral:

Retirement systems around the country are wrestling with how much risk to take as they try to fill mounting funding gaps. Many decided after the last financial crisis to cut down on stocks and bonds and chase more ambitious returns in real estate, hedge funds, commodities and private equity.

Between 2007 and 2015, the average percentage of assets large pension plans parked in alternative investments or real estate grew to 17.6% from 10.1%, according to the Wilshire Trust Universe Comparison Service.

Point is, the plan was mismanaged, but Dallas was not alone in seeking better returns through real estate. And no one city council member, not one mayor, not one pension board member from either service, spoke up. The real estate assets were not even accurately reflective of their market value. Rather, the books reflected purchase price with operating and development costs mixed in. Then in 2013, the Dallas Morning News noted that the properties had not been appraised. But we were coming out of the recession in 2013. Still, the fund lost $545 million due to the write-downs and market losses.

I spoke with a former city council member today who was on the council during all this time. He told me the real estate investments may not have been the wisest, but they alone are not what dragged the pension down. It was the DROP program, and too many benefits, which cost the city millions of dollars. For example, Glenn White, the 18 year-long former president of the 2,750-member Dallas Police Association, insisted that the fund could sustain an 8% return when former city manager Mary Suhm said that was not realistic. The DPA also got the City Council to increase benefits. (Here is an interview with White, now retired and playing golf in McKinney.)

“From year one to five, yes, Dallas police officers are underpaid,” said my source. “It takes about $100,000 to train a police officer, and Dallas has the very best training around. But from years five on to the end, their pay is higher and the benefits are unbelievable. The public needs to know this.”

In the comments, readers are saying that Dallas is about to become a prime example for other cities about to encounter the same fate. Let’s hope we can at least emerge as a shining example:

Watch very carefully how this is resolved. This is a big city. It won’t be resolved easily or quietly, there’s too much money involved.

There are public worker pension funds all over the country in bad shape.  Much more so than private sector worker pension funds.

Whatever Dallas does to resolve this problem should be a clue as to how other jurisdictions will try to resolve theirs. It won’t be pretty.

Am I over-dramatizing this?

No.

One Comment

  • Wonder how much the rates of return on the publicly-traded REITS held by the fund exceeded the returns on the activist real estate investments.