Kelly Gottschalk was a month into her job as director of the Dallas police and fire pension fund when the latest numbers started arriving. She knew there’d be problems. But things were heading from bad to worse.

It came just as her staff and consultants were finalizing reports on the $3 billion fund’s financial health. Now, an audit and appraisals of one of its biggest real estate investments called for a major write-down. Another $103 million was about to disappear from the fund’s books.

The bad news kept coming: $47 million lost to a pair of oil and gas investments. Millions more lost on a stake in Yellow Cab, hurt by competition from Uber.

These are dismal times for the fund that public safety workers depend on for retirement. Its former administrator, Richard Tettamant, resigned under pressure last year as it became clear that bad investment decisions, unrealistic financial assumptions and overly generous benefits had jeopardized the fund’s health.

Last month, an estimate by one of its consultants forecast that without big changes, it will run out of money in 25 years.

Avoiding that will require hundreds of millions of dollars, though pension officials aren’t yet certain of the amount. The other question is, from whose pocket? It will probably mean increasing how much public safety workers contribute to the fund. It may mean cutting their benefits.

Taxpayers and political leaders will have to examine their obligation, legal and practical, to help.

“We’re going to look at everything,” said Gottschalk, who began in April. “We do know that we and the city both have the same interests in [that] they want the best police and fire they can hire and keep.”

For that, the city needs a strong pension.

“So we need to work towards that,” she said. “Whether that looks like money coming out of the employees, or out of the city, or a reduced benefit, we don’t know at this point. But there aren’t a whole lot of options.”

A recent report by Moody’s Weekly Credit Outlook said the pension troubles threaten the city’s credit rating. A lower rating would mean higher borrowing costs, which translates to less money for things like streets.

But city leaders and taxpayers, who supply the pension fund with over $100 million per year, will be reluctant to provide more. That would be true even if the fund’s officials hadn’t squandered its health on risky investments that facilitated their travel to posh destinations across the globe.

Asked if the city should bail out the fund, Mayor Mike Rawlings had this to say: “No.”

Rawlings has long decried the fund’s investment decisions. In 2013, he shook up the fund’s board by replacing three of the four City Council members on it. The 12-member board also includes police officers, firefighters and retirees.

Rawlings compares the city, in this situation, to a bank. “The bank’s going to say if a company has these troubles, we [already] gave you money, you know?”

He said the fund’s former leaders deceived the rank and file.

“These police and fire put their trust in the management,” Rawlings said. “They were not told the truth, and we’ve got to start telling them the truth and work our way out of this.”

Overvaluing real estate is one way fund officials obscured reality. Another blind spot came from rosy assumptions on how their investments would turn out.

The fund has long assumed it would make 8.5 percent annually on its money. For decades, that was realistic. But the economic climate of the past decade has made that unsustainable. While other funds downgraded assumptions, Dallas fund officials tried to beat the market.

They plunged into alternative investments, such as speculative real estate ventures, that didn’t have clear market values like stocks and bonds. Luxury real estate particularly attracted them — they traveled at least 45 times to the Napa area of California to oversee properties.

“Some people call us contrarian; I like to call ourselves innovative,” Tettamant told people. “We try to look at things differently than the rest of the market. If you follow the herd, you’re going to get market returns.”

Instead, the fund got worse than market returns. Officials were taken advantage of by high-priced consultants and speculators with fancy sales pitches. In one sad example, the fund sank $34 million into a tract of Arizona desert that later sold for $7.5 million.

Last year, when board members finally sensed disaster around the corner, they ousted Tettamant. Since then, several key board members have left. The board hired Gottschalk, former deputy city manager of Tucson, as director.

Last month, board members voted to face reality. They lowered the fund’s assumed rate of return to 7.25 percent. The change may seem small, but over decades, it amounts to about $600 million the board now admits probably won’t be there for retirements.

Making up the difference will require tough decisions, not to mention political battles.

A legal fight could also come. In June, the City Council voted to hire a law firm “to provide expert advice regarding complex issues relating to the Dallas Police and Fire Pension System.”

The fund has enjoyed significant autonomy from the city because it is organized under state law. Last year, for example, pension officials withheld records the city demanded for an audit. That fight almost ended up in court.

“The police and fire guys wanted independence from the city, and they’ve got to figure out their own medicine,” said City Council member Lee Kleinman, whom Rawlings nominated to the pension fund’s board in 2013.

A decade ago, Dallas voters approved a rescue of the city’s retirement plan for nonuniformed employees after its investments faltered. The city borrowed money to cover the retirement plan’s $535 million shortfall.

A bailout for the police and fire fund is “in the realm of things that can be reviewed,” Kleinman said. But he doubts he would support it.

“The question is, do you want to hand more money to the same people that lost all the money in the first place?” he said. “Of course, it’s a different board, it’s a different administrator, and it’s a different group. But still.”

At last month’s meeting, the board created a committee to study the options.

“Nothing is set in stone, including the negotiations with the city,” said firefighter Sam Friar, the board’s new chairman. “But there are some difficult days ahead, I know that.”

Friar says he has great confidence in Gottschalk and other recent hires. The board is recruiting a chief investment officer, a newly created position.

“At least we know where we are,” he said. “Now it’s just a matter of getting to where we need to be. We still have time to fix this thing, and right now the benefits are still safe.”

http://www.dallasnews.com/news/metro/20150731-dallas-police-and-fire-pension-fund-confronts-dismal-outlook.ece