Dallas is one more preview of coming attractions in municipal pension land. From Tyler Durden at zerohedge.com:
Over the past year, the biggest casualty to emerge as a result of global NIRP (or close to it) monetary policy have been pension funds, which have had two choices: either suffer losses as yields on new fixed income investments barely cover (and in some case don’t), or scramble for duration (or outright risky investments like junk bonds and high beta stocks).
In August, we created the chart below as a simplistic illustration of the pension “duration dilemma.” The chart graphs how a pension liability grows in a declining interest rate environment versus the value of 5-year and 30-year treasury bonds. As you can see, a $1BN pension that is fully funded at prevailing interest rates would be nearly $700mm underfunded if interest rates declined 300bps and all of their assets were invested in 30-year treasury bonds. The result is obviously even worse if the fund’s assets are invested in shorter duration 5-year treasuries.
So what do pension fund managers do when perpetually declining interest rates continue to drive their funded status lower and lower despite one’s return profile? Well, there is little choice: one has to move further and further out the yield curve in an attempt to match asset duration with that of one’s liabilities. That, or reach for the skies by buying the riskiest assets possible, and pray for a home run.
Unfortunately, most pension fund managers better known as “dumb money”, are hardly star stockpickers. One such example is the fast imploding Dallas Police & Fire Pension (DPFP), which covers nearly 10,000 police and firefighters, and whose troubles we first covered back in August, is on the verge of collapse as its board and the City of Dallas struggle to pitch benefit cuts to save the plan from complete failure. According the the National Real Estate Investor, DPFP was once applauded for it’s “diverse investment portfolio” but turns out it may have all been a fraud as the pension’s former real estate investment manager, CDK Realy Advisors, was raided by the FBI in April 2016 and the fund was subsequently forced to mark down their entire real estate book by 32%, thereby exposing just how great the risk truly is when pension funds swing for the fence… and miss.
Thing only got worse, when news of the fund’s woes spread, and as we reported in September, Dallas police officers caught on to the ponzi and rushed to withdraw retirement funds as quickly as possible before the whole system goes bust. As reported by a local ABC affiliate, Dallas police officers are retiring at a record rate and opting for full cash withdrawals of their pension benefits as opposed to equal monthly distributions for life (apparently they don’t think the fund will be around long enough to pay them for very long).
Through the first two weeks of September, there have been 21 Dallas police officers who retired. Multiple sources told NBC 5 that commanders are bracing for many more retirements over the next two weeks as well.
The Dallas Police Department did not foresee the volume of retirements this month. In early August, Deputy Chiefs told city council members in a presentation that they projected 14 retirements between Aug. 9 and Oct. 1.
In short, declining returns, a mismatched asset-liability book, and a surge in redemptions: the three things that no fund managers wants to hear, let alone at the same time.
To continue reading: Dallas “Pension Fund Panic” As Mayor Warns Of 130% Property Tax Hike To Avoid Collapse
