Trustee evidence room. Decision frozen November 1, 2016. Audited snapshot December 31, 2015.
The cash on hand is not the obligation it would have to meet
At December 31, 2015 the audited cash and cash equivalents plus short-term investments came to $107,059,073. Members' DROP accounts totaled $1,516,615,000. That proxy would equal only 7.06% of the DROP balance, and less than one year of ordinary benefit payments (about $205,200,000 on the 2015 average). It is a limited proxy from an old snapshot, not free cash and not a forecast.
My call, stated before any outcome is known
Yes. Before any further outflow surge, protect a liquidity reserve and adopt an orderly sale policy for real estate and private equity now.
- Reserve
- Hold cash plus short-term investments of at least 12 months of 2015 average monthly benefit payments, $205,200,000, walled off from new illiquid commitments. The audited proxy of $107,059,073 is $98,140,927 short; raise it first from listed fixed income and equity ($822,872,585 at the snapshot), after confirming their liquidity with the custodian.
- Trigger
- If month-end cash plus short-term investments falls below $102,600,000 (six months of 2015 average benefit payments), or DROP distributions in any calendar month exceed $18,762,500 (twice the 2015 monthly average of $9,381,250), staff must within 5 business days pause discretionary real estate and private equity commitments, report to the board, and restore the reserve from listed securities.
- Orderly sale policy
- Market real estate and private equity toward the adopted 12% and 5% targets on an orderly, competitively bid schedule; no sale below the latest independent appraisal without a recorded board vote; no forced sale to meet a single month of withdrawals; each sale reported with the appraisal date and buyer count.
- What this is not
- Not a forecast of a run, not a claim that the DROP balance is due at once, and not a claim of any power to stop distributions.
Decision bridge: from asset value to spendable cash to claims
- 1. Asset valueTotal assets $3,070,138,554, of which real estate $651,936,804 and private equity $445,014,054 are estimated fair values that cannot be spent until sold.
- 2. Limited cash proxyCash and cash equivalents $77,072,359 plus short-term investments $29,986,714 equals $107,059,073, or 3.49% of total assets and 6.26 months of 2015 average benefit payments.
- 3. Recurring and borrowed claimsBenefit payments averaged $17,100,000 a month in 2015 (about $205,200,000 a year). Notes payable were $235,314,513, which is $128,255,440 more than the proxy can cover. Their terms and any collateral demands are not in the excerpts.
- 4. Contingent DROP claimThe DROP balance of $1,516,615,000 is a member account liability, not a pool of bank deposits sitting in cash, and only retired members can withdraw. It is not all due at once. Even a hypothetical 7.06% withdrawal would equal the whole proxy.
- 5. ActionProtect a reserve of at least $205,200,000, set the trigger above, and sell property and private assets on an orderly schedule rather than at the moment cash runs short.
Audited asset categories: value is not spendable cash
| Category | Audited dollars | Role in this decision |
|---|---|---|
| Real assets | $1,135,348,482 | Asset value, not spendable cash |
| Private equity | $445,014,054 | Asset value, not spendable cash |
| Equity securities | $439,815,460 | Asset value, not spendable cash |
| Alternative investments | $395,025,520 | Asset value, not spendable cash |
| Fixed income securities | $383,057,125 | Asset value, not spendable cash |
| Cash and cash equivalents | $77,072,359 | In cash proxy |
| Short-term investments | $29,986,714 | In cash proxy |
| Forward currency contracts (not charted, net liability) | -$388,840 | Possible settlement need |
| Total investments (excludes cash and cash equivalents) | $2,827,858,515 | Denominator for shares |
| Total assets | $3,070,138,554 | Context |
Concentration against the adopted property and private equity targets
Real estate $651,936,804 and private equity $445,014,054 together are $1,096,950,858, or 38.79% of audited total investments of $2,827,858,515. All real assets are 40.15%. On the audited basis real estate is 23.05% against a 12% target, and private equity 15.74% against a 5% target. Moving to target on this denominator would mean roughly $312,593,782 of real estate and $303,621,128 of private equity changing hands; that is a measure of distance, not a sale order or schedule.
| Class | Audited share | Consultant share (as printed) | Adopted target | Other printed values |
|---|---|---|---|---|
| Real estate | 23.05% | 23.48% | 12.00% | 10.00% and 25.00% |
| Private equity | 15.74% | 15.34% | 5.00% | 4.00% and 15.00% |
The transmittal letter's 23.48% real estate figure matches the consultant presentation, not the audited detail (23.05%). The target table (printed p. 49) prints three percentages without column headings; only the first is confirmed as the target. Private equity on either basis is above 15%, the third printed value, which appears to be an upper bound but is not labeled in the excerpt.
