Last April, FBI agents in bulletproof vests descended on the Harry Hines headquarters of the Dallas Police and Fire Pension System at 9 a.m. The agents were there to raid CDK Realty Advisors, a firm that shares the building and works closely with the pension. Two hours later, the agents rolled out a parade of handcarts, each stacked with boxes filled with financial documents.
What was never reported was that the FBI returned to the building days later. On their second visit, the agents came to see the officers of the pension. Again, they trundled away boxes of documents.
The FBI doesn’t comment on ongoing investigations, so we’ll have to wait to see if they found what they were looking for. For one man—Richard Tettamant, the pension’s former director—the wait must feel interminable.
He has reason to be concerned. Tettamant was forced out two years before the FBI came calling, after three decades with the pension. But for years, he had led the pension to make questionable investments, mostly on luxury real estate developments, an unsound strategy even in boom times. Until recently, the pension claimed to have $3.4 billion under management, but it was overestimating what many of those assets were worth, ignoring their fair (and sinking) market value. That couldn’t go on forever. As the bookkeeping has caught up with reality, the fallout has been ugly.
During a six-week period last year, worried pensioners pulled $220 million out of their accounts. To keep the pension solvent and do right by the 9,300 cops and firefighters who belong to it, the city will have to chip in. In addition to the $100 million or so that taxpayers contribute every year to the pension, Dallas could be looking at a $1 billion liability. The mayor has talked about declaring bankruptcy.
To keep the pension solvent and do right by the 9,300 cops and firefighters who belong to it, the city will have to chip in.
Why bring this up now, with Tettamant more than two years removed from his job at the pension? Precisely because he has been gone. He has been out of sight, out of mind, out of the newspapers. That won’t do. We need to remember Tettamant in full as the man who engineered this mess that the city finds itself tethered to, a disaster that in October led to the downgrading of Dallas’ debt rating and could create a sustained financial crisis.
I should note that city and state pensions are a mess all over: Fort Worth, Houston, Los Angeles, New York, and Chicago are dealing with huge pension liabilities. Detroit went bankrupt. In fact, Dallas’ pension for city employees, the Employee Retirement Fund, which is separate from the police and fire pension and which has been managed much more wisely, is also feeling the squeeze. In November, voters approved a ballot measure to increase contributions from employees, among other measures meant to help prop it up.
So why is the police and fire pension different? Because it made fantastically stupid moves, which happens when, as one investment fund manager told me, you put someone “uniquely unqualified” in charge, a guy who got his start running a strip-mall Baskin-Robbins, circa the mid-1970s. (Hard to know the year for sure, as Tettamant did not return my calls.) He would later claim that the Baskin-Robbins, off Kiest and Hampton, was the most successful location in North Texas. True or not, selling the store provided him the resources to pursue an MBA at the University of Texas at Arlington.
On the strength of that degree, which he got in 1982, Tettamant was hired as an assistant pension administrator by the city of Dallas back when the pension was still just a municipal department housed in City Hall. By 1993, he was plan administrator and had acquired sufficient Jedi mind tricks to turn that department into an entire system, one that operated outside the city’s purview but still depended on it for part of its funding. In 2005, not satisfied with the 31 or so flavors of traditional stock market vehicles available to him, Tettamant increasingly bought illiquid assets, mostly real estate, making such chancy investments a far greater percentage of the system’s holdings than experts considered acceptable.
Cue the housing bubble. Tettamant’s dominoes toppled, eventually forcing the pension to mark down the value of its portfolio—most notably a resort in Napa, luxury houses in Hawaii, and the $200 million Museum Tower in downtown Dallas (which was financed with a high-wire variable-rate loan from a Japanese bank).
“It was nuts,” says an investment manager who has intimate knowledge of the police and fire pension’s portfolio. “The idea is to diversify to reduce risk, because you’re playing with people’s retirement. Tettamant thought he had found a way to guarantee higher returns with no increased incremental risk. Sorry, that doesn’t even happen if you’re brilliant. And he was not.”
