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Parker to sue pension boards for more information

It’s pensions all the time around here.

Mayor Annise Parker

Mayor Annise Parker said Thursday that her administration is gearing up to sue the city’s pension systems to open their books and preparing a “road show” of pension reforms she will present throughout the area with the idea of getting state legislation to achieve them.

The city wants information on retirees and near-retirees