Mechanical DROP withdrawal stress
This is arithmetic, not an estimate of likelihood. It applies a hypothetical fraction to the December 31, 2015 DROP balance and compares the result with the unchanged audited proxy. It does not assume every member can withdraw, that withdrawals arrive at once, or any timing. The cash-flow break-even fraction is 7.06%. For scale only, 2015 DROP distributions were $112,575,000, or 7.90% of the opening balance of $1,424,639,000.
Sourced baseline (unchanged)
Audited cash plus short-term investments, December 31, 2015$107,059,073
DROP balance, December 31, 2015 (table entries x 1,000)$1,516,615,000
Hypothetical withdrawal
At 10% withdrawn, demand would be$151,661,500
Uncovered by the proxy$44,602,427
| Hypothetical fraction withdrawn | Demand | Uncovered by the cash proxy | Proxy covers |
|---|---|---|---|
| 5% | $75,830,750 | $0 | 100.00% of demand |
| 10% | $151,661,500 | $44,602,427 | 70.59% of demand |
| 25% | $379,153,750 | $272,094,677 | 28.24% of demand |
| 50% | $758,307,500 | $651,248,427 | 14.12% of demand |
Uncovered amounts would have to come from selling assets, borrowing, or both, on terms not shown in the excerpts. They are not a forecast of a shortfall.
Why the proxy is not free cash
- It is a December 31, 2015 balance; the exact cash on November 1, 2016 is unknown.
- Monthly benefits of about $17,100,000 are paid from it continuously, so a year of ordinary payments (about $205,200,000) exceeds it by $98,140,927 before any extra withdrawal.
- Notes payable of $235,314,513 are a claim on the same assets; their maturity, covenants and collateral terms are not printed.
- Forward currency contracts are a net liability of $388,840 and could require settlement.
- Distributions already include "monthly installment payments of DROP balances" (printed p. 19), so ordinary DROP outflows are not extra cash.
Two accounting conventions, not reconciled
The audited statements report fair value at December 31, 2015. The consultant presentation lags private investments by one quarter and adjusts for cash flows. Its cash line does not equal audited cash or the audited proxy, and this page never substitutes it for audited cash.
| Line | Audited (fair value, p. 24 and p. 35) | Consultant (p. 63, lagged) | Difference |
|---|---|---|---|
| Cash | $77,072,359 | $82,122,733 | $5,050,374 |
| Cash plus short-term (audited proxy) vs consultant cash | $107,059,073 | $82,122,733 | -$24,936,340 |
| Real estate | $651,936,804 | $706,930,030 | $54,993,226 |
| Private equity | $445,014,054 | $461,964,044 | $16,949,990 |
* Market values and returns for Private Investments and related benchmarks are lagged by one quarter and adjusted for cash flows as discussed above.
Input ledger
As-printed fields keep the source's own units. Every entry in the printed p. 44 DROP table is in thousands and is multiplied by 1,000; for example the printed combined plan balance at December 31, 2015 becomes $1,505,721,000 and the supplemental plan balance becomes $10,894,000. Together they are $1,516,615,000, consistent with the MD&A's rounded "$1.52 billion" (difference -$3,385,000).
| Item | Source | As printed (source units) | Printed unit | Dollars |
|---|---|---|---|---|
| Short-term investments | DP15 p. 24 | $ 29,986,714 | dollars | $29,986,714 |
| Fixed income securities | DP15 p. 24 | 383,057,125 | dollars | $383,057,125 |
| Equity securities | DP15 p. 24 | 439,815,460 | dollars | $439,815,460 |
| Real assets | DP15 p. 24 | 1,135,348,482 | dollars | $1,135,348,482 |
| Private equity | DP15 p. 24 | 445,014,054 | dollars | $445,014,054 |
| Alternative investments | DP15 p. 24 | 395,025,520 | dollars | $395,025,520 |
| Forward currency contracts | DP15 p. 24 | (388,840) | dollars | -$388,840 |
| Total investments | DP15 p. 24 | 2,827,858,515 | dollars | $2,827,858,515 |
| Cash and cash equivalents | DP15 p. 24 | 77,072,359 | dollars | $77,072,359 |
| Total assets | DP15 p. 24 | 3,070,138,554 | dollars | $3,070,138,554 |
| Notes payable | DP15 p. 24 | 235,314,513 | dollars | $235,314,513 |
| Net position held in trust-restricted for pension benefits | DP15 p. 24 | $ 2,699,581,009 | dollars | $2,699,581,009 |
| Real estate | DP15 p. 35 | 651,936,804 | dollars | $651,936,804 |
