For the last week, our local news in the DFW area has been all abuzz about problems within the DPFP (Dallas Police & Fire Pension). A great MarketWatch article came out yesterday: Dallas police and fire pension plan problems caused by extraordinary decisions. Some interesting points from the article are as follows:
- 68.4% of the pension is inappropriately invested in alternative assets, like luxury homes, student housing, and raw land.
- The Deferred Retirement Option Plan (DROP) features of the plan allows workers eligible for retirement to defer their payments back into the plan with outrageously high fixed interest payments of 8.5 to 9 percent. As of January, 56% of the entire plan was DROP money.
- The DROP balances have always been available for immediate withdrawal. News of poor performance from bad investment decisions caused a run, resulting in a 55% funding shortfall.
What insights can we derive? Pension plans, conceptually, are not bad. When invested correctly, with the proper provisions, they can efficiently provide a great retirement incentive to civil service workers like firefighters and police officers who put their lives on the line for our safety. Unfortunately, many times they are poorly run by unqualified people. I reviewed the short bio’s of all of the current trustees, and found very little in the way of investment experience in any of the information provided: Board of Trustees.
The DPFD is an extreme example of poor investment oversight. It’s a shame. Dallas Firemen and Police deserve a better outcome, along with Dallas taxpayers who will probably end up with the tab. Other public pensions, foundations, and even private sector retirement plans should heed the warning. Fill your boards and investment committees with people who have solid investment backgrounds because good people stand to be harmed by bad decisions.