The $3 billion pension for the Dallas, Texas, police and fire services has been forced to take a 9% hit to its portfolio after overstating returns on its real assets investments.
The Dallas Police & Fire Pension System (DPFPS) could run out of money within 25 years, advisors Buck Consultants told the board on July 9, following write-downs in its real assets portfolio.
“Considering the magnitude of the 2014 and 2013 losses… we may need to re-evaluate how the asset return is determined.” —Buck ConsultantsAccording to documents on the pension’s website, Buck Consultants reported that total actuarial losses for 2014 totalled $460 million. This was significantly more than the $279 million losses reported in May, and came on top of asset value write-downs in 2013.
“Considering the magnitude of the 2014 and 2013 losses, as well as the size of the non-traditional assets, we may need to re-evaluate how the asset return is determined,” Buck Consultants stated in its presentation to the pension’s board.
The pension currently has 16.9% invested in real estate, 14.8% in private equity, and 6.1% in infrastructure. Buck Consultants said that continued underperformance of these “non-traditional” assets would require a lower rate of assumed return in the future.
On top of the asset write-downs, DPFPS’ actuaries Gabriel Roeder Smith & Company recommended a lower rate of inflation be used in future return assumptions, as Dallas’ 4% assumed inflation rate was much higher than most forecasts.
Buck projected several outcomes for the pension based on future annual rates of return between 7% and 8.5%. While an 8.5% annual return—the current assumption—would see the pension’s assets run out in 2065, a 7% annual return could see it run out of money to pay pensions as soon as 2038.
Source: Dallas Police & Fire Pension System; Buck ConsultantsWith the most optimistic actuarial assumptions, the pension is
71.4% funded, according to Buck’s presentation.
Credit rating agency Moody’s warned that, under new accounting measurements, the DPFPS’ total liability could rise to as much as $5.5 billion.
“By lowering its investment expectations, the board has reduced the risk of unexpected increases in future contribution requirements,” Moody’s analysts Tom Aaron and Adebola Kushimo wrote in the group’s latest credit outlook. “However, the resulting cost increases already challenge the city, particularly because its current contributions are near a state-defined maximum cap.”
The city of Dallas already contributes 27.5% of payroll to its pension funds, but can only increase this to a maximum cap of 28.5% if public employees agree to also increase their contributions, Moody’s said.
The fresh problems for the DPFPS come as it is on the hunt for a CIO to oversee its investments. It is the first time the pension has hired for such a position. The search is being led by new executive director Kelly Gottschalk.
Related: Dallas Police & Fire Pension to Hire First CIO & Why Public Pension Return Forecasts Are Always Wrong