DP16 | Dallas Police & Fire Pension System, Comprehensive Annual Financial Report for the Years Ended December 31, 2016 and 2015. Transmittal letter and independent auditor's report July 25, 2017. All passages below are verbatim except line breaks and spacing; printed page numbers are those of report pages.

[Transmittal letter, printed p. 4, 2016 Financial Results]
The Plans’ net position decreased by $531 million in 2016 primarily as the result of payments of lump sum amounts from Deferred Retirement Option Plan (DROP) balances in the latter half of the year. With uncertainty surrounding the impact of potential plan amendments, fueled by lack of assurance of the City of Dallas’s commitment to participate in a solvency resolution, and fed by negative attention in the press, members withdrew over $600 million in lump sum payments from their DROP balances during 2016 compared to only $81 million and $56 million in 2015 and 2014, respectively. Total DROP balances at July 31, 2016, prior to the increase in DROP withdrawals, were $1.54 billion which represented approximately 58% of total Plan assets at that time.

[Transmittal letter, printed p. 5]
The vast increase in DROP distributions created substantial liquidity strains for the portfolio and caused debt compliance issues. In order to meet the liquidity demands created by DROP withdrawals, equity and fixed income sales ensued. In addition, private equity holdings were sold to move the actual portfolio holding closer to the asset class policy levels.

[Transmittal letter, printed p. 6]
In December 2016, the Board approved the sale of 26 fund investments across the Private Equity, Private Debt and Real Estate portfolios which resulted in proceeds of approximately $246 million and reduced unfunded commitments by approximately $130 million.
The Board temporarily halted DROP balance lump sum withdrawals in December 2016 and in January 2017 passed a policy which governed how and when DROP balances could be distributed to retirees and beneficiaries. HB 3158 does not allow DROP balances to be distributed in response to lump sum requests. The timing of closing certain secondary sale transactions and the halt of lump sum DROP balance withdrawals in December resulted in excess cash (14.1% actual compared to 2% target) at December 31, 2016.

[Transmittal letter, printed p. 6, Real Estate Portfolio]
At December 31, 2016 the Real Estate asset category was 25.7% of the portfolio and the target is 12%. DPFP continued to work towards the new lower target allocation by executing the sales of seven wholly-owned real estate assets in 2016. The reduction of the liquid asset classes to meet the cash demands of DROP resulted in a higher percentage of the assets being allocated to Real Estate and other private asset classes as of year end.

[Management's Discussion and Analysis, printed pp. 16-17]
In December, the Board approved a sale of 26 fund investments across the private equity, private debt and real assets portfolios resulting in proceeds of $133 million and reducing unfunded commitments by $53 million prior to year-end, with additional proceeds of $113 million and reduction of commitments of $54 million occurring in 2017. In addition, sales of seven wholly-owned real estate assets during the year resulted in a reduction of $58 million in the real assets portfolio, provided proceeds of $57 million, and made further progress toward the reduction of exposure to real estate, in line with the revised asset allocation target.
