Dallas Mayor Sues to Stop Police, Fire Pension Exits-Heather Gillers

More than $500 million in withdrawals have been made since early August

 

Dallas Mayor Mike Rawlings before a city council budget meeting at Dallas City Hall in August Photo: Associated Press

The police and firefighters of Dallas have pulled more than $500 million out of their retirement savings plan since early August, worried that their pension fund could soon run out of money. Now, Dallas Mayor Mike Rawlings is suing to stop them.
The Dallas mayor said he is acting in his private capacity as a Dallas taxpayer and paying for the suit himself. In a Monday court filing, Mr. Rawlings asks a Dallas County judge for a restraining order that temporarily halts withdrawals from the Dallas Police and Fire Pension Fund.
The revolt by members of the $2.27 billion fund heightens the risk that a major U.S. pension fund could run out of money. It also offers an extreme case of what can happen when a pension wagers on lucrative returns to cover funding shortfalls.
Many pension funds took on more risk in recent years to fill mounting funding gaps, hurt in part by declining bond yields that damped returns. 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.
But Dallas is in a class by itself. The withdrawals since August represent an 18% drop in the fund’s total assets, seriously reducing the fund’s ability to earn money through investment.
“This particular circumstance is more akin to runs on the bank that you saw at the beginning of the Depression because people were afraid they weren’t going to get their money,” said Robert Klausner, an attorney who represents public pension funds.
The situation is roiling a city still reeling from the shooting deaths of five officers in July during a police brutality protest.
Mr. Rawlings’ court filing described the situation as “a financial crisis” for the fund and said that he is worried about its solvency. The mayor’s office has been adamant that taxpayers shouldn’t have to bail out the faltering retirement plan.
Officers say they are pulling their retirement savings because of concerns about the fund’s finances. A series of aggressive real estate bets from Hawaii to Paris and a conflict over the value of those properties triggered more than $500 million in losses, leaving the fund with enough to pay just 45% of future benefits. Officials are warning the pension could go broke by 2027.
Dallas adopted its more aggressive strategy before the crisis, adding luxury homes and shopping centers in Hawaii, student housing in Texas, and raw land in Idaho and Colorado, records show.
The strategy appeared to be working, with Dallas returns often beating national medians. But that success received scrutiny in 2013 when the Dallas Morning News reported that many properties hadn’t been appraised for years. Instead, certain holdings were valued based on their purchase price and in some cases by also adding development and operating expenses, said Chief Financial Officer Summer Loveland, who joined the fund in November 2013.
Administrator Richard Tettamant, who led the fund beginning in 1992, said that any assessments based on purchase prices were appropriate and that the board approved all investments. He resigned in June 2014 at the board’s request, and remaining officials began re-evaluating the fund’s holdings.
Between 2013 and 2015 the fund lost $545 million due to market losses and write-downs. Trustees gave up on the idea of earning 8.5% returns, lowering their target to 7.25%.
The Dallas pension plan has already been forced to sell off assets and deplete cash levels to accommodate the wave of withdrawals, according to the lawsuit. The mass pullout “is irreparably harming” the Dallas plan’s finances, the lawsuit alleges, threatening its ability to make future pension payments to retirees or pay workers, vendors and creditors.
If the withdrawals continue, “no solution is possible,” according to the lawsuit.
Police and firefighters are able to make lump sum withdrawals from the pension fund by retiring and pulling their money from the Deferred Retirement Option Program where monthly pension checks accumulate interest if police and firefighters chose to work past retirement age.
The public-safety workers are in the midst of voting on a series of benefit cuts that would reduce the amount needed to bail out the pension fund from $3.2 billion to $1.1 billion, according to pension officials. A county court ruled Friday that the vote could go forward after temporarily halting it based on a separate suit filed by five police officers and firefighters.
At a brief court hearing Monday on Mr. Rawlings’ suit, a judge postponed the question of whether to grant an emergency temporary restraining order until after a Thursday pension board meeting, said Laura Reed, a spokeswoman for Mike Rawlings who attended the hearing. That gives the pension board an opportunity to vote to block withdrawals from the fund on its own.
In September, the fund’s board considered restricting withdrawals from the fund but opted against it. Instead, pension officials begged police and firefighters to stop, warning that “our long-term solvency will become much more challenging” if the exit continues.
Even so, trustees heard more than 80 requests to retire in October, compared with a monthly average of 14.
“I have not seen this situation anywhere else in the country,” said Alicia Munnell, the director of Boston College’s Center for Retirement Research. “It’s the combination of bad investment outcomes and an extraordinarily large [withdrawal] program that led to serious trouble.”

Source: Wallstreet