The Nasher, Politics and Pension Fund Management: Can This Be Good?

Categories: Schutze

Thumbnail image for Thumbnail image for Kwame.jpg
Former Detroit Mayor Kwame Kilpatrick, a pioneer in the use of political influence in public pension fund management.
Got a story in the newspaper newspaper this week I'd like you to see if you have a minute. It's about the Nasher Sculpture Center and Museum Tower, the condo building accused by the Nasher of reflecting too much light on it. I spoke with officers of the city's police and fire associations (unions) last week, and they expressed alarm over the degree to which the mayor and some City Council members are bringing a political issue into what should be the strictly non-political arena of public pension fund management.

The Dallas Police and Fire Pension System owns Museum Tower. The mayor and his friends are supporters of the Nasher. The cops and the firemen think the mayor is trying to beat up on their pension fund in order to make it bend to the will of the Nasher. His spokesman, Sam Merten, told me that was bullshit (my word).

But the police and fire association officials I spoke with had some persuasive detail to offer to support their fears. They told me they were informed last year by former City Manager Mary Suhm that their employment contract talks were on permanent hold until they got their pension officials to do what the mayor wants on the Nasher. Suhm does not respond to any of my emails, so I don't know what her version is.

Merten said the accusation is false, but he did confirm that the mayor met with association officials last July to discuss the contract talks and did discuss the pension fund at that meeting. State law prohibits public employee group officials from bringing up pension issues in contract talks. Merten said the law doesn't say mayors can't do it, and he said the mayor was meeting with them just to chat, not negotiate.

See also: Mixing Politics and Pensions

I looked up the law. Yeah, he's right. It doesn't say, "Oh, and by the way, this includes mayors, too." But the intent of state law is quite clear: Nobody thinks mixing politics, pay issues or other extraneous agendas with fiduciary issues is a good idea. It is, after all, a significant element in how Detroit got where it is today.

In my piece in the paper, I say this should be simple: The mayor and the City Council have every right to examine the pension fund. It is a public obligation in the end, and it will fall to taxpayers to set it right if it gets into financial trouble.

But the dispute between the Nasher and Museum Tower is by its very essence not a public issue. If there were a single ordinance or stricture the city could use to make Museum Tower do what the Nasher wants, believe me, it would have been invoked long ago. Museum Tower obeys the law, and that is why the Nasher has pursued its interests politically, socially, commercially and through The Dallas Morning News and D Magazine, all of which is its right.

But the mayor and the council ought to bend over backward to demonstrate that political, social and commercial interests, along with media suck-up interests, are not polluting the fiduciary waters at the pension fund.

So? Simple. As long as they are pursuing an audit of the pension fund, the mayor and the council should drop all reference to the Nasher issue and allow the private parties to duke it out however they may. Failing that, the police and fire associations have good reason to believe that what we are seeing at City Hall is Early Detroit.


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29 comments
Francoman
Francoman

The City of Dallas knows exactly what happening at the Pension Board.  They have four Board Member on the Pension Board and have since its inception.  Furthermore, the Pension Board agreed to pay for another additional audit just to please the City. The Pension Board has a splendid reputation having weathered the great recession in respectable shape.  Therefore, I believe the police and firefighters when they say the Mayor of Dallas is just trying to bully the Board.  Clearly, the Mayor is playing politics.

MikeWestEast
MikeWestEast

The process for the Mayor to influence the Pension Board is via the Council appointees.  Getting it on the record at an employee meeting is just dumb.  It is why this story does not make any sense.  Also using the City Manager is dumb for the same reason.


It does make sense that the Mayor fired most of the appointees and put his people there.  All of that is within the law and the normal way to get things done. 


The stubbornness of the Board on this audit is another Dallas item that makes no sense.  25% of board is from the Mayor.  In real life, a Board Chairman does not fight 25% of her board on a transparency issue.  It smells to high heaven.

holmantx
holmantx topcommenter

Transparency and public audits aren't the problem or the cure.  If it were towns and states  across the nation would not be taking Chapter 9.

The problem is that public pension funds' nuts aren't on the line.  And they aren't because special interests has horned out the general interest.  The citizen has not had a voice in public employee benefits for many years now.  The unions are on one side of the table and the politicians who the unions financed to get elected are on the other side.  And that was okay until the economy crapped out and a little light (and interest) is being shined on just how much these benefits are going to cost the taxpayer since they are un/under funded.

