The Dallas Police and Fire Pension System is finally free from one major piece of its costly plunge into luxury real estate.
Executive Director Kelly Gottschalk said the system recently sold 3,100 acres that includes the historic Aetna Springs Resort in Pope Valley, Calif., to Alchemy Resorts for $22 million.
On paper, the sale — a year and a half in the making — is a financial disaster for the retirement fund. Gottschalk said the system has spent nearly $111 million on the property, which it purchased in 2006.
But the sale means the troubled system will now have some cash to spend on safer bets, she said.
"It's the focus of the board, obviously — and it's been our focus since I got here — to get out of these investments that are really dragging the portfolio down," she said.
The troubled Napa investment was one of many that helped put the fund on a path to insolvency before an overhaul in 2017.
In the 2000s, the fund's former leaders, chasing big returns, sank hundreds of millions of dollars into unusual alternative investments. System officials overvalued many of the properties for years. And they expressed overconfidence: In 2012, the system's comprehensive annual financial report declared in its introduction that the fund's "investment strategy has proved successful."
It hadn't. After the pension system assigned more realistic valuations to its portfolio, the returns of the past appeared more dismal. And paired with the lucrative benefits the system paid out to police and firefighters over the years — the money was doled out under the pretense of investment success — the system's future looked bleak. By late 2016, the fund was projected to become insolvent within a decade.
Gottschalk, who took the top job in 2015, said the system's "portfolio, as a whole, was very strange for a pension system."
The Aetna Springs resort was among the properties that was emblematic of the fund's unusual decisions before and after the real-estate market tanked in 2008. The system's former leaders, who had gone on many lavish "due diligence" trips across the world, visited Napa County regularly and often stayed in luxury hotels.
The system had banked on redevelopment plans, including a resort with dozens of rooms on the site, to pay off in the long run.
Gottschalk said that she also traveled to see the property and that it was "beautiful," albeit remote. Aetna Springs is far from any amenities and about 35 miles from the city of Napa.
The golf course there was a money loser for the fund, Gottschalk said. And she said that building a resort on the property would have been difficult because of the place's historic nature.
"That looked like it would cost a lot of money," she said.
City Council member Lee Kleinman, who served on the pension fund board from 2013 to 2016 as the financial pressures became clear, said Aetna Springs "was clearly the highlight of the inappropriate purchases."
"Or maybe the low-light of the inappropriate purchases," he said. "They had no business being in that."
Sam Friar, who joined the board in 2011, said the property was "one of those deals that should not have happened in the first place."
"It was a bad decision to buy the thing to begin with," he said.
Gottschalk said the property did get interest: The system received eight written offers. An offer from Alchemy Resorts was much higher than the others, she said. And the final sales price was more than the $18 million value at which the system had written the property down.
The sale is part of the system's efforts to get out of the legacy investments of the past, which have hurt its portfolio.
The pension system isn't completely out of Napa County. The system is still trying to sell its Iron Corral vineyard, which Gottschalk said "is actually a profitable property."
And other woeful investments — raw land outside Boise, Idaho, for example — remain in the portfolio. The board has sued some former advisers and its former attorney over some of the costly decisions made by the past administration.
Those decisions led the Legislature in 2017 to overhaul the pension system after brokering a deal among city officials, police and firefighters and retirees. The result is reduced benefits, higher contributions from the city and public safety workers, and a board loaded with investment professionals rather than a majority of police and firefighters.
Current board members have expressed bafflement at past boards' decisions. Friar, a retired firefighter, said he has been impressed by his new colleagues on the board and doesn't believe such missteps will happen again. He said the Napa County property sale ultimately means the system has "to eat a little crow, I guess."
"It's one of those lessons learned — one of those mistakes that nobody should ever make," Friar said. "But we did, and we'll just have to live with it."
