The Role of Governance in the Dallas Police and Fire Pension Crisis

This is the second part of an on-going series about the Dallas pension crisis.

As we explained in a recent post, there are several factors influencing the declining solvency of the Dallas Police & Fire Pension System (DPFP), including risky investments, generous DROP returns, and large lump-sum withdrawals. The situation has gotten even more complicated in recent weeks with Dallas Mayor Mike Rawlings requesting an investigation of potential unspecified criminal activities conducted by previous DPFP administrators. Meanwhile, the actual causes behind the plan’s misfortunes apparently go far deeper than any possible past criminality and point directly to the way the retirement system is governed, which is the focus of this post.

The story goes like this: under the guidance of DPFP’s previous plan administrator — Richard Tettamant — the fund tilted its asset allocation more heavily toward risky and overvalued real estate investments, including exotic villas in Hawaii, and luxury resort in California. These far flung real estate investments — which board members took upon themselves to “check up on” regularly — along with alternative investments returned far less than expected over the past decade. On top of consistent poor investment returns, in 2015 the whole portfolio was devalued by roughly $1 billion after the Mayor requested a full audit, collectively causing a steep decline in system’s funded ratio from 63.8% to 45.1% the same year.

While it remains to be seen whether or not the investigation will find that the plan’s past leadership violated their fiduciary responsibilities, a more overarching problem facing DPFP — as Reason colleague Eric Boehm has alluded to in his recent blog — has more to do with the fund’s structure rather than any potential criminality.

Indeed, under the Texas law, DPFP is allowed to follow its own governing statute, which authorizes its members to “amend the plan in any manner” they see fit. All that is needed for the Pension Fund’s Board of Trustees to amend the plan’s benefit provisions is to receive 65% of membership votes — no approval from the city’s elected leaders, nor the taxpayers, is needed.

In addition, the DPFP’s 12-member board appropriates eight seats to current and retired plan members, therefore giving almost complete control over the plan’s benefit provisions and eligibility requirements to police and fire employees (i.e. beneficiaries), and hence to unions. Needless to say, the legislative gimmick was costly, allowing the plan to increase the DROP program’s guaranteed interest rates to 8-10% in the late 1990s and expand eligibility requirements.

To top it off, under the Texas State Constitution, the DPFP Pension Board, among other things, is required to adopt actuarial assumptions, including the long-term assumed rate of return. As such, the plan’s current governing structure essentially supports a pernicious circle of accepting, enforcing, and maintaining unaffordable and risky plan features such as guaranteed interest rates on DROP accounts.

It will be interesting to see how this governance issue plays out in the 2017 legislative session. Throughout the recent turbulence, Mayor Rawlings expressed a reluctance to making any supplemental city appropriations to the DPFP unless it were accompanied by transitioning control over the pension board governance to the city. It remains to be seen if legislators in Austin are willing to allow such a dramatic shift in governance to happen.