The city of Dallas knows it needs to spend millions to revive its underfunded police and fire pension system, but a City Council committee learned the brutal reality last week: The city’s investments are underperforming most of the state’s pension systems of similar size, meaning the system is underfunded.
“It really hurts,” said City Councilwoman Gay Donnell Willis, who represents North Dallas and Preston Hollow. “When you look at this huge unfunded liability, it makes you wonder what would have happened with an allocation in the top quartile of the average rate of return.”
City Council Special Committee on Pensions He was given an explanation That’s according to city officials and Dolly Wiley, CEO of Commerce Street Investment Management. The city has hired Wiley’s firm to review the investment strategies for its police and fire pension plans and the Employees Retirement Fund, the pension plan for the city’s non-uniformed employees.
Commerce Street presentation Last week’s meeting was intended to provide a “100,000-foot-level” overview of the effectiveness of the city’s investment strategy for the two pensions, particularly as it compares with other pension systems in the state.
The performance of both pensions is directly tied to their funding status. Currently, the Fire and Police Pension Fund is only funded at 34-39 percent, while the Employees’ Pension Insurance is more stable at 73 percent. This disparity indicates the need for a comprehensive review of the different investment strategies of the two systems.
Wiley said employee fund investments have a 6.6 percent annualized return over 10 years. Police and fire pensions have a 2 percent return, the lowest in the state. Privately funded funds have performed slightly better, at 4.9 percent.
Police and fire pension investments in stocks (or publicly traded shares) have performed better than their statewide peers, with returns exceeding 8 percent.
“But having said that, when you look at private equity, they’re underperforming,” Wylie said. “Part of that is legacy assets. They’ve been dealing with legacy assets for the last seven years, and I know they’re still dealing with them.”
Those old assets caused the pension fund to nearly collapse in 2016, resulting in a deficit of about $3.3 billion. For years, the fund had invested in risky real estate and land purchases that didn’t produce the rates of return the trustees had hoped for.
By 2014, more than half of the company’s assets were luxury high-rises like Museum Tower and vacant land in Arizona, Idaho and Colorado. The holdings generated roughly $500 million in no income. The pension fund was forced to cut benefits to pensioners in 2016.
“In the short term, you can outperform by taking more risk, but in the long term, it’s very hard to outperform by taking more risk,” Mr. Wylie said last week. “The market is going to punish you.”
Those assets returned about 4 percent last year, Wiley said, but the state’s pension funds have earned about 17 percent on their private equity investments.
In 2017, the Texas Legislature ordered the police and fire pension systems and the city to develop plans to ensure solvency by 2055. City officials estimate the pensions will be about 70% funded by 2046.
But overall, Wiley said there is light at the end of the tunnel for the city’s public safety pensions.
“I’m encouraged because we’re actually seeing paths to reduce risk and improve,” he said. “We can’t plan 100% yet, but once we meet with them and get some understanding of what limitations they have, we think we can help them improve. And the numbers could be significant.”
City Councilwoman Paula Blackmon said she wanted to know whether Wiley had confidence in his management of the two pension funds before the City Council agreed to write the big checks.
“You can’t ask people to write checks or sell assets or do anything unless you’re confident, at least in my opinion, that the money is being managed in the best possible way,” Wiley said. “I don’t think that means perfect. I mean probably above average.”
But the City Council still has a lot of work to do before the state’s November deadline. The council will spend much of the summer crafting a budget for next fiscal year while also approving spending to finally put the police and fire pension systems in a solvent state. None of the plans the police and fire systems submit to the state will be funded without City Council approval. That plan must be submitted by November.
Recommended by city officials It would require the city to increase its contributions over the next five years, then transition to an actuarially determined contribution (ADC) rate, which combines the cost of benefits for that year and the unfunded liability resulting from funding shortfalls over time. The city would start with a payment of $184 million in 2024 and increase each year to a peak of $507.4 million in 2054, before declining to $71 million in 2055. Over the next 30 years, the city would contribute $11.2 billion to the fund.
The biggest issue at present is the inflation adjustment for current pensioners. When pensions almost collapsed in 2016, cost-of-living adjustments were stopped and pensioners have not received any adjustments since.
Jaime Castro, president of the Dallas Police Association, said the adjustment is crucial for retired paramedics, who have seen their monthly pay stagnate while inflation rises. They also are in a plan that commits to a 4 percent adjustment each year. State law requires pensions to be at least 70 percent funded for such an adjustment to occur, so such an adjustment may not be feasible at this time. Some kind of increase could be considered, as long as the city covers the cost.
“[W]”Given today’s historic rate of inflation, we cannot accept a plan that does not provide a COLA sufficient to cover the cost of living by citing cost-of-living adjustments,” he said in a statement. “Currently, Dallas police officers cannot receive a COLA until their pensions are 70 percent funded, which is projected to be in 2046.”
City officials are proposing a small increase. It could come in the form of a so-called “13th check,” an end-of-year check worth about 1 percent of a retiree’s base pension pay. For example, if an employee receives a $50,000 annual pension benefit, they would get an extra check for $500 at the end of the year. The extra check could arrive each year if the pension’s investment return can be improved.
Dallas Chief Financial Officer Jack Ireland said the increases would begin in 2025 and, depending on performance, could continue through 2045, the year before DPFS is 70 percent funded and can take over paying adjustments with revenue.
“We also recommend that the city’s oversight be strengthened,” he said last week. “We also recommend that we continue to review and identify avenues for lump-sum funding in our revenue streams. We will continue to work with the DPFP to try to reach an agreement. There is no agreement on our recommendations at this time.”
According to the city, Dallas had 5,270 active police and firefighters employed as of March. About a quarter of them were eligible to retire, meaning pension affordability can’t wait even if the November deadline isn’t looming. The task force will meet again next week.
author
Bethany Erickson
View Profile
Bethany Erickson: D MagazineThroughout her career, she has written about real estate, education policy, the stock market, and crime, sometimes all at the same time. She hates lima beans and 5 a.m., and takes practice SAT tests for fun.
