First, the Dallas Police and Fire Pension System plunged into risky real estate ventures at the height of last decade’s bubble.
Then, when the city wanted to audit the value of those investments, pension officials refused to hand over documents, and the standoff threatened to spiral into a lawsuit.
Finally, after a year of wrangling and delay, an independent review of the $3.3 billion fund has confirmed what many suspected: accounting problems.
The review, which focused on the fund’s real estate holdings in 2013, estimates that it overvalued some properties by tens of millions of dollars.
Those least shocked may be police officers and firefighters. They saw their fund suffer about $96 million in losses on risky real estate investments in 2013. Much or all of these losses were write-downs that followed new appraisals of real estate properties.
The new appraisals and the city’s push for an audit came after The Dallas Morning News flagged problems with the fund’s accounting. The News reported in early 2013 that the fund valued many of its real estate ventures by what it had invested, rather than by appraisals or other methods. This was contrary to widely accepted standards.
“This report shows we need better governance and more transparency into our pension fund so we can address issues as they come up — not years after the damage has been done,” said Mayor Pro Tem Tennell Atkins, reading from a statement at a news conference he called Tuesday.
Atkins was one of several City Council members whom Mayor Mike Rawlings installed on the pension’s board as he shook it up in mid-2013. The board consists of four council members and eight current and retired police officers and firefighters.
Rawlings took a keen interest in the fund’s heavy investment in “alternative” assets — such as real estate — that often don’t have clear market values like stocks and bonds.
The fund’s real estate investments surpassed $1.5 billion in the middle of 2012 — equivalent then to about 50 percent of the fund’s net worth. That investment strategy is unusual. Among large public pension funds, the median share invested in real estate was then less than 5 percent.
The News reported that much of the fund’s real estate consisted of risky ventures such as a luxury resort and vineyard in Napa County, Calif., ultra-luxury homes in Hawaii, and large tracts of land in Arizona and Idaho.
Rawlings knew that state law requires the city to audit its pension funds every five years. The next was due in 2013. So the mayor pushed to include a review of the fund’s alternative assets.
Pension officials fought the add-on review, saying it was not within the scope provided by state law. The fund, which has significant autonomy from the city because it is organized under state law, refused to hand over documents. The city and the fund edged to the brink of a lawsuit.
That’s where Atkins came in. Because he was a fund trustee, its officials could not avoid turning over documents to him if he demanded them. Over months of wrangling, attorneys for the city and the fund, as well as Atkins’ personal attorney, hammered out a deal under which Atkins would direct an auditing firm to do the review. The pension fund and the city split the cost for Atkins to hire an affiliate of the firm Deloitte.
Atkins released a summary of Deloitte’s report Tuesday. The firm focused on $1.287 billion in alternative assets held by the fund at the end of 2013.
Of these, Deloitte found that $772 million in assets were at risk of being overvalued “because the valuation approaches or methods … appear to have been improperly applied and/or inconsistent with commonly accepted valuation practice.”
From this pool, Deloitte selected nine large assets that the fund had valued collectively at $585 million. The firm estimated the actual value of these assets instead to be between $507 million and $559 million.
Overvaluing assets on a fund’s books can create a falsely optimistic picture of its overall health, leaving police, firefighters and taxpayers on the hook for the future.
Fund officials, in a statement released Tuesday by their public relations firm, called the overvaluation flagged by Deloitte “financially immaterial when measured against DPFP’s entire investment portfolio.”
“However, we understand that even a small variance is unacceptable since our mission is to protect the financial futures of the police officers and firefighters who protect us,” the statement said.
Atkins declined to say which of the fund’s real estate investments were included in the review, but he said the fund’s controversial Museum Tower luxury condominium building was not among them.
“The report will speak for itself — but I can tell you there are significant problems at the [pension] system,” Atkins said. “I challenge the board and the system’s administration to address these problems.”
The mayor, reached by phone Tuesday, said the review’s findings come as no surprise.
“We just needed to confirm this,” Rawlings said. “The good news is we’ve made progress.”
The pension fund’s board ousted its top staffer, Richard Tettamant, last year after real estate write-downs helped prompt poor investment returns. The fund is searching for his replacement.
The fund’s chief financial officer left his post as the city’s audit got underway. The new CFO pushed for accounting changes that are likely to have already corrected the valuation problems pointed out by Deloitte’s review. Atkins could not confirm this.
Board members, meanwhile, have aligned around more conservative investing strategies.
Still, the fund’s financial situation concerns city and fund officials. This is in part because of real estate losses but due more to a lucrative pension perk — the deferred retirement program known as DROP.
Fund members voted last year for significant changes to DROP, but several beneficiaries sued, and a judge said the changes violated the Texas Constitution. The board then voted to suspend new entrants to the program beginning April 1. But its benefits to those already in the program will continue to sap the fund.