| Infrastructure | DP15 p. 35 | 197,551,994 | dollars | $197,551,994 |
| Timberland | DP15 p. 35 | 123,592,696 | dollars | $123,592,696 |
| Farmland | DP15 p. 35 | 162,266,988 | dollars | $162,266,988 |
| Private equity | DP15 p. 35 | 445,014,054 | dollars | $445,014,054 |
| Total | DP15 p. 35 | $ 2,827,858,515 | dollars | $2,827,858,515 |
| DROP combined plan: Balance at December 31, 2014 | DP15 p. 44 | $ 1,414,248 | thousands of dollars (x 1,000) | $1,414,248,000 |
| DROP combined plan: Accumulations | DP15 p. 44 | 203,275 | thousands of dollars (x 1,000) | $203,275,000 |
| DROP combined plan: Distributions | DP15 p. 44 | (111,802) | thousands of dollars (x 1,000) | -$111,802,000 |
| DROP combined plan: Balance at December 31, 2015 | DP15 p. 44 | $ 1,505,721 | thousands of dollars (x 1,000) | $1,505,721,000 |
| DROP supplemental plan: Balance at December 31, 2014 | DP15 p. 44 | $ 10,391 | thousands of dollars (x 1,000) | $10,391,000 |
| DROP supplemental plan: Accumulations | DP15 p. 44 | 1,276 | thousands of dollars (x 1,000) | $1,276,000 |
| DROP supplemental plan: Distributions | DP15 p. 44 | (773) | thousands of dollars (x 1,000) | -$773,000 |
| DROP supplemental plan: Balance at December 31, 2015 | DP15 p. 44 | $ 10,894 | thousands of dollars (x 1,000) | $10,894,000 |
| Global Private Equity (consultant) | DP15 p. 63 | 461,964,044 | dollars | $461,964,044 |
| Global Real Estate (consultant) | DP15 p. 63 | 706,930,030 | dollars | $706,930,030 |
| Cash And Equivalents (consultant) | DP15 p. 63 | $ 82,122,733 | dollars | $82,122,733 |
| Average monthly benefit payments, 2015 (rounded in source) | DP15 p. 20 | $17.1 million | millions of dollars (rounded) (x 1,000,000) | $17,100,000 |
| Total DROP account balance, MD&A (rounded in source) | DP15 p. 20 | $1.52 billion | billions of dollars (rounded) (x 1,000,000,000) | $1,520,000,000 |
Source quotations
"Upon retirement with DPFP, the member is able to withdraw amounts from their DROP account along with receiving monthly pension benefits."
"Increased DROP withdrawals are also presumed to be due to anticipation of potential proposed amendments to the DROP program in a future plan amendment."
"Combined Pension Plan ... Balance at December 31, 2015 $ 1,505,721"
Unknowns that this decision does not assume away
- Exact cash on November 1, 2016. The only audited balance is the December 31, 2015 snapshot; no 2016 cash figure appears in the excerpts. (DP15 p. 24)
- Timing and size of DROP withdrawals. MD&A says increased withdrawals are only 'presumed' to reflect anticipation of amendments; no count of eligible retirees, no request pipeline and no timing is given. (DP15 p. 20)
- Who can withdraw. Withdrawal is available 'Upon retirement'; the excerpt does not say how much of the balance belongs to members already retired. (DP15 p. 28)
- Property values on sale (cap rates, parcel income, appraisal haircut). Values are estimated fair values, with declines in 'development stage properties'; no cap rate, parcel income or sale discount is printed. (DP15 p. 4)
- Property and private-asset sale schedule. A 12% real estate target was adopted, but no sale schedule or buyer evidence appears. (DP15 p. 6, p. 49)
- Notes payable terms, maturity and any collateral calls. Notes payable of $235,314,513 are printed without terms; no unconditional credit-line availability is shown. Forward currency contracts are a net liability of $388,840 and could require settlement. (DP15 p. 24)
- Target table column meaning. The excerpt prints three percentages per class without headings; only the first (target) is confirmed by the transmittal letter. (DP15 p. 49, p. 6)
- Legal power to delay or stop DROP distributions in 2016. Nothing in the excerpts grants such a power; this analysis assumes none. (DP15 p. 28, p. 19)
No cap rate, parcel income, appraisal haircut, 2016 cash balance, withdrawal timing, sale schedule, credit-line availability or point forecast of withdrawals is used anywhere on this page.
Sources
- DP15 audited report: Dallas Police and Fire Pension System, 2015 Comprehensive Annual Financial Report, transmittal and auditor's report dated July 21, 2016. Pages cited are printed page numbers.