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On targeting public pension plans

I have three things to say about this.

Texas could be gearing up for its own Wisconsin-style grudge match over public employee benefits.

A group of high-powered Houston business leaders is starting a statewide campaign to overhaul retirement for future teachers, firefighters, police officers, judges and other state and local government workers.

“I think the state needs to get the hell out of this (pension) business completely,” said lawyer Bill King, who is forming Texans for Public Pension Reform with others from the Greater Houston Partnership, an über-chamber of commerce with business members representing $1.5 trillion in assets.

Taxpayers bear too much risk on behalf of public employees by providing them a guaranteed retirement that most private sector workers don’t get, King said.

But advocates of the public pension system say there are ways to eliminate or reduce risk without doing away with the program.

“They don’t have to destroy a system that works,” said Keith Brainard, research director of the National Association of State Retirement Administrators.

He said government pensions provide retirement security for millions of Texans in a cost-effective manner for taxpayers. Research by the Center for Retirement Research at Boston College shows that professionally managed pension funds produce better investment returns than 401(k)s and cost less to administer.

King said the campaign is in its infancy, and its specific goals are still being developed. It’s not clear how the campaign will get involved in next year’s elections or the 2013 legislative session, but King said he is confident the campaign will soon make pensions an issue for lawmakers.

King said he would support a constitutional amendment eliminating public pensions in the state and moving all government employees to retirement accounts akin to 401(k)s. Legislators would have to approve such an amendment on the ballot when they convene in 2013.

[…]

King, the son of a union pipefitter, said he was disappointed with the anti-worker tenor of the Wisconsin battle over collective bargaining rights. This campaign, he added, is not intended to bully public employees.

Well, that’s nice to hear, and I don’t have any particular reason to doubt King’s sincerity on this, but let’s be honest: It’s highly likely that if this campaign gains any traction, it will pick up support from people who will be happy to demonize and bully public employees. To think that won’t happen is naive. It’s also the case that no matter how good King believes his own intentions are, once the employees whose pensions are threatened by this become engaged, they’re likely to play rough, too. It will be easy to blame them for any shift in rhetoric that King’s campaign will feel the need to make down the line.

Both the Employee Retirement System of Texas and the Teacher Retirement System of Texas have more than 80 cents for every dollar needed to pay their long-term obligations, a level considered to be a benchmark of a strong fund. The state funds also have tight restrictions on contributions and benefits.

There are about 1,800 public retirement systems in Texas, the vast majority of which are small cities and counties that pool their resources for investment purposes. The big cities, however, have mostly set up shop on their own and have separate plans for police, firefighters and other municipal workers.

Given the large number of plans in Texas, Brainard said, the state “has been striking in the relative absence of abuse and pension problems.”

Where there have been problems, Brainard said, they have been in the big-city pensions. Those plans have fewer constraints on increasing benefits than do the state systems.

The sentiment that pensions are unsustainable gained traction across the country after the 2008 financial market collapse sank the value of funds everywhere. State and local governments failed to cover $660 billion of their $2.94 trillion in pension liabilities last year, according to the Pew Center on the States.

There’s nothing in this story to indicate how big a problem King is talking about. We know Houston has some pension issues, and the story gets into that, but its problems mostly stem from a change to pension benefits that was made a few years ago. If the state or other cities have similar issues, you wouldn’t know it from this story. How much money are we talking about, and how much of it is attributable to the economic downturn? If you’re going to claim there’s a crisis, then show me some numbers.

By the way, on the matter of Houston’s pension problems, one of the issues the city faces is that its options for taking action to deal with it are constrained by state laws. If King and the Greater Houston Partnership have done anything to help persuade the Legislature to give Houston more tools for taking care of this, I am not aware of it and the story does not discuss it.

The problem is that states can’t save money anytime soon by doing away with pensions.

In fact, it costs more in the midterm because taxpayers must contribute more to cover the benefits accrued by retirees and current workers because new workers would no longer be chipping in to the pension, [Stephen Fehr, a researcher with the Pew Center on the States] said.

When a Texas Senate committee looked in 2008 at a similar pension conversion, the committee found no compelling reason to do so.

The state’s Pension Review Board at the time estimated the combined contribution from the state and employees to the Employees Retirement System of Texas would have to rise from around 17 percent of payroll to as much as 30 percent if the pension were closed to new people.

In 30 years, the contribution rate would climb beyond 80 percent .

Nevertheless, King argues that finally wiping clean the public pension liabilities is worth the higher costs now.

“It will require sacrifices in city services and higher taxes than would otherwise be necessary,” King wrote. “But at least the number will be finite, unlike in our current predicament.”

Again, if you believe in this environment that there would be any kind of tax increase to help cover the cost of shifting to a 401(k) plan, you are naive in the extreme. The cost would be covered by general revenue, which would either mean further cuts to things like public education, or more budgetary flimflam like what we saw this session with deliberately underfunding Medicaid. That’s not acceptable, especially for a problem whose scope is not clear, but it’s what we’ll get for as long as we have a Lege that resembles the current one. When we get these mostly Republican-created problems that are affecting us right now under control – that is to say, when we get a different Legislature, one that really is fiscally responsible – then maybe we can talk about this. Texans for Public Pension Reform, you let me know when you’re willing to help with that effort. EoW has more.