Other top officers in the pension and on its board (currently seven appointees from the police and fire departments, plus four city council members) should have stopped this, but they were having too much fun taking junkets to check on their sweet real estate holdings. In one four-year period, they spent $1 million on travel. Also, the trustees appointed by Dallas mayors from 1990 to 2009 rarely showed up to meetings—exactly when Tettamant was in the throes of his gambling binge.
But as we watch this drama unfold—the fund headed toward insolvency as its members try to get their money out any way possible; Austin officials admonishing the mayor for seeking a state-sponsored bailout for our own stupid decisions; the FBI investigating the pension to make sure it did nothing illegal, only stupid—never forget who was the head of this snake: Richard Tettamant.
And where did that head land when it was severed? Tettamant, who was making $300,000 when he was forced out, lives in Colleyville now and works for Ethika, a real estate investment firm. He draws a pension from Dallas’ Employee Retirement Fund. That’s the city pension that didn’t take crazy risks with other people’s money.
[Editor’s note: Eric Celeste received a statement from Richard Tettamant, through a PR spokesperson. This statement was received too late in the production process of the print magazine to include it. The statement has been appended below.]
I was the Administrator of the Dallas Police and Fire Pension System (DPFPS) 1993 to 2014. During my tenure the System created a very successful benefit program. The funding of the plan increased from 25% to almost 70% even with the Great Recession. During my tenure the System’s annualized net return over 30 years was 9.0% Fiscal Year Ending 2013 with a diversified investment portfolio. During the 2000’s DPFPS was recognized as the Outstanding Mid-Sized Public Employee Pension System in the country for its double digit performance. It’s important to note that the contribution rate from the City has not changed since 1984.
Since the late 1980’s the DPFPS has utilized third-party, nationally and internationally prominent investment consultants and managers to advise the Board in investment decisions. In the early 2000’s the DPFPS Board voted to invest in separate account real estate investments to improve its returns. It is not the responsibility of the DPFPS staff, including myself, to recommend investment strategy or investment decisions, but rather to assist the Board as directed by its Trustees. All investments were vetted by the DPFPS Investment Advisory Committee wholly consisting of Trustees and reviewed by outside investment consultants. Prior to the purchase of almost every investment, the Board reviews the financials and in almost every case performs a site visit, including meeting and interviewing the investment managers.
To clarify, the DPFPS Administrator is not a member of the Pension Systems’ Board of Trustees and has no vote on investments. Per Texas statute only duly elected or appointed Board members are authorized to approve investment decisions. The Administrator’s role is to make sure the meetings are held in accordance with the state statutes and that a thorough vetting of the proposed investment occurs per the Board approved investment policy. The Administrator does not control or have authority to change or modify any investment. During my tenure, I provided my opinion on any particular investment only when specifically asked to by the Board. After the Board approves an investment, the staff’s role is to negotiate a contract, subject to Board approval, and to monitor the manager and the underlying investment for subsequent periods to make sure the contract terms are followed. Any issues were presented to the Board for their direction.
Changes to actuarial and accounting rules have dramatically impacted all Defined Benefit Plans, increasing unfunded liabilities. The same plan benefit rules, the same participants and the same investment portfolio suddenly showed a huge unfunded liability. To be clear, the rise in unfunded liabilities for all Defined Benefit plans was not caused by specific investments, but by these imposed rule changes.
Beginning in 2008, the DPFPS Board anticipated the impact of these rule changes and proactively addressed the issue by recommending a reduction in first responder benefits (twice), which was approved by a vote of the membership. Today, many Defined Benefit plans such as in Dallas (the general employees plan), Chicago and Houston, who were similarly affected by the accounting and actuarial rule changes and the recession, are successfully implementing modifications to both benefits and contributions by raising the retirement age, reducing benefits for new hires, increasing the contribution level by pension members and the City, and modifying their benefit program. These changes could be implemented over a multi-decades-long period to mitigate the impact and still achieve the goal of solvency.