Adds a whole new meaning to the old Glen Campbell song, "I am a lineman for the county" when sung in fusion rap.

If I had it to do over again, I'd be a lineman for COLLIN County.

mavdog
mavdog topcommenter

Jim, you should do a bit more homework about this audit.

The City audits the various employee pension funds once every 5 yrs. The audit was  to be done in 2013. The City believes (rightly) their auditors be provided access to ALL of the financial records seen as necessary to complete their work.

The Pension Fund is reported to have not allowed the auditors to have unrestricted access to the records. Specifically, the auditors were not allowed to review all the records pertaining to the "alternative investments" which include the real estate assets. The DP&FPS says these records shouldn't be made available for to do so would weaken their negotiation position as they attempt to sell any of these assets. That is what we can call "stonewalling". it's ridiculous.

The link of the need for an audit-again, an audit is scheduled and it should, it MUST be done-to the Museum Tower controversy is inaccurate.

I also question how our Mayor can make any demands about the negotiations with Police and Fire on a new contract. We're a weak mayor system here in Dallas, remember?

holmantx
holmantx topcommenter

Political creep into public pension business decisions is precisely what is bringing down entire states.  And it has been a team effort.  Unions exert pressure for outsized benefits causing fund managers take big risks on speculative projects, and employ voodoo accounting to look solvent, in hopes of covering the political bet.

The fatal defect in this risk/return equation is that the taxpayer is on the hook if the pension fund goes upside down.  The cops and the fund managers don't take the pain if their business gambles don't pay off.

Dallas Police and Fire has no business being in the Condo Tower and wouldn't be if it came out of their hides at retirement.  The simple cure is this - under no circumstances can the taxpayer be insurer of last resort for public pension funds that are, in effect, mismanaged.  Eliminate the moral hazard.

And Detroit may be a nice case study, but an article out today on California is a testament to just how wildly out of control this little dynamic can get.

Public Pension Debacle on Its Way - Mark Bucher, Investor's Biz Daily

p.s. - every Dallas cop approaching the end of their 20, is a millionaire. 

JimSX
JimSX topcommenter

@mavdog  You'e absolutely right that the mayor has no legal or statutory right to inject himself into contract talks, but there you have it and there he was, meeting with union heads about their contract talks after they say the city manager told them the talks were on hold until the mayor got his way on Museum Tower (which he denies, through Merten). All I'm saying is what a mess. A Laura mayor, by the way, could not jump into contract talks, because she didn't have the Citizens Council behind her. A Citizens Council mayor can do what the fuck he feels like, and therein lies the secret. The Morning News had some mush-mouth academic recently on the op ed page talk about how the city needs to give the new city manager a chance. Puhleeeze. The city needs to watch out the new city manager doesn't OK fracking inside Montessori schools.

JimSX
JimSX topcommenter

@holmantx  I think I catch your drift.  Anybody, public sector or private, with a defined benefit pension worth $50,000 a year in cash and benefits owns the equivalent of a $1.7 million trust fund. But, Holman, let's say what we mean here. Is it your feeling that a cop who spends 20 years protecting the public while foregoing higher potential pay in the private sector is treated too generously by the existing pension system? If so, and if you would reduce benefits, what other adjustments to compensation would you suggest to offset the recruitment deficit that would be brought about by a cheaper retirement benefit? Exactly how do we entice people to do that particular job? Is a strong retirement benefit not an especially good incentive to use in order to attract stable think-ahead types to the work?

mickeygil1
mickeygil1

@holmantx the p.s. you throw out there is b.s. to the highest degree sir  

A Dallas Cop or Firefighter is not a millionaire after 20 /// a percentage of final salary multiplied by the years of service /// So there would be no way to retire a millionaire after just 20 years of working for one of the lowest paying Police and Fire Dept in the Metroplex. 

But I almost have my 20 years in so if you could tell me what City office I need to go to and pick up my Million I'm all ears. 

I just hope I don't have to pass one of the most beautiful newly built bldgs downtown or get caught in the massive traffic jam of people beating the doors down trying to get into the Nasher.

wcvemail
wcvemail

@holmantx I don't have time to research the numbers right now, but I understand that the pension guarantor of last resort, the federal pension guaranty board, is severely underfunded at a time when they're having to take on more and more muni as well as corporate pensions.

mavdog
mavdog topcommenter

@JimSX

So why are you linking the city push for an audit to the issue of Museum Tower? That is the focus of your piece "Mixing Politics and Pensions".

