Could Dallas Be the Next big City to File for Bankruptcy?

Jan 4, 2017 | Bankruptcy

Could Dallas Be the Next big City to File for Bankruptcy?

When you think of Dallas, you certainly don’t think of a city that’s hurting for money. Everyone remembers Larry Hagman as J. R. Ewing. He sure lived the opulent life. There’s something oddly endearing about the grotesque and ostentatious wealth he and his cronies displayed. It probably makes a lot of us long for at least a slice of that millionaire Dallas pie.

From that show we all learned how there’s lots of wealth over there in Dallas. But as much as we were on the edge of our seats after the “Who Shot J.R.?” cliffhanger (for the young folk- google it), it was all just fiction.

So, is Dallas just another struggling city on the brink of financial catastrophe like Detroit, or is it the rich city of J. R. Ewing? If it’s the latter, then why on earth would it be on the cusp of bankruptcy?

Dallas has been an oil-soaked hotbed of economic growth for decades. It’s grown by leaps and bounds into one of the largest metropolitan areas in the nation. But the oil industry is fickle. When oil went bust decades ago it was especially hard in Houston,with the industry tanking and the prices of housing going through a mini version of the great recession we just endured in the late 2000’s. Dallas fared only slightly better.

So is Dallas still an oil-based economy that’s struggling due to the current state of the oil economy? That might explain its need for bankruptcy. It would make its situation similar to Detroit, a city which already filed for bankruptcy recently. Only instead of oil, Detroit has suffered over the decades due to a weakened auto industry.

Let’s take a look at Dallas’ economy today. Maybe we’ll get this bankruptcy thing figured out.

The Dallas Economy

It was recently reported in the New York Times that Dallas has had the fastest economic growth in recent years when compared to the 13 biggest cities in the united states. This is evident simply by the number of cranes around downtown.
Dallas is also the headquarters of hundreds of major corporations, many of which have moved there recently from states like California – seeking a tax-friendly environment in which to grow. With all of those corporations, Dallas must be raking in the tax revenue.

Even the pick for mayor of Dallas should tell you something about the wealthy nature of the city. Michael S. Rawlings used to be a chief executive at Pizza Hut. You’d think a guy like that would be able to keep the numbers in the black for a city with so many corporations and economic growth.

So what’s really going on here? How can a city that should be one of the richest in the nation let alone the world be on the brink of bankruptcy? There has got to be something else we’re missing.

It’s the Pensioners

We all love our local police department. They keep our streets safe for us after all. And our firefighters, they’re the best. Not only do they rescue us from burning buildings and stop fires before they become city-wide raging infernos, but they also are the first one’s there when your grandad has a heart attack, or when you get into a serious accident.

As a perk to these dangerous and sometimes deadly professions, most cities offer great retirement benefits. Your average police officer typically doesn’t have to do the daily grind until he or she is 65 years old before retiring and enjoying the fruits of his or her labor. It would be tough for any of us to complain about this perk considering our officers, firefighters and other first responders deserve it for the dangerous work they do.

But (and there’s always a big “but” when it comes to money), all of this comes at a price. Having good benefits and early retirement available to those on the city’s payroll costs a pretty penny. A city can end up spending a significant proportion of its revenue on supporting the retired.

This is what happened to Detroit. It has already filed bankruptcy as a consequence. And this is the number one budget problem that Dallas (the city of J.R. Ewing) is suddenly facing.

Shouldn’t They Have Seen This Coming?

Any city leader who is worth much to a city would see this pension issue from a mile away. Lot’s of cities have already faced this issue over the last several decades. Wealthy or not, why would Dallas be any different?

It’s likely a problem of “kicking the can down the road.” Why would any city leader bother to address such an unsexy topic as fixing the budget problem when he or she doesn’t have to?

Can you imagine a politician running on the political platform of… “my first goal when I get into office is strengthening our future pension/budget issues!” Voters don’t care about those kinds of issues until they become a problem, and at that point, it’s a problem that’s much tougher to fix.

We as voters like to hear about the new library or improvements to the public park system. We want to hear how our taxes are going to be lowered or how 5,000 more jobs will be created when some new business comes to town. Preventative maintenance on a subtle budget issue like pensions doesn’t get people elected or re-elected. We don’t want our political leaders to put a dime towards repairing a bridge until the bridge collapses. Only then does it become a hot-button topic. And replacing a bridge is much tougher than repairing it before it breaks. This pension issue is no different.

But now it’s an issue. Now (when the city is in a financial crisis) the retirement system becomes a sexy topic. Now is when politicians step in and become the superheroes they aren’t and save the day. Now is when the mayor becomes Superman and the city council become the “Fantastic Four” or “Furious Five” or whatever else you want to think of them as.

And that’s where we are today with Dallas. A city so full of money and yet, so on the brink of bankruptcy.

