Dallas Pension Fiasco Lights Up Broader Problems

Down the tubes

A pension fiasco in Texas lights up broader problems. Investment losses and a bank-like run have prompted the Dallas Police and Fire Pension System to ask the city for a $1.1 billion bailout. Some of its woes are unique, but it was chasing unrealistic returns in a low-rate world. That’s a problem for the entire $4 trillion U.S. public pension business.

The system, which covers about 9,000 workers, invested aggressively in property over the last decade in search of better returns. Some bets went bad, but losses remained hidden as the fund listed the assets at their purchase price instead of at market value, according to a 2013 investigation by the Dallas Morning News. By the start of this year, after an audit, writedowns had wiped $1 billion off the actuarial value of the plan’s assets, leaving the system just 45 percent funded.

Worse yet, over half its $2.7 billion in assets at the beginning of 2016 were held in savings-like accounts that allow lump-sum withdrawals. These were set up in the 1990s to encourage employees to work beyond the typical retirement age by paying fat interest rates. As the fund’s problems multiplied, participants withdrew their money – some $500 million over the past four months, the Wall Street Journal reported last week.

Dallas Mayor Mike Rawlings earlier this month warned that funding the system’s rescue package would require a crippling 130 percent property tax hike.

Such poor governance may not be widespread, but one other reason for the trouble is common. Many U.S. public pension funds are still counting on returns of between 7 percent and 8 percent a year to fund their promises to retirees. Dallas had been targeting 8.5 percent until last year. Now it’s down to 7.25 percent.

That’s still high given prevailing low interest rates, which sap returns on bonds. It leaves funds with a dilemma. Those that stick to their targets may have to make riskier bets to meet them, increasing the chances of a blowup. Lowering the aims could mean rocketing liabilities. It’s an unpalatable choice that the bad situation in Dallas brings to the fore.

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