Are you defending the Pension Fund refusal to provide the materials the auditors are seeking on these "alternative investments"?

JimSX
JimSX topcommenter

@holmantx  Oh, almost forgot: tell me again why the pension fund has no business being in the condo tower? As I understand it, there isn't a major fund in the country that's all in traditional funds and investments, because, if they were, little stretches like George W. Big Recession would have left them sucking wind. So if condo towers are out for some reason, what are the other non-traditional investments you would urge and why? After all, we can;t always have Democrats in the White House: every whip-stitch, the country's going to elect another Republican, Wall Street will go whore-house again, the bubble will burst and the economy will tank. We gotta be prepared for the Bubbas. 

holmantx
holmantx topcommenter

@mickeygil1 @holmantx  

No, they are not but that's the joke and the point of a lot of cop conversations about who has the biggest built-up value.

So don't bullshit people when you know you are over a million in potential payouts.  And yes, that doesn't mean you are a millionaire but you damn well joke about it, and envy those cops who have racked up more than you.

holmantx
holmantx topcommenter

@wcvemail @holmantx  Public pension funds are insured by the taxpayer.

Private pension funds are insured by a quasi-government company called the Pension Benefit Guaranty Corporation (PBGC), and it's busted.  It has been whining for a multi-billion bail-out from Congress.

Unfortunately for the pensioners, we're all bailed out in flyover country.

Besides.  As Groucho Marx famously said, "I refuse to pay for a retirement system that will not have me as a member."

or words to that effect

mavdog
mavdog topcommenter

@JimSX

while I will agree with you in general on the bifurcation of financial oversight and political issues, it does occur to me that to expect a politician to not act in a political manner may be unrealistic....

JimSX
JimSX topcommenter

@mavdog  

I guess I didn't say it good. Fiduciary issues are perfectly fair game for the mayor and council. Carrying water for the Nasher on a purely political (social) issue is not fair game, either in  contract talks or in fiduciary talks.

itchyjack
itchyjack

@mavdog  I'm curious if the FAA will get involved in this, as such a strong reflection may be against codes related to potential impacts on air traffic in the Dallas corridor.  If so, that would certainly fall on the shoulders of the architects and engineers, as they are the ones ultimately responsible for code compliance, as well as the final design features (structural components and facade materials) - because it's their stamps on all of the final drawings, not the developers.

WylieH
WylieH

As pointed out in a Wall Street Journal article, every potential funding source passed on this deal months before the fund decided to go all in.

mavdog
mavdog topcommenter

@holmantx @WylieH

"an architectural screw-up"

the architects who were involved in Museum Tower did the work they were assigned to do. They aren't at fault for completing the task. there is no "screw up" by the architects. neither is there any error by the general contractor (or at least any that are apparent).

The problem is the building the developer instructed the architect to design and the GC to build. if the building had been limited to the original height (per the covenants that expired) there woldn't be an issue.

Tipster1908
Tipster1908

@WylieH add to this the fact that I don't know a single prudent asset manager who would invest in the equity of a deal and then guarantee the debt as well. the only other "professional" investors I have seen do those deals are other public pension funds. go figure.


Jim- can't believe you didn't mention the fact that just as the Nasher/MT stuff was getting to its nastiest, and as condo sales were just slated to begin, Jack Mathews made a bid for the MT building. the line went that Mathews was the right steward b/c his civic-mindedness would foster a solution. to me it always sounded like Mathews knew he could quiet the Nasher crowd and lowball the pension system for an asset that, if played correctly, could have huge upside. the Mayor praised the deal, saying it was a great solution to the problem. that seems incredibly shady to me, but what do I know...


what people might want to remember is that high end condo sales in Dallas may be tricky, but don't forget that the W got bought up by a bunch of Japanese investors who needed a place to park their money, the first Ritz tower was a great success (the second tower overestimated demand for that particular brand). the wealthy who are in this segment of the market are the ones who are raking it in hand over fist and I can assure you their buying power is better than ever. there's no reason MT has to fail. that doesn't mean the pension fund should ever have gotten involved in buying it.

holmantx
holmantx topcommenter

@JimSX @holmantx  defending themselves?

more like a mechanized panzer attack with complete air supremacy.

who defends the hapless citizen?  Where's HIS lobbyist?

holmantx
holmantx topcommenter

@WylieH  

Did any of the parties to this deal carry insurance on the design and construction or was the Fund self-insuring?

