Home ListingNovember 2, 2015

Real Asset Write-Downs Hit Dallas Credit Rating

More revisions are anticipated as the underfunded police and fire pension battles to improve its health.

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Rating agency Moody’s has downgraded the city of Dallas, Texas, amid ongoing funding problems for its $3 billion pension fund for police and fire services.

Valuations and returns for its real estate assets portfolio had been overstated “since at least 2008,” the Dallas Police & Fire Pension (DPFP) reported to members earlier this fall. This has so far resulted in write-downs totalling more than $300 million.

The write-downs may not be over.

New investment managers were “in the process of assessing the path to maximize the value of the assets,” according to DPFP advisors Buck Consultants. “Therefore, further adjustments may result from their analysis.”

Moody’s downgraded Dallas’ credit rating by one notch—from Aa1 to Aa2—last week. The decision “reflects the city’s very large and growing unfunded pension liabilities, a high fixed cost burden, and basic infrastructure needs which we expect to keep the direct debt burden elevated,” the rating agency said.

The rating agency also warned of “limited options available to the city to remedy the growing pension burden,” but added that changes to investment strategy may improve the fund’s deficit over time. Under the most optimistic actuarial assumptions, the pension is only 71% funded.

DPFP took a major step in August to improve its portfolio management: The fund hired James Perry from Texas Tech University’s endowment as its first CIO.

The fund has hired lawyers to review its real estate investments, according to an August 14 update from Executive Director Kelly Gottschalk. Gottschalk said there was “no presupposition that there may be any amounts collectible or that any party has done anything wrong. The board merely wants to be thorough and ensure that all steps have been taken.”

One Texas-based real estate manager—CDK—stepped down from investing the pension’s assets effective September 30. The fund appointed Clarion Partners, headquartered in New York, to take over management of its direct property portfolio.