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Reaching for returns

Pension funds' non-traditional investments change the game of fraud risk assessment

U.S. public pension plans are facing an unprecedented crisis with an estimated shortfall of $1.378 trillion needed to pay benefits to retirees. Most pension funds have taken on higher-risk investments to seek increased returns. The rise and fall of the Dallas Police and Fire Pension System because of these non-traditional investments provides a cautionary tale with important lessons for CFEs.

In December 2016, the Dallas Police and Fire Pension System (DPFP) was teetering on the brink of collapse. Heavy investment losses left the fund only 45 percent funded, and the fund’s consultant projected it would be insolvent in 15 years. News of the losses caused police and firefighters to retire in droves and withdraw their Deferred Retirement Option Plan accounts in lump sums. The fund’s trustees had asked the city of Dallas for an immediate contribution of more than $1.1 billion, which Dallas Mayor Michael S. Rawlings and City Council member Lee Kleinman said threatened to bankrupt the ninth-largest city in America. (See Dallas Stares Down a Texas-Size Threat of Bankruptcy, by Mary Williams Walsh, The New York Times, Nov. 20, 2016.)

The disaster in Dallas can be traced back to the DPFP’s aggressive push for higher investment returns. Beginning in 2004, the fund reduced its allocations to traditional public stocks and bonds in favor of non-traditional investments, particularly in real estate development. By 2014, more than 56 percent of DPFP assets were invested in non-traditional assets, which increased from 15 percent in 2004.

The DPFP managers’ strategy initially appeared to be a huge success. The industry publication Money Management Letter named the DPFP “Mid-Sized Public Plan of the Year” in 2009. The Texas Association of Public Employee Retirement Systems recognized the fund in 2011, 2012 and 2013 as one of the top-performing pension systems in Texas for its 20-year average returns. (See TEXPERS’ Report on the Asset Allocation and Investment Performance of Texas Public Employee Retirement Systems, Texas Association of Public Employee Retirement Systems, March 26, 2012, March 5, 2013, April 4, 2014.)

But many of these investments ultimately failed to deliver. The fund invested about $149 million in ultra-luxury homes in Hawaii, Utah, Colorado and Arizona, but later its administrator reported it had lost about $60 million on the ventures. They paid $97 million for 2,650 acres of land in Napa Valley, California, to develop a luxury golf resort, but the project stalled in the face of local opposition and lawsuits. (See Dallas police-fire pension fund has $400 million bet on luxury real estate, by Steve Thompson and Gary Jacobson, Dallas Morning News, Feb. 17, 2013.)


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