Mayor Rawlings Files Lawsuit to Stop Police & Fire Pension System Bleeding: Bad for Our Real Estate Market?

Share News:

floresrawlings

How badly has our real estate market been harmed by this news? Why did he wait until now, or was Rawlings’ timing impeccable?

The news about Dallas’s Police and Fire Pension System goes from bad to worse. And it continues to be negative national news that could potentially hurt our housing market. In particular, the Wall Street Journal ran a backwash of Dallas Morning News reporting blaming everything on the “bad real estate investments.”

Those “bad real estate investments” are not the whole reason why the fund is in trouble and asking taxpayers for $1.1 billion. It’s mismanagement, and an incredibly thoughtless accounting trick that has enabled retirees and mature pensioners to essentially rob from the young.

In that recent New York Times piece that has the world talking about “Dallas’ bankruptcy”, the blame is put on the state legislature in 1993:

To many in Dallas, the hole in the pension fund seems to have blown open overnight. But in fact, the fuse was lit back in 1993, when state lawmakers sweetened police and firefighter pensions beyond the wildest dreams of the typical Dallas resident. They added individual savings accounts, paying 8.5 percent interest per year, when workers reached the normal retirement age, then 50. The goal was to keep seasoned veterans on the force longer.

Guaranteed 8.5 percent interest, on tap indefinitely for thousands of people, would of course cost a fortune. But state lawmakers made it look “cost neutral,” records show, by fixing Dallas’s annual pension contributions at 36 percent of the police and firefighters’ payroll. It would all work as long as the payroll grew by 5 percent every year — which it did not — and if the pension fund earned 9 percent annually on its investments.

Buck Consultants, the plan’s actuarial firm, warned that those assumptions were shaky, and that the changes did not comply with the rules of the state Pension Review Board.

The DROP accounts were like savings accounts with a guaranteed interest rate. But few news reports critiqued it. . The media only blamed the “shaky real estate investments.

Mayor Rawlings joined with city leaders and the people who made the dream of homes for some of Dallas' chronically homeless a reality. Photo: Lisa Stewart Photography

Mayor Rawlings joined with city leaders and the people who made the dream of homes for some of Dallas’ chronically homeless a reality. Photo: Lisa Stewart Photography

Mayor Mike Rawlings filed a lawsuit Monday, a personal lawsuit as a private citizen, and at his own expense, asking a judge for an emergency temporary restraining order and then a permanent restraining order on the system’s DROP payments of lump-sum withdrawals. Now that the you-know-what has hit the fan, especially after the Times article, pensioners are withdrawing funds faster than they can draw guns. Those withdrawals are bleeding the fund, threatening its solvency. Roughly $220 million in DROP withdrawals were made in the six weeks after the board first made significant changes to the system, including reducing the benefits and chopping the cost of living increases.

Curiously, the Pension board declined to restrict DROP withdrawals from the $2.39 billion fund on September 26, and the withdrawals continued — $500 million by Thanksgiving. Pension members are voting on the benefit cuts, after a judge lifted a temporary restraining order last week, December 2, filed by five police officers and firefighters that was designed to stop the vote, presumably to let a few members continue to bleed the fund.

Here is Rawlings’s written statement:

As a 40 year resident and taxpayer of the City of Dallas, I have chosen to personally file suit in District Court not only to protect the retirement benefits of all our police and fire personnel, but also to protect the pocketbooks of all my fellow citizens and taxpayers. I am funding this suit and at no time will any taxpayer dollars be expended in this effort.

In deference to the court, I will withhold further comment at this time.

Regarding personal filing vs. city

The Mandamus procedure specifically provides for a private citizen to enforce the laws at issue. There was no need to involve the City, the focus should be the legality of the Board paying out $500 million for a non-constitutionally protected program, that cut pension solvency from 15 years to 10 years in a matter of months.

Council member Lee Kleinman, a former pension board trustee, said he agreed with the mayor’s decision. He said the board has long known runs on the bank were possible and should have acted.

“That board should have dropped the gate months ago,” he said. “They have an obligation to preserve the assets of the system so there is money available to pay the benefits.”

Others said Rawlings gave no indication, just said he planned to do something to stop DROP – just didn’t say what.

“DROP is causing this atomic bomb, and unless we stop that, pause that for a moment, I don’t know of any other way we’re going to be able to get a handle on it,” (Ricky Callahan) he said. “Insolvency’s coming in 2028 – and sooner if people keep raiding the fund.”

By raiding, he is referring to the DROP program that was enacted back in 1993, a complicated mechanism designed to save money (ironically) by keeping veteran cops on the job. It allowed veteran police and firefighters to effectively “retire” from the fund while they kept working. Their pension funds were then deposited into DROP accounts, which were paid a guaranteed interest rate of 8.5 percent, regardless of what the actual pension fund was earning on investments, thereby royally funding these officer’s pensions while those of the junior pensioners were effectively robbed.

Once the public became aware of what was happening, and Mayor Rawlings started talking about a 130% tax increase to keep the city afloat, many retired police and firefighters panicked and withdrew funds.

Here is the scary thing: DROP now accounts for more than 50 percent of the pension’s assets, up from 30 percent just six years ago. It’s like a bookkeeping nightmare.

Gross mismanagement on many accounts — the Pension board primarily — and those who engineered DROP back in 1993.

I am so tired of hearing that it was bad real estate investments, which is what the media so focused on. The fund may have been way too heavy on real estate at 50% of the fund’s net worth, but the board was seeking better returns.

Despite all the negativity of mainstream media reporting, Museum Tower is selling off — 60% as of this writing — and the last time I looked, the entire nation was in a really good place with values up everywhere. So unless the fund bought swamp land in Florida, those assets could have been sold off without loss.

What is a problem is enacting legislation that benefits the present but screws the future. This is going to be a costly legal mess:

“Every decision that is made going forward, by the pension board or the city of Dallas or the membership or the legislature in Austin, will ultimately be decided in court,” Griggs said. “There are going to be lawsuits over everything. This is just part of the process.”

Years and years of lawsuits.

Will this hurt the Dallas real estate market? We welcome your opinions.

Candy Evans, founder and publisher of CandysDirt.com, is one of the nation’s leading real estate reporters.

2 Comments

  1. renato on December 6, 2016 at 7:50 am

    So the carrying value of the Museum Tower investment by the fund should be down to $80 million based on the $200 million initial investment in the development ? Based on approximately $2 billion in “real assets, private equity, and alternative investments” (about 70% of total fund assets) held by the fund at the end of 2015, the Museum Tower investment is now only around 4% of the fund’s total illiquid assets and not really a concern in terms of cash flow with the units continuing to sell off in an orderly manner?

    • Candy Evans on December 6, 2016 at 9:01 am

      Drop in in the bucket compared to DROP

Leave a Comment