Tax vs Income Chart Dallas 1

Our real estate market has never been better. North Texas sales were up 26% in November. Our median home price is now $230,000. Yeah, the trophy home sales are a little soft, but  our region saw some of the biggest property price/value increases in the country in September, just three months ago. We are up a whopping 8% year over year from 2015 (Standard & Poor’s/Case-Shiller Home Price Index) and only Seattle, Portland and Denver have bigger price gains. We are among the top U.S. cities with the greatest annual home price gains. Nationwide, prices were only up 5.5 percent from 2015. Says Standard & Poors:

“Other housing indicators are also giving positive signals: sales of existing and new homes are rising and housing starts at an annual rate of 1.3 million units are at a post-recession peak,” S&P’s David Blitzer said in the report. “We are currently experiencing the best real estate returns since the bottom in July of 2012.”

Dallas-area home prices are up over 30 percent from the pre-recession high in mid-2007, according to Case-Shiller.

But I am still terrified. And confused. All this could be wiped out by the absolute Class A disaster going on down at City Hall: figuring out how to save the Police and Fire Pension plan. Which has been around since the mid 1990’s. Did everyone just ignore the problems up until now? (Including me — wasn’t on my radar.) And where is the tax revenue on all these gains going? I sat at City Hall in late August and heard, with my own ears, Mayor Rawlings say there was “room in the budget”.

Could this be the next perceived nail in the Dallas real estate coffin? “Bad schools, bad taxes, let’s look in the ‘burbs.”


Screen Shot 2016-12-06 at 11.28.55 AMThis is one of the biggest pickles Dallas, or really any U.S. city, has been in.

As we have mentioned, the police and fire pension is asking the taxpayers of Dallas to make up a $1.1 billion shortfall. At the same time, the police are SUING Dallas for $4 illion in back pay, IF they are victorious in ther lawsuit.

The mayor of Dallas has personally filed a lawsuit against the fund, asking it to put a halt to the DROP program, which he maintains is bleeding it. And the Dallas City Council will be hashing it out all day tomorrow.

A real estate connection: the mayor’s lawyer, by the way, is Mike Gruber, husband of Dave Perry-Miller’s Diane Gruber, father of Dave Perry-Miller’s Becky Gruber.

There are a trifecta of issues to consider, and Jennifer Staubach Gates sent the entire briefing to her email list. That woman is the queen of transparency.

On the one hand, we have the police filing suit against the city of Dallas, the taxpayers, in a lawsuit that goes way back to 1994, more than twenty years ago. The lawsuit is over a pay differential: that is, the police say that every time the city gives one member or group of members (such as new recruits) on he force a raise, everyone on the force gets one. Whole new meaning to “Let the force be with you.” Dallas says no, but a stupid state law from 2005 is fueling that flame.

We have put the briefing up for all to read. Of note: (more…)


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.(more…)

Dallas downtown skyline with Margaret hut hills bridge at night.

Let’s say you are going to put your home on the market. You want to know what to list it for, so your realtor suggests getting an appraisal. Good deal. The appraiser comes over, measures for square footage, notes the type of floor coverings and windows, asks about updates. Then he or she takes a look at sales around you, real market value trades. That is how they determine the market value of your home.

In the world of pension fund valuations, seeking the value of your home might go like this: let’s add in a few variables (your neighbors might tear down and build new next door) and market fluctuations over a five year period, the notion that you might add a pool, spa and a new roof, lot values may go up, and take the average of all that. That’s kind of the actuarial value. It’s the “I want to sell my house for $1.5 million because I think that’s what it’s worth” value.

On that note, I found the NYT article about screwy pension accounting and two sets of books. A tiny pension plan for six people in California, decided to convert to a 401(k) plan in 2015. According to California’s renowned public pension system, Calpers, they had more than enough money until they went to pull the funds: surprise, the pension was underfunded. By a half million dollars. Whoa. That’s why William F. Sharpe, professor emeritus of finance at Stanford University’s Graduate School of Business, who won the Nobel in economic science in 1990 for his work on how the markets price financial instruments, says every city in the U.S. needs to demand to see the actual market values of all the pension funds they are responsible for.

Imagine if our Dallas City Council had done that five years ago. And then told us about it.

The two competing ways of valuing a pension fund are often called the actuarial approach (which is geared toward helping employers plan stable annual budgets, as opposed to measuring assets and liabilities), and the market approach, which reflects more hard-nosed math.

The market value of a pension reflects the full cost today of providing a steady, guaranteed income for life — and it’s large. Alarmingly large, in fact. This is one reason most states and cities don’t let the market numbers see the light of day.

But in recent years, even the more modest actuarial numbers have been growing, as populations age and many public workers retire. In California, some struggling local governments now doubt they can really afford their pension plans, and have told Calpers they want out.

Even scarier, this is a problem that reaches into the $3.7 trillion municipal bond market.


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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?


DCAD on the road1 is a great site to read (and subscribe to) for nitty gritty (gritty) fiscal news. Doing a little search, back in 2011, Watchdog ran this headline:

Pension reformers warn of looming breaking point, cite governments’ ‘actuarial bullshit’

That was when legislators in tiny Rhode island voted overwhelmingly to remove pension benefits from all its employees and 21,000 retirees.

For pension reformers in Texas and across the country, Rhode Island was just a matter of time and a bellwether. In a report issued late last week, the Laura and John Arnold Foundation of Houston warned of underfunding of the nation’s public pensions by $1.26 trillion and the “catastrophic” municipal bankruptcies, pension debasement and wholesale public service cuts that were sure to follow if something wasn’t done.

This was written in 2011. That’s when Bill King, a Houston lawyer and columnist, helped found Texans For Public Pension Reform. His intent was to make pension reform an issue for the 2013 Legislature.

“I think the state needs to get the hell out of this (pension) business completely,” King told the Austin American-Statesman in August. Although he has pulled back a bit on that statement, King says that unless the state commits itself to paying fully each year for the pension promises it makes he can see a time in the next decade when half of a Texas homeowner’s property taxes would be needed to pay pension contributions.

Pensions, say these experts, will be the basis of the next financial downturn.

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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!