The Dallas Police and Fire Pension Plan received accolades for their investment performance through 2008-2009, but those accolades mean nothing to worried plan participants today.
I was going to title this: “Uruguayan Timber, American Idol and a Resort in Napa.”
This has been an unfolding story since this summer. It’s very extreme, and it’s very rare. But it happens.
Back in 2005, the Dallas Police and Fire Pension Plan (DPFP) decided to diversify away from the “risky stock market” and instead move into “hard assets” (real estate). Back in 2005, the country was nearing the peak in the real estate bubble.
While some folks don’t like the stock market, stock prices are listed in the paper every single day, and it is pretty simple to calculate values. However, with real estate, there is no way to accurately predict what a property is worth — until the property is actually sold. And how does a retirement plan make distributions to a participant if assets are tied up in illiquid investments like real estate?
In a very short period of time in 2005, the Dallas Police and Fire Pension plan invested HALF of their plan’s assets in places like a $200mm luxury apartment building in Dallas, luxury Hawaiian homes, a tract of undeveloped land in the Arizona desert, Uruguayan timber, the American Idol production company and a resort in Napa.
The reason the plan “appeared” to be succeeding (in 2008-09) was because they valued the real estate and other investments at their purchase prices, not their present values. Once the plan began to show current values of these investments, the air came out of the tires.
Fast forward to today: the Dallas police and firefighters pension fund has just 45% of the money it needs to cover benefits. The fund could be out of money completely in 15 years at the current rate of withdrawals.
And (according to one of the articles linked below), for those eligible, the sane thing to do is retire and take a lump sum payout in cash, before the money is all gone. That’s precisely what’s happening, and it is further pressuring the system. The cash is draining quickly.
Pensions are (generally) thought to be in danger if their funding ratio is less than 80 percent.
The DPFP fund has a funding ratio of just 45 percent.
The DPFP has approached the city of Dallas to infuse the pension plan with $1.1 billion, equivalent to the entire city annual budget (which they do not have). This would not even solve the problem this plan faces.
Also, in this particular case, the plan allowed retirees to take large lump sum withdrawals and also locked in high (unrealistic) rates of return for participants making deposits.
You can read more about it below. A quick search on Google produced a lot of news.
Here are a few articles:
And also here: http://awealthofcommonsense.com/2016/11/something-im-worried-about/
What should you do? Until 2008, employers were required to send you the pension plan’s annual report, which had many details, including a breakdown of investments. But employers complained about the cost of mailing the annual report or making it available online. So if you want it, you have to request it from the U.S. Department of Labor. Request it!