Politics & Government

The Senseless 7: Pension Board Trustees Who Screwed the City

These are the people who approved the disastrous DROP program that could cost Dallas $1 billion.

I’ve gotten a bit fixated in recent days on the Dallas Police and Fire Pension System and who deserves blame for creating the $1 billion liability that the mayor thinks has the potential to bankrupt the city of Dallas. There’s a lot of blame to go around. First and foremost, there is Richard Tettamant, longtime head of the pension, ousted in 2014. But he was aided and abetted by a clueless and absentee board of trustees. So I heaped some blame on the Dallas mayors who appointed some of those trustees. Then, at the urging of a commenter on this blog, I tracked down the names of a bunch of trustees who served during the span of those mayors.

Today I want to sharpen the focus. I want to call out just seven trustees. These are the people who did something 24 years ago that we are about to pay dearly for. Today the pension board has 11 trustees. In 1992, though, there were just seven. These seven approved the Deferred Retirement Option Plan, or DROP. It was a way to retain cops and firefighters of retirement age by allowing them to put money in a plan with a guaranteed (and insane) rate of return between 8 and 10 percent. Here’s a great blog post on the Governing site from 2015 that explains why DROP was such a bad idea.

We are screwed today for two reasons. The pension made irresponsible, risky investments in real estate. And it created DROP. Here are the seven trustees, then, who sat on the board in 1992 and approved that disastrous plan:

Council member Charlotte Mayes
Council member Mattie Nash
Council member Charles Tandy
Lieutenant Gerald Brown (fire)
Sergeant Larry Eddington (police)
Lieutenant Charles Luedeker (fire)
Sergeant John M. Mays (police)

It would be interesting to know how much money those two cops and two firefighters made from DROP. Part of the reason the pension is in peril is because the pensioners have made a run on their DROP accounts. During one six-week period, pensioners withdrew $220 million from DROP. Were Lieutenant Brown, Lieutenant Luedeker, Sergeant Eddington, and Sergeant Mays among those who bailed?

This is going to get worse before it gets better.

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Comments

  • Larry Brautigam

    Good work here, Tim.

    • TodaysTomSawyer

      Indeed!

  • EricCeleste

    $1 billion minimum liability.

    • I don’t know why there isn’t a story in the paper every day about this issue. If the city has to pay for this, EVERYTHING gets pushed back. Every other need of the city (roads, arts facilities, trails, etc., etc.) will have wait.

      • Doug Miller

        Well who do you think should pay for it? Dan Flynn has already said to not even think about going to the state (good on him), it’s the city’a liability and they should have to pay up.

        This is why all cities should immediately go to a 401k type plan like the rest of us have.

      • Ryan Hogue

        Dallas has one of the lowest police and fire budgets in the country for a large city, Houston pays almost $1.4 billion this year and Dallas pays $733 million as a city….Austin, San Antonio and El Paso also spend more of their city budget on fire and police…and Dallas police and fire have a larger call volume than all of those cities. The reason that the 5 cops that got gunned down even worked for Dallas when they could have made $20k more per year working for a Suburb was the promise of a good retirement….the money is not going to roads or public service…it’s been going to the councils pet projects…..look are all the art going up down town and at every public building…..we pay 110 employs for cultural arts that had an operational budget of almost 20 million in 2013. Furthermore, we also have a recent history of losing money to curuption….google search “Dallas council members indicted”…..on the first page you get 1 felony theft, and 6 for embezzlement and fraud…including a former a former mayor pro tem don hill and a state rep Teri hodge. That’s not counting the county commissioner. The FBI has a task force dedicated to Dallas politicians. In addition, we spend less on parks per capita than any other major city….so the to blame the police and firemen of Dallas that risk their lives for your safety is pretty freakin irresponsible….so before you echo the rhetoric coming from city hall you need to check your facts.

  • Mavdog

    Thanks Tim. Keep asking the question.

    • C Newman

      There has to be a Director’s and Officers Liability policy in place. Won’t matter one way or the other though since even a ridiculously high limit will only be a drop in the bucket of this fiasco. Could still be somewhat worthy since as those people as D’s and O’s and even just as Fiduciaries involved in the mismanagement could be held personally liable.

  • JamieT

    The most shocking thing to me is that this open secret could lurk under our noses for 24 years without anyone saying anything before now.

    • Michael Kenyon

      It’s almost like the local press is in their pocket.

      • Thank you for your comment, Michael. Explain what you mean by it, if you would. How could the local press be in their pocket? You saying the press ignored the problem because they got some benefit? I’m trying to understand your point.

        • Ryan Hogue

          Dallas has one of the lowest police and fire budgets in the country for a large city, Houston pays almost $1.4 billion this year and Dallas pays $733 million as a city….Austin, San Antonio and El Paso also spend more of their city budget on fire and police…and Dallas police and fire have a larger call volume than all of those cities. The reason that the 5 cops that got gunned down even worked for Dallas when they could have made $20k more per year working for a Suburb was the promise of a good retirement….the money is not going to roads or public service…it’s been going to the councils pet projects…..look are all the art going up down town and at every public building…..we pay 110 employs for cultural arts that had an operational budget of almost 20 million in 2013. Furthermore, we also have a recent history of losing money to curuption….google search “Dallas council members indicted”…..on the first page you get 1 felony theft, and 6 for embezzlement and fraud…including a former a former mayor pro tem don hill and a state rep Teri hodge. That’s not counting the county commissioner. The FBI has a task force dedicated to Dallas politicians. In addition, we spend less on parks per capita than any other major city….so the to blame the police and firemen of Dallas that risk their lives for your safety is pretty freakin irresponsible….so before you echo the rhetoric coming from city hall you need to check your facts. Why is this not in the media?