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12 Comments

  1. landslide says:

    Keep in mind that Houston is one of the only cities in Texas that retained the power to reduce future pension benefits by approving an opt-out provision in a May 2004 election. As you may recall, the public pension systems, with help from the Governor’s office, got a constitutional amendment on the ballot that passed in September 2003 (along with “tort reform”) never to allow public pensions to reduce future benefits. City lobbyists under Mayor Brown reached an agreement with proponents of the bill to allow cities to opt out if approved by voters the following May. Mayor White put it on the ballot and the opt-out passed overwhelmingly.

    http://www.chron.com/news/houston-texas/article/Mayor-wants-election-to-opt-out-of-pension-plan-1983841.php

  2. anonymous says:

    Thank you for your comments on this article, Kuff. I’m a public employee (State), and our retirement fund is carefully managed and has strict rules about what goes in and what comes out so that it remains that way.

  3. John says:

    Actually The Economist had a piece on July 7th about this very issue (please check it out on their website). It lays the numbers out and discusses the problems. They show when the pensions will run out of money and various US cities will have to fund everything since nothing will be left in the accounts. Their chart also assumes the fantasy 8% yearly returns which none of the idiots running these pensions can do

    NYC- 2021
    Chicago- 2019
    Boston- 2019
    San Francisco- 2032
    Houston- 2027

    So for figuring out the dollar issue. Just look at the pensions outlays for this year and increase it with CPI plus a few % points. Then those will be the dollar amounts cities will start paying when the pensions are kaput

  4. Bill King says:

    Kuff,

    With respect to your post re the story in the Austin American Statesman, we provided them quite a bit of additional information, but they obviously have space limitations. Here is some additional information about the public pensions in the state which you and your readers may find of interest.

    It is important to remember that the pension plans vary dramatically, both in the benefit structure and their funding status. It is impossible generalize about all plans. A good primer on Texas’ state and local pension plans can be found at http://www.prb.state.tx.us/files/reports/2011primer.pdf.

    Our fundamental concern is that a growing number of these plans are being systematically underfunded. This report estimated that the unfunded liability (roughly speaking the amount it would take to pay off the benefits already earned) for all local and state pensions is $42 billion. (You have to go through and add it up as they do not sum the tables.) However, there is a quirky accounting rule that applies to pension plans that allows them to “smooth” investment gains and losses over a 5-year period. As a result all of the plans have investment losses from 2008-2009 that have been “deferred.” If you use the fair market value of the assets rather than their actuarial value, the unfunded liability is $68 billion. Also, some of the assumptions used to estimate the liability are questionable. For example the Houston plans assume an 8% investment rate indefinitely. So the “real” liability could be significantly higher.

    The fundamental dynamic that we see often repeated is that politicians are anxious to curry favor with public employees by granting them benefits without going back to taxpayers and asking them to pay for them. This is a bad deal for future taxpayers and public employees. Even with modest benefits, the plans can become financial nightmares if they are underfunded and the investments underperform, which, of course is exactly what has occurred in the last several years. For example, in 2020, the Houston pension plans contributions will be equal to 50% of all the property taxes collected by the City!

    There is a general belief that these plans have been chronically underfunded for years and that this problem has been decades in the making. Not so, however. Most of these plans were overfunded (i.e. had more assets than needed to pay the benefits accrued) as late as 2000.

    At the end of the day this is an issue of generational responsibility and morality. We, as a generation, have accepted the services of these employees but decided to have our child and grandchildren pay part of that cost. That is not a legacy that I want to leave my children and grandchildren.

    The good news is that there are solutions. Private industry went through this process in the last several decades and there are many models we can use. The solutions are not complex, but they are hard.

  5. […] the Kuff looks at a movement to end pensions for public […]

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  9. ac says:

    Or does King represent Investment companies that would love to have all the money in these funds transferred over to them?

  10. Paula Garrett says:

    I think King represents a group looking to line his own pockets with our retirement funds!!!

  11. Joseph Houston says:

    I’ve looked into the HPOPS pension (Houston Police) at length and in great detail that partially forms the basis for Mr. King’s arguments. It is currently about 80% funded and if you look at the history of the city, it was a political choice by the mayors and city councils to underfund this pension by tens of millions of dollars every year over the past 10+ years. The officers pay in as required and even took massive cuts in benefits when blackmailed by then Mayor White in 2004 yet there is still talk that they are getting “gold plated pensions” while “feeding at the public trough”.

    HPD gets a smaller pension benefit than any of their peers in major cities but pay more while also paying more for lower medical coverage (last year’s major increase in medical costs to retirees was a shocker). Under the 2004 scheme, officers pay in over 10% of their “total direct pay”, get less than 50% benefit (not including overtime by the way), cannot retire until they are 55 years old, and lost DROP. Their current pay is substantially less than that of other major Texas cities (and a great deal less than that of other cities across the country) to begin with so those suggesting the officers sock away more money are being unrealistic.

    As far as claims that our pension is run by idiots because of a “fantasy” 8% return expectation, a quick look at the returns over the last 25 years show the rates of return have historically been higher, the last two years averaging almost 17.5% each year, and the five year average (which includes the massive hit everyone took for two years) still pans out to about 7%. Given a 30 time horizon, HPOPS is much better off than many others that take a short term view but supporters of King’s crusade to become mayor in the future on the backs of employees should be looked at in depth.

    By all means, let new employees know ahead of time that they are screwed, not because the pension system made poor investments or because employees are greedy, but because the mayors and councils have consciously chosen to underfund and push these debts off to the future. Officers agreed to huge cuts years ahead of this discussion (in 2004 when it could make a big difference, not post 2011 when the biggest damage was done) and now you tell them, it wasn’t enough because the people the electorate continued to vote in office slide out of sight. Morale is already at an all time low and hiring quality people has been questionable but by all means campaign on this course and see where it ultimately leads you. 🙁

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