One Dallas City Council member was terse in his reaction on Tuesday to the mismanagement of the Dallas Police & Fire Pension System that’s left officials scrambling to fund the program for the next 30 years.
“I think we need to fire whoever is managing this investment fund and get somebody in who can actually meet our … actuarial assumption that we’re going to earn 6.5% in this fund and we’re only earning 2%,” Paul Ridley (District 14) said during a council briefing.
“That means that we have unrealistic expectations if we keep the status quo investment policies. So, if we’re going to reach our goals and make this fund solvent, we need to think not just about the city’s contributions, but we need to ensure that money is being wisely invested going forward. And I don’t see from this track record that it is.”
Ridley was the most outspoken of just a few council members who responded to CFO Jack Ireland’s update on how officials plan to fully fund the Dallas Police & Fire Pension System (DPFPS) and Employee Retirement Fund. Ireland offered the same presentation during an Ad Hoc Committee on Pensions meeting in May.
“We really started this — or I started this — with the goal of getting approval before the July break,” Ireland said. “Well, this is the first time it’s come to the full body, and that’s probably unfair to the folks who haven’t been on the Ad Hoc Committee to say, ‘Hey. Vote next week.’ So, we’re not asking you to do that.”
Instead, Ireland will seek approval of the funding plan on August 14.
The Dallas Express reported on May 25 that, according to Ireland, the Dallas Police & Fire Pension Fund is not projected to be fully funded until 82 years from now, “which clearly exceeds PRB’s 30-year requirement.” Under a Texas law approved in 2015 and amended in 2021, that process must include a Funding Soundness Restoration Plan submitted to the Texas Pension Review Board.
Among the recommendations included in the funding plan are:
Using the “step-up” scenario proposed by Cheiron, an actuarial consulting firm, in which $17 million to $20 million of taxpayer money will be contributed to the fund annually over the next five years.
Retirees, beginning in 2026, receiving supplemental pay of 1% each year that DPFPS yields a positive rate of return until it reaches 70% funding.
An adjustment of 1% in fiscal year 2025 to permanently add to the base benefit for retirees.
When the system reaches 70%, tying the cost-of-living adjustment to the consumer price index at a maximum of 1.5%. The pension is currently funded at 39.1%.
“I think it’s important that we realize what we have to do versus what we may choose to do,” Ridley said.
“What we have to do is to submit a plan to the PRB by November 1 of this year showing exactly how we are going to reach 100% funding in the pension fund within 30 years, is that correct? And what we may choose to do is supplementing that funding with additional general fund contributions to achieve some substitute for a [cost of living adjustment] through supplemental payments. And that’s the other issue that’s been explored by the committee and staff, is that correct?”
Ireland told Ridley his assessments were accurate.
“So, I think our focus should be on what we have to do,” Ridley said. “We have a deadline. We have the state breathing down our necks, requiring us to make sure that there is financial soundness — actuarial soundness — in the pension fund. I think the proposed phase-in of five years is a reasonable and rational idea. We’re starting with a significant increased contribution of $40 million. If we went to the three years that the pension board is requesting, how would that increase our next three years’ contributions … budget hole in the general fund?”
Ireland said the difference between the two phased-in assumptions is about $58 million.
“In analyzing which of those options to choose, I think it’s important to underscore the fact that retirees are being paid 100% of their pensions currently, correct?” Ridley said. “There’s no shortfall in what we’re paying them.”
Retirees continue to receive their base benefits with no reductions, Ireland confirmed.
“And so … it shouldn’t matter to the retirees whether we have a three-year phase-in or a five-year phase-in,” Ridley said. “Their benefits will be paid 100% regardless.”
But Kelly Gottschalk, executive director of DPFPS, expressed disappointment over some of Ridley’s remarks, saying they are “not based on understanding behind the numbers,” per WFAA. “We have made progress,” she said.
By the end of the current fiscal year, the City will have contributed $185 million to the plan. Based on staff recommendations and other factors, Dallas will have contributed about $11.2 billion to the pension fund over 30 years. DPFPS staff has recommended a contribution of $11.6 billion over the same period — a difference of $419 million.
On Tuesday, Ireland said his latest projection for the city’s shortfall is $40 million. He’s reported several times this year that figure was expected to be at least $38 million.
To help ease the strain on the budget, Ireland has recommended officials consider using pension obligation bonds, monetizing assets, diverting 25% less of the City’s sales-tax allocation to Dallas Area Rapid Transit, and increasing the property-tax rate through a tax ratification election.
“Your recommendations are very, very sound and much appreciated,” Jaynie Schultz (District 11) said.
Ireland has also recommended that city council members assume additional oversight over DPFPS.
“Those board members have a fiduciary responsibility to the fund — not to the City,” he told the Ad Hoc Committee on Pensions on May 23. “So, we believe there needs to be some additional oversight from the City to ensure we are able to manage the pension contribution increases that do become a liability. …
“We have proposed City approval being required for items that would substantially increase our liability, changing benefits, changes to significant actuarial assumptions like the discount rate, settling lawsuits, or other things that would be a significant increase to the City’s liability and the City’s cost.”
Ridley endorsed that recommendation.
“I strongly support the staff’s recommendation of increasing the city’s oversight that I think is necessary because of all the really poor performance of this fund over time,” he said.
“As I mentioned, the performance has been 2% in a period in which the stock market has soared. I don’t understand how professional fund managers could earn so little on such a large fund. We also had a serious shortfall because of the mismanagement of this fund by previous management that lost untold hundreds of millions — if not a billion dollars — on bad investments that, unfortunately, we cannot correct at this late date.”
Reporting from Fox 4 KDFW attributed the fund’s poor performance to former DPFPS Administrator Richard Tettamant, who spent two decades in that role before his removal in 2014.
On Tuesday, Ridley said that he was “disappointed to hear” during a briefing by Commerce Street that “we’re still recovering from those poor investments as though we still have some of them.”
Ireland said three of the assets remain part of the DPFPS portfolio.
“I’m hoping that Commerce Street Investments can shed some light on this as to why we’re underperforming Houston and other cities and how that will be rectified,” Ridley said.
Over a 10-year period as of December 31, 2022, Houston’s return on its Municipal Employees Pension System is 10.6%. For its firefighters, it’s 8.7%. And for police, it’s 8.4%. For the San Antonio Fire and Police Pension Fund, the return is 6.6%.
In Austin, the return for police is 6.3%. It’s 7.2% for firefighters and 6% for the Austin Employee Employees Retirement System.
This is in comparison to the 6.6% earned in Dallas for its Employee Retirement Fund and the 2% for its Police and Fire Pension.