  • DubiousBrother

    According to the current Pension Document which was linked to by Mavdog in another post:

    Section 3.01 (p) The Board may purchase from one or more insurers one or more insurance policies that provide for the reimbursement of a Trustee or employee of the System for liability imposed as damages caused by, and for costs and expenses incurred by the individual in defense of an alleged act, error, or omission committed in the individual’s capacity as a fiduciary or employee of the System. The Board may not purchase an insurance policy that provides for the reimbursement of a Trustee or employee of the System due to the Trustee’s or employee’s dishonesty, fraudulent breach of trust, lack of good faith, intentional fraud or deception, or intentional failure to act prudently.

    It would be interesting to see if the insurance was purchased, what the per occurrence limits are as well as the aggregate limits.

  • DubiousBrother

    “by allowing them to put money in a plan with a guaranteed (and insane) rate of return between 8 and 10 percent.”

    In today’s financial environment it is hard to imagine but home mortgage interest rates were in the 8% to 9% range in 1992.

    In the late 1980’s, stock brokerage firms came up with a product called universal life insurance which was used to replace “low interest” whole life insurance policies with an “honest” policy paying 10% on the cash value portion of the policy. The pitch was “we will never see interest rates lower than 10% again in our life times” and the non-guaranteed projections were amazing. Of course the 10% honest interest rate was not guaranteed for more than 1 year and people that fell for it ended up with no policy or very high annual costs in the later lower interest rate years.

    I am not sure how the DROP has been administered but the guaranteed rate of return should have been adjusted each year to reflect current investment conditions. Instead, it seems, the Board ended up chasing unrealistic returns in high risk investments.

    • DubiousBrother

      A reckless guarantee but not 8% – 10%.

      “Amounts held in the DROP account of a Member shall be credited at the end of each calendar month with interest. The interest rate will be determined by the System’s Qualified Actuary, in accordance with reasonable actuarial practices, as
      follows:
      (1) In general, the interest rate will be computed at a daily rate that will equal 8% per annum for the year that begins October 1, 2014, 7% for the year that begins October 1, 2015, 6% for the year that begins October 1, 2016 and 5% for the year that begins October 1, 2017, and any October 1 thereafter.
      (2) Notwithstanding Paragraph (1) above, for any period commencing on or after
      October 1, 2018, in which the DROP is in a Cumulative Loss Position, the interest rate shall not exceed 4% if the System’s Funded Ratio is less than 65%, 3% if the System’s Funded Ratio is less than 60%, or 0% if the System’s Funded Ratio is less than 55%. On the other hand if the DROP is in a Cumulative Gain Position the interest rate shall be 6% if the System’s Funded Ratio is at least 85%; 6.5% if the
      System’s Funded Ratio is at least 90% or 7% if the System’s Funded Ratio is more than 95%.”

  • DubiousBrother

    Here is the section which lays out the Cities annual contribution. I don’t see under any provision where the city has to come up with over $1 billion dollars in addition to the annual contribution.

    Section 4.02 Use of Public Funds

    (a) The financial share of the cost of the Pension System to be paid out of the public treasury shall be as provided by this Section.

    (b) Funds contributed by the City as its share of the amount required to finance the payment of benefits under the Pension System may be used for no other purpose. The contributions shall be annually appropriated by the City Council and periodically paid on the basis of a percentage of the Total Wages and Salaries of the Members of the Police and Fire Departments who are Members of each of the plans within the Pension System and who are on Active Service. The amount of this percentage and any change in it may be determined only by the Legislature or by a majority vote of the voters of the City.

    (c) Funds shall be appropriated by the City to carry out various other provisions contained in this Article that authorize expenditures in connection with the administration of the Pension System.

    (d) The percentage of required contributions from the City shall be in accordance with the
    following schedule and any increase or decrease in City contributions shall occur automatically on any increases or decreases in the Members’ contribution percentage:
    City Contributions / Member Contributions

    28½% / 9%

    27½% / 8½%

    26% / 8%

    24½% / 7½%

    23% / 7%

    21½% / 6½%

    (e) The City may elect to contribute more than that required in the schedule provided by
    Subsection (d) of this Section, except that the City’s contribution percentage may not exceed 28½ percent unless approved as provided by Subsection (b) of this Section. Further, in no event may the City’s contribution be less than 21½ percent unless approved as provided by Subsection (b).

    (f) For purposes of Subsection (d) of this Section, a Member’s contribution rate, regardless of the plan of which the person is a member, is considered to be the highest contribution rate of any member of any pension plan within the Pension System.

    • Mavdog

      See Article 16, Section 66 of the Texas Constitution.
      (f) The political subdivision or subdivisions and the retirement system that finance benefits under the retirement system are jointly responsible for ensuring that benefits under this section are not reduced or otherwise impaired.

      • DubiousBrother

        This does not include death or disability benefits. I’m sure it will be up to a court to decide what “jointly responsible” means.

  • DubiousBrother

    Who were the actuaries and why did they not see red flags?

    Section 4.08 Actuarial Valuation

    (a) The Board has the authority to employ a Qualified Actuary to provide a continuing observation of the operation of the Pension System and to make recommendations and give advice to the Combined Pension Plan Document as Amended and Restated Through September 8, 2016 Board about the condition of the assets of the Fund and the administration of the Pension System. A Qualified Actuary shall receive such compensation as is determined by the Board in accordance with Section 4.01 of this Article.

    (b) A Qualified Actuary shall perform continuing actuarial observation of the assets of the
    Fund not less than once every two years and make a report of the condition of the assets of the Fund to the Board. The Board may require more frequent reports.