The Dallas Police and Fire Pension Keeps Paying its Advisers More Despite Bad Returns

Museum Tower Thibodeaux.jpg
Brandon Thibodeaux
Our cover story this week deals with the Dallas Police & Fire Pension System, the owners of the much-argued-about Museum Tower project in the Arts District. In researching the story, we obtained a draft of the fund's 2011 annual report, which hasn't been released yet. It shows that although the pension fund had an exceptionally rocky year in 2011, its investment managers made $32 million in "asset management" fees. And those same advisers can expect to do even better in 2012, internal documents show.

Our story focused in on a few of the pension fund's other high-dollar real estate transactions. Real estate is, at this point, the pension fund's single largest asset, making up some 24 percent of its total portfolio.

The pension fund's trustee board recently voted to reduce that number to 15 percent, but that process is expected to take up to two years.

Real estate, though, has turned out disappointing returns for the fund recently: in 2010, it gave them just a 3.07 percent rate of return on their investments, compared with a national average of 11.72 percent. In 2011 it did even worse, returning a 6.4 percent rate of return where the national average was 20.7 percent.

A number of the pension fund's especially ambitious real estate investments have turned out poorly: Painted Hills in Arizona and Lake Luciana in California, for example, both ended up mired in years-long court cases and are sitting empty, which they'll do for the foreseeable future. And some properties just haven't turned out at all: Akard Place, a planned multi-million dollar development in Uptown, never materialized either.

Akard Place is also one of the fund's projects that's managed by CDK Realty Advisors, the seven-person firm that oversees 70 percent of the fund's real estate assets. That's $500 million with one small company. The two entities also share an office building, which they co-own, an unusually cozy relationship between advisor and client.

Management fees to CDK and other investment advisers make up the pension fund's single largest expense. Fees have climbed almost ever year for the past decade. In 2001, DPFP paid $11.5 million in fees. By 2007, as the fund's assets approached $3 billion, it shelled out $17.5 million.

Around 2008, as the pension fund began investing more and more aggressively in alternative investments -- real estate, private equity, natural resources, anything other than traditional stocks and bonds -- those fees spiked. In 2010, the pension fund projected they would pay $18 million in fees. As it turns out, according to the draft of its 2011 annual report, they actually paid $30.9 million to these outside investment managers. In 2011, it paid $32 million.

This record-setting fee-paying is despite the fact that 2011 was the pension fund's worst year in a long time, netting just a 0.3 percent rate of return overall. Real estate and private equity both performed especially poorly.

Management fees are tied in part to performance, according to an October 2011 article in the fund's newsletter written by Steve Umlor, vice-chair of the trustee board. So why is the pension fund planning to pay a record $34.7 million to its investment advisors this year, if some of them performed so poorly?

As it turns out, "performance" means the performance the pension fund hopes the advisors will achieve, as Umlor explained in the same article. "You will notice that portion of the budget shows an increase of 5.21%," he informed 9,000 the cops and firefighters who make up the fund's membership, referring to investment management expenses, "As we are hopeful our assets and investments will significantly increase in 2012."

Whether the assets actually do increase this year or no, it looks like the fund's investment advisors can still count on a big payday.


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12 comments
ozonelarryb
ozonelarryb

Dumb enough to sign these usurious contracts, and we let 'm loose in our city with high powered cars and trucks and guns....

 

 

oakclifftownie
oakclifftownie

So before we all storm the castle because of the  (Shocking to us) 30 + Million check the fund writes people who run it What is the going rate for handling those kinds of assets and how is such compensation decided ? I don't know but I guess someone here will.

 

holmantx
holmantx topcommenter

"When arguably the dumbest investors in the room (public pension funds) rally to the defense of high-risk, high-cost, thinly-regulated, opaque private equity fund managers that should tell you something."  - Public Pension Suckers For Private Equity FORBES 2/16/2012

 

"Over the past 30 years I’ve investigated hundreds of private equity scams in public pension portfolios that, I can assure you, have not made the retirements of participants more secure. Private equity investing only guarantees that pensions will pay exponentially higher fees. The higher the fees, the more difficult it is to achieve superior net investment performance. It’s that simple. In addition, the further pensions migrate from transparent, liquid markets, the greater the risks. To make matters worse, since private equity is a relatively new asset class, the risks involved are still largely unknown."

 

He goes on to talk about the Texas Teachers Pension Fund basically doing the same thing Dallas Police and Fire has been doing, as well as public pension funds from CA to NY.

 

http://tinyurl.com/cm6vgqx

 

Steve Malanga has been covering this also, and has included The taxpayer-insured bonds on the Convention Center Hotel, which also has no hope of making it financially.

ket354
ket354

The pension fund sounds more like a gambler gone full tilt. They're losing ground and making riskier bets to try to catch back up - that never goes well.

Edward
Edward

 @oakclifftownie I believe the original article compares them to other funds that are a lot larger but pay much less in these kinds of fees. I don't think there's any way they can justify either the fees they are paying or the apparently incestuous relationships going on here.

 

It would be interesting to know if there are any more direct relationships between the fund managers and Board. Any wives/brothers/in-laws/deacons? Any other outside financial arrangements?

 

What do the Board members get paid, other than the perks they get? I really can't believe the police officers and firefighters are comfortable with what appears to be significant waste, and the $45K to $30K cut in benefits to new hires seems exorbitant. 

WylieH
WylieH

@oakclifftownie The typical rate is between 1% and 2% of assets under management. In addition, for high risk investments, the manager will get a promote that equals up to 20% of the profits once a certain threshold return (frequently equal to the Fund's required return-- in this case 8.5%) has been reached. Based on the Fund's asset mix and performance, it would appear that the advisers are being grossly overpaid.

holmantx
holmantx topcommenter

 @WylieH  @oakclifftownie Public Funds are backed by the taxpayer if the fund managers lose either by incompetence or malfeasance.  Moral Hazard.

 

Private funds that go bust are turned over to the PBGC Pension Benefits Guarantee Corporation (qasi-govt operation like the Postal Service).  It's Prez testified last year they were broke and will have to be bailed out.  However, even if they weren't they only pay a fraction of the original benefits.

 

And the taxpayer is all taxed out.  Hence, the avalanche of Chapter 9s (municipal bankruptcies).

WylieH
WylieH

I should point out that the fee structure above applies to actively managed equity portfolios. A fair amount of their portfolio should be invested in index funds and the like--- those fees are as low as 0.25% with no incentive structure.

WylieH
WylieH

@TexOHara Very true.

TexOHara
TexOHara

 @WylieH Most private equity managers can't even beat the S&P 500. 

 

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