Why Isn’t There Enough Money?

The New York Times reports that the police and fire pension system of Dallas just asked for an extra $1.1 billion to help fund its pension. And although this is a huge amount of money, it’s still less than what’s needed to completely fund the entire pension system.

The Times reports that this $1.1 billion is about the same as the grand total of Dallas’ general fund budget. In other words, even if Dallas were to spend its entire general fund on funding the pension, it still wouldn’t fix the problem and it would leave zero dollars for anything else, including paying the salaries of current police and firefighters. Obviously Dallas cannot afford to pay the $1.1 billion requested by the pension fund.

It seems impossible that Dallas could be so astronomically far away from funding its pension plan. Something must have gone wrong in the past to make things so bad. What on earth did Dallas do with the money?

According to the New York Times, the problem may have started way back in 1993. The retirement age for police and firefighters was only 50 years old. There was a strong temptation to retire and begin collecting benefits once an officer turned 50, which would create a vacuum of veteran officers.

Nobody wants a police force or fire department full of rookies, so Dallas decided to create some incentives to keep veteran officers on the force. They decided to offer them a savings account that earned a fixed 8.5% a year once they reached the age of 50.

Now anyone who understands the principle of compound interest would tell you that a guaranteed 8.5% would cost Dallas a truckload of money for each and every pensioner over 50. We are talking Warren Buffet-like returns just for not retiring.

But lawmakers had a plan. All they had to do was make investments that earned 9% per year (obviously wishful thinking) and have a payroll that increased by 5% per year (also wishful thinking).

You’re probably shocked to learn that neither of those things lived up to its inflated expectations. And since this has been going on since 1993, the separation between the pension budget and financial reality has gotten worse as the years have gone by. The Times reports that this resulted in a pension debt of $7 billion dollars. But the story doesn’t end there.

The trustees involved in trying to maintain a 9% annual interest rate struggled to do so (and no, Warren Buffet was not one of them). According to the New York Times, they invested in land deals. And these weren’t just your garden variety land deals. They involved investments such as a luxury resort in Napa County, villas in Hawaii, farmland in Australia, and timberland in Uruguay.

But why the exotic land deals in places that were also “coincidentally” in world-renowned vacation destinations? We can only speculate as to the motivation, but each of the investments did require regular on-site inspections by those managing the investments they made. Could this be the reason they didn’t drop some cash on a deal in Flint, Michigan or Stockton, California?

The Times reports that millions of dollars were spent on investment tours that also included places like Pisa, Italy and Zurich, Switzerland. Even though the nature of the investments seemed a bit suspect, the investment officials argued that these investments were actually successful and earning the pension fund money. Any issues with their investments was off the public radar.

Unfortunately for those running the pension fund, there was one investment that created public controversy and spread light on what they were up to. And it was difficult to ignore, because it happened right in the city of Dallas itself.

Museum Tower – Shining a Light on the Pension Crisis

Back in 2003 Dallas opened a museum called the Nasher Sculpture Center. It was an effort by the city to help revitalize the downtown area. It included sculptures by artists such as Rodin and Matisse and was to become a world-class museum. One outstanding feature of the museum was to be the glass ceiling which would allow the sculptures to be scene in filtered, natural light. This was a brilliant idea.

The pension fund chose to have some skin in the game. They decided on a project to build a condominium tower near the museum. Their initial investment was $20 million. As time passed, the size of the tower doubled, and the pension plan took over the entire project, to the tune of $200 million.

After construction began, a beautiful 42 story shining glass tower began to emerge. And just as quickly as it grew, so did a glaring problem. The sun shined on the reflective glass tower and beams of light shone right down to the sculpture center’s beautiful glass ceiling.

When visitors now go to the museum to look at the sculptures, they see a patchwork of blinding light and unattractive shadows. Even the plants in the museum’s gardens are suffering, with the more delicate ones being blighted to death by the reflected rays of the sun.
This situation caused a public outcry. Fingers of blame began to be pointed in every direction. So it was only a matter of time before the public began to start asking questions about the pension fund and its $200 million investment in the Museum Tower.

When reporters began to ask questions about the tower, it was only reasonable for them to ask about every other pension fund investment. According to the New York Times, the public began to see that overall, the pension’s investments were making less money than had been promised by the managers of the pension. The managers dispute this, but there’s no disputing how much debt the pension system is in overall, regardless of the success or relative failure of these investments.

There’s still no resolution to the fight between the tower and the museum. In the meantime, the pension fund is still grossly underfunded and asking the city of Dallas for money it doesn’t have. This may force Dallas to ultimately file for bankruptcy just like Detroit did not long ago. It would join the ranks of other American cities and counties that filed for bankruptcy such as Jefferson County, Alabama, Orange County, California, Stockton, California, and San Bernardino, California.

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