The $2.1 billion Dallas Police and
Fire Pension System is suing its former actuary and advisor Buck Consultants
for allegedly failing to “provide adequate warning or proper counsel” that the
fund says could have prevented the system’s impending fiscal crisis.
According to The Dallas Morning News,
the pension fund alleges in the lawsuit that Buck Consultants, which had
advised the pension’s board of directors for more than 25 years, and three of
its employees “failed to communicate important risk information.”
The three employees named in the
lawsuit are David Driscoll, David Kent, and Richard MacKesey, who the pension
accused of repeatedly reassuring it “that the fund was actuarially sound, when,
in fact, it was not.”
The pension’s funding crisis was
triggered by a run on its deferred retirement option program (DROP), which
allowed veteran police and firefighters to retire on paper while staying on the
job. The program guaranteed pension checks that accrued interest of at least 8%
for those who opted for it—however, the pension’s investment portfolio couldn’t
keep pace with this rate of return.
In 2016, the fund proposed changing
the rules of the program as it didn’t have many restrictions on withdrawals;
however, this spurred many retirees to withdraw their money before any
potential rule might kick in, causing a run of more than $600 million over the
latter half the year, which resulted in benefit payments exceeding contribution
In its lawsuit, Dallas Police and Fire
argues that Buck Consulting should have known that the way DROP was structured
would prove detrimental to the fund.
“Buck gave no indication of the danger
DROP would one day pose to the fund at the time it was adopted or for many
years thereafter,” the suit says.
In its most recent annual report, the
pension fund said that “due in large part to the reduction in liquid assets
caused by the DROP outflows of 2016,” illiquid investments still comprised
approximately 49% of the portfolio as of the end of 2017.
“The vast increase in DROP
distributions created substantial liquidity strains for the portfolio and
caused debt compliance issues,” said the fund in its annual report. “In order
to meet liquidity demands, equity and fixed income sales ensued. In addition,
private equity and real estate assets were sold to generate liquidity, to bring
the asset classes closer to the target and reduce unfunded commitments.”
At the end of 2016, the pension’s
board voted to stop honoring DROP withdrawal requests, and then at the start of
2017 adopted new rules that limited future DROP distributions based on
liquidity and debt covenant requirements.
In the suit, the fund also alleges
Buck committed a breach of contract, and provided negligent misrepresentation
and professional malpractice.
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