Dallas sues former pension advisers for not warning about DROP's risks

The suit alleges that Buck Consultants and three of its employees repeatedly failed to “provide adequate warning or proper counsel” of the system’s impending calamity

By Corbett Smith
The Dallas Morning News

DALLAS — The Dallas Police and Fire Pension System is headed to court once again, this time filing a lawsuit in Dallas County against its long-time actuary and adviser for its guidance in the years leading up to the fund’s fiscal crisis.

The suit alleges that Buck Consultants  -- an actuarial and benefits administration company that advised the fund’s board of directors for over 25 years  -- and three of its employees repeatedly failed to “provide adequate warning or proper counsel” of the system’s impending calamity.

Buck and three actuaries -- David Driscoll, David Kent and Richard MacKesey -- did not “merely stand idly by,” the lawsuit reads. “[T]hey performed annual actuarial valuations, failed to communicate important risk information” to the pension fund, and repeatedly reassured the Dallas Police and Fire Pension System “that the Fund was actuarially sound, when, in fact it was not.”

A 2017 deal by city officials, state lawmakers, police and firefighter associations and the pension board put the $2.1 billion retirement fund on a slow path to full funding. But before the legislative fix, the pension fund was facing insolvency within a decade.

The crisis was precipitated by the pension plan’s Deferred Retirement Option Program, or DROP, which allowed veteran firefighters and police to retire on paper while remaining on the force. For those in DROP, pension checks were deposited into individual accounts that long guaranteed interest rates of at least 8 percent. That benefit proved to be unsustainable given the pension system’s irregular -- and often unsuccessful -- investment portfolio.

DROP also had few restrictions on withdrawals. In mid-2016, when the pension fund proposed changes to DROP, retirees in the plan withdrew hundreds of millions over the next five months, placing the system’s overall health in further peril.

The suit specifically points to Buck’s role in the 1993 adoption of DROP, where “the Board and the legislature relied on Buck’s assessment” to create the program.

“This would prove a fateful decision, but 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 read.

From 1994 to 2016, the pension system’s unfunded actuarial liability increased by $2.8 billion, “much of which was attributable to DROP,” the lawsuit read. From a similar span -- 1994 to 2015 -- Buck indicated only once in its annual reports that the “current contribution rates [were] NOT sufficient to keep the System actuarially sound,” according to the lawsuit.

In the suit, which seeks monetary damages over $1 million, the pension alleges a breach of contract by Buck, and negligent misrepresentation and professional malpractice by Buck and the trio of actuaries.

Dallas Police and Fire Pension System Executive Director Kelly Gottschalk said the tenor of the lawsuit was consistent with what her organization had shared with its members in recent years: the board would investigate those associated with the mismanagement of the pension system, and “hold them accountable.”

Buck’s general counsel, Roderick Bernstein, said per company policy, “Buck doesn’t comment on pending litigation.”

Efforts to contact the three actuaries for comment were unsuccessful.

Under Gottschalk’s leadership -- she took the reins of the organization in 2015 -- the Dallas Police and Fire Pension System has engaged in several legal battles to redress some of the missteps taken by those affiliated with the former administration.

The system is currently in litigation with its former investment consultants, Townsend Holdings, and its former attorney, Gary Lawson. In a suit filed last September, the pension fund alleged negligence for speculative real estate investments made on the fund’s behalf. In a separate case, the fund received a $2 million settlement with commercial real estate managers CDK Realty Advisors, a firm to which the pension fund blames for $320 million in losses.

Copyright 2018 The Dallas Morning News

McClatchy-Tribune News Service

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