Houston pension bill moves ahead, despite flaws

Jon Cassidy
Posted: Mar 21, 2017 5:17 PM
Houston pension bill moves ahead, despite flaws
Photo by Traci Patterson/Creative Commons

Houston Mayor Sylvester Turner has proposed a pension reform plan with some redeeming elements.

Houston Mayor Sylvester Turner went to Austin Monday to convince lawmakers that he has hit upon a solution to Houston’s $8.1 billion pension problem.

His answer is math — really complicated but ultimately pointless math.

Last September, Turner promised a hard cap on the city’s pension liability and a fixed 30-year repayment plan. Instead, he has delivered a bill that would allow debt to continue to accrue and repayment to be put off indefinitely.

The city is as exposed to bankruptcy as ever, as Turner’s plan primarily deals with what checks get written when, not with the massive debt that continues to mount.

State Sen. Joan Huffman filed a bill last week containing Turner’s plan, with one addition opposed by both Turner and the Houston unions: a requirement that the city get voter approval before issuing $1 billion in pension obligation bonds.

The bill cleared a Senate committee Monday on a 7-1 vote, as did a stand-alone bill by state Sen. Paul Bettencourt that would also require public approval for pension bonds. In the House, the Pensions Committee cancelled a hearing.

To put the city’s pension debt into household terms, Houston has been refinancing its teaser-rate mortgage every year or two, getting further and further underwater.

Turner promised an end to that with the equivalent of a fixed 30-year mortgage. He delivered, but there’s a catch: Houston can take out second mortgages, third mortgages, and so on in perpetuity, each with a new 30-year repayment period.

And Turner would like to kick off this journey to solvency by putting his next house payment of $134 million on the credit card, so to speak.

The upside of the plan is that Turner has won some concessions. The police and municipal employees unions are willing to trade some of their IOUs (payable by taxpayers) for cash up front at a steep discount. The firefighters union has decided to oppose the plan, but Huffman said Monday that they “will have to be brought along kicking and screaming.”

The city would issue bonds to infuse the funds with $1 billion in cash, while the unions would give up $2.5 billion in promised benefits.

The firefighters have an incredibly sweet deal already, no requirement to negotiate with the city, and tremendous political power with Democrats and Republicans. If Houston is going to avoid bankrupting itself, the firefighters’ grip on power will have to be loosened, so a fractured coalition here counts as a win for taxpayers, regardless of what happens to the bill.

The firefighters have opposed reform at every turn, refusing even to open their books to lawmakers or city officials. Their arguments Monday amounted to “a promise is a promise” and “here are some widows.”

Actually, the voters of Houston have promised the union little. The state began dictating pension terms to Houston in 1947.

On the rare occasion that voters have been consulted, as they were in 2004, they declined to guarantee public pensions while supporting the idea of collective bargaining. The fire union has found it much more profitable to manipulate state lawmakers into giving them what they want than to negotiate with the city.

While Turner’s bill achieves some concessions, it doesn’t deliver the promised features.

“We cap the city’s exposure,” Turner told the committee. “The bill says that the parties are obligated to come back to the table and they shall adjust their benefits to stay within the corridor,” which is a separate cap limiting the city’s pension payments to 37 percent of payroll.

But the cap can be punctured, if the city and the pension boards want to resume kicking the can down the road, through a new concept called a “liability loss layer.”

Skipping the details of how it would be activated, the concept would allow for losses from investment underperformance to be amortized over new 30-year periods. This is important, as the unfunded liability has been created in large part by poor planning.

When the pension funds pretend they’ll get 8.2 percent returns, and their actual returns last year were negative 1.5 percent, a brand-new billion-dollar liability shows up on the books.

Even though the pension funds will use a 7 percent projected rate of return going forward, massive new debts will show up every year that those returns fail to materialize.

Turner’s plan calls for the workers to make up some of those shortfalls through higher payroll contribution rates, but it doesn’t enforce it, and it leaves the escape valve of the “liability loss layer.”

His plan shifts some exposure to retirees through mandatory cuts in cost-of-living allowances when the market does poorly.

Bill King, Turner’s Republican rival in the last election, noted on his blog that the debt far outweighs the workers’ ability to cover losses through their paychecks:

“Because the liability is so large relative to the payroll (total pension liability is approximately 15 times payroll), it will take large increases in employee contributions to make up even modest misses on the investment performance. The employee contribution levels in the new agreement are about 10 percent. So, a consistent 1 percent miss on the investment goal of 7 percent would eventually require the employee contribution to go to 18 percent. At contributions anywhere in that kind of range, the City will not be able to recruit or retain employees.”

Turner said Monday that if he’s not able to use a pension bond to cover a $134 million pension contribution that’s due, then “a lot of people will not be working.”

Of course, that’s what got Houston into its present mess: the unwillingness of its leaders to pay the pension contributions due every year. For 17 years, they’ve been financing it through debt.

Houston isn’t even paying all of the interest due on its pension debt, much less paying down the principal. Turner’s plan would continue that “negative amortization” by another 8 to 10 years, by King’s estimate, before the payments began to escalate sharply.

James Quintero of the Texas Public Policy Foundation summed up the strengths and shortcomings of the plan.

He praised the “adjustments to the DROP program,” notorious for its million-dollar payouts, as well as the fixed 30-year schedule, and Huffman’s inclusion of a provision to allow voters to decide on the pension bonds.

He pointed out that the plan lacks a 401k-like “defined contribution” plan for new hires. That’s one of the easy first steps that struggling localities elsewhere have taken, but which Turner rejects for ideological reasons.

Houston should also have local control of its own money, he said, also arguing that the 7 percent discount rate was unrealistic.

King and most local conservatives have also argued for a defined contribution plan.

A few experts have noticed that Turner’s plan, if tweaked, could be used to impose a defined contribution plan through the back door. That is, in setting a defined maximum the city will pay each year, the city could be defining its contribution. But the liability loss layers would have to be stripped from the plan.

So long as the taxpayers are responsible for covering debts worth more than everything the city owns, there is no limit to the danger.

Jon Cassidy reports for the Texas Bureau of Watchdog.org Contact him at jon@watchdog.org and follow him on Twitter @jpcassidy000.