The Dallas Police and Fire Pension Just Isn’t Making Its Money Go Far Enough

The city of Dallas knows it will need to spend millions of dollars to bring the dramatically underfunded Dallas Police and Fire Pension back to life. But a city council committee last week learned a cruel reality: its investments are performing worse than the vast majority of similarly sized pension systems in the state, which means that its money won’t stretch far enough.

“It just stings,” said Councilmember Gay Donnell Willis, who represents North Dallas and Preston Hollow. “It makes me wonder, as I look at this massive unfunded liability, what could have been with a top-quartile allocation with just average returns.”

The City Council’s Ad Hoc Committee on Pensions was briefed by city staff and Dory Wiley, the CEO of Commerce Street Investment Management. The city hired Wiley’s firm to review the investment strategies for the police and fire pension system and the Employees Retirement Fund, which is the pension system for the city’s non-uniform employees. 

Commerce Street’s presentation last week was meant to be a “hundred thousand foot level” overview of the effectiveness of the investment strategies for the city’s two pensions, especially when compared with some of the state’s other pension systems.

The performance of the two pensions is directly linked to their funding status. Currently, the fire and police pension is only between 34 percent and 39 percent funded, while the employee pension is at a more stable 73 percent. This disparity underscored the need for a comprehensive review of the investment strategies, which differ between the two systems.

Wiley said the employee fund investments have a 6.6 percent annual rate of return over 10 years. The police and fire pension has a 2 percent rate of return, one of the lowest rates in the state. Its fund with private assets performed slightly better at 4.9 percent.

The police and fire pension’s investment in stocks (or public equity) has performed better than its peers statewide, with a rate of return higher than 8 percent.

“But having said that, we go to the private equity and then that’s where the underperformance is,” Wiley said. “Part of that is legacy assets. They’ve been dealing with them for the last seven years, I know they’re still dealing with them.”

Those legacy assets nearly collapsed the pension in 2016 and have helped produce a shortfall of about $3.3 billion. The pension spent years investing in high-risk real estate and land purchases that didn’t generate the rates of return that the board expected.

By 2014, more than half of its assets included luxury high-rises like Museum Tower and empty land in states like Arizona, Idaho, and Colorado. The holdings underperformed to the tune of about half a billion dollars. The pension was forced to cut pensioner benefits in 2016.

“You can outperform in a short time by taking more risks, but it’s very difficult for you to outperform in the long term by taking more risk,” Wiley said last week. “The market will punish you.”

Wiley said that those assets returned at a rate of about 4 percent last year. But pensions around the state received about a 17 percent rate of return on their private equity allocations.

In 2017, the Texas Legislature ordered the police and fire pension system and the city to devise a plan to become solvent by 2055. City staff estimates that by 2046, the pension will be about 70 percent funded.

But all in all, Wiley said he sees a light at the end of the tunnel for the city’s public safety pension.

“I’m encouraged because I actually see a path to reducing risk and improve it,” he said. “I can’t 100 percent map it out yet, but I think once we meet and get some understanding of what limitations they have, we can help them improve, and it could be a pretty sizable number.”

Councilmember Paula Blackmon said that before the Council agrees to write a big check, she wants to know if Wiley felt confident in the stewardship of the two pension funds.

“We can’t go to the public, at least in my humble opinion, and ask them to write a check or sell assets or do anything unless they have confidence that funds are being managed to the best that they can be done,” Wiley said. “I don’t think that means perfection. It probably means better than average.”

But the City Council still has a lot of work before its state-mandated November deadline. It will spend much of the summer crafting next year’s budget while also approving the expenditures that will eventually help bring the police and fire pension system to solvency. Without Council approval, any plan the police and fire system submits to the state won’t be funded. That plan must be submitted by November.

City staff recommends requiring the city to contribute more over the next five years before moving to an actuarially determined contribution, or ADC. This rate combines the cost for benefits that year and the unfunded liabilities from any funding shortfall over time. The city would begin with a $184 million payment in 2024, increasing each year until reaching a peak of $507.4 million in 2054. That could fall to $71 million in 2055. Over the next 30 years, the city would contribute $11.2 billion to the fund.

The biggest bone of contention currently centers on an inflationary adjustment for current pensioners. When the pension nearly collapsed in 2016, cost-of-living adjustments stopped, and pensioners have not received any adjustment since. 

Jaime Castro, who leads the Dallas Police Association, says the adjustment is vital for retired first responders who have seen inflation increase while their monthly income stagnate. They also paid into a system that promised a 4 percent adjustment every year. Such an adjustment may not be viable right now, as state law requires a pension be at least 70 percent funded before it provides such adjustments. Some sort of increase could be on the table, so long as the city foots the bill.

“[W]ith today’s historic rate of inflation, we cannot accept a plan that doesn’t provide a COLA where we can live on,” he said in a statement, referring to a cost-of-living adjustment. “Currently, Dallas Police Officers will not receive a COLA until the pension is 70 percent funded, this is projected to be in 2046.”

City staff is suggesting a small increase. That could come in the form of the so-called “13th check”— a check at the end of the year worth about 1 percent of the retiree’s pension base pay. For example, if an employee receives $50,000 a year in pension benefits, they would receive a $500 extra check at the end of the year. If the pension can improve its investment returns, the extra check could come every year.

Dallas CFO Jack Ireland said the increase would start in 2025, and could continue—depending on performance—through 2045, the year before the DPFS is projected to be 70 percent funded and can take over paying the adjustment with its returns.

“We also recommend that we strengthen city oversight,” he said last week. “We also recommend that we continue to review and identify ways for lump sum contributions in our revenue streams, and we still want to continue working with DPFP to try to come to a consensus. We don’t have consensus on our recommendation at this point.”

The city says that as of March, there were 5,270 active police officers and firefighters employed in Dallas. Roughly a quarter are eligible to retire, which means that the pension’s solvency can’t wait—even without a November deadline looming. The Ad Hoc committee will meet again next week.