It seems like there should be some kind of policy out there in force that covers an architectural screw-up.  The GC might have some.  The architects might carry Errors and Omissions.  

This amounts to a de facto 3) violation.  The Fund bought a risk investment and it completely fell apart.  A total loss.  Hopefully the Fund can absorb it but in no case can this fiasco be hung, directly or collaterally, around the taxpayer's neck.


holmantx
holmantx topcommenter

@JimSX @holmantx  It is not a matter of welching.  The cities of Viello, Stockton, Harrisburg (there are many others) had to seek bankruptcy protection because their citizens CANNOT pay.  Not that they don't want to.   They don't have it and they cannot collect such sums over time.  4 million taxpayers have fled California.  

It is not a question of not living up to an agreement.  Revenue sources are finite.

WylieH
WylieH

There are at least five major reasons why Museum Tower was an inappropriate investment for the pension fund:

1). At roughly 8% of total assets, it represented too high a concentration of risk in a single asset.

2). The size of the commitment caused the fund to greatly exceed its internal guidelines for the maximum allocation of investments to real estate.

3). In combination with other alternative investments, the fund is far too concentrated in investments that are dependent on the Dallas economy, placing fund beneficiaries at risk of losing their jobs AND their retirement savings if an economic calamity impacts Dallas. Remember Enron?

4). The fund is supposed to be investing for the long-term, to match up its investment returns with its obligations to retirees. Condo development is supposed to be a relatively short-term investment. Build and sell.

5). Real estate development is extremely high risk and requires highly specialized expertise to execute successfully, in comparison with investment in stabilized income producing properties. The fund lacks in-house expertise in real estate development.

Finally, my understanding is that this project was approved as a result of political pressure exerted by Suhm and Leppert. If you do some digging, I think you will find that the fund's investment decisions have been heavily influenced by local politics for years.

JimSX
JimSX topcommenter

@holmantx @JimSX  

With so many voters willing to Welsh on time-honored pension contracts with public employees, would you propose that public employees be barred from defending themselves in the pubic arena?

holmantx
holmantx topcommenter

@JimSX @holmantx  

And there is another moral hazard.

Should the politicians we elect to represent the citizen in collective bargaining agreements with public employees . . . take money off the public unions to get elected?  


mavdog
mavdog topcommenter

@JimSX

A pension fund should diversify their investments. The fund does need to look at making investments in real estate.

That being said, the pension fund should be a cautious investor in these type of assets, not a large risk taker.

The DP&FPS is reported to be close to 50% of its assets invested in these higher risk investments. That is much higher than what is an average, and is taking on such a high degree of risk it should be questioned.

You ask why shouldn't the fund invest in Museum Tower. While investing in a residential project is not in itself a poor decision, as over the recent past residential is the best performing type of real estate, investing in a high end residential tower in Dallas CBD is questionable. There is no track record of other successful same type projects nearby, and the Fund went in alone. The fund should have gone in with other investors to share the risk at the least.

holmantx
holmantx topcommenter

@JimSX @holmantx  

Take whether the cop deserves it or not off the table.  Can the citizen afford to pay such a Cadillac plan? 

I forget the ratio but I think the citizen matches the cop’s dollar contribution with some multiple ($2 or $3).  What I am saying is that the citizen’s liability should stop right there.  And if it did, those fund managers would be investing those dollars paid in . . . in Treasury securities (risk free).  Unfortunately, the Pension Fund couldn’t pay their retirement load, so they engage in risky investments to get a higher return (insert goofy accounting gimmick to make the Fund look more solvent than it is).  So not only does the citizen pay 2 for 1 on contributions, if the Pension Fund is blown up by mismanagement, the retirement load comes out of the general fund – current taxation.  This is what is bankrupting towns and states across the nation.  The citizen has done its part on the 2 for 1 match.

And it is my understanding that the Police and Fire union some years ago went to the state legislature who put the Dallas citizen on the hook for the pension fund should it fail (become un or underfunded).  This is why we call such crap – moral hazards.

Nationwide, had all the public pension plans been held to the notion that if you lose your nest egg, the pensioners lose their retirement (like in the private sector unless you are GM) . . . we would not be in the mess that has finally overtaken California.

Cadillac retirement plans plus no risk investing by the Pension Funds to pay for them equals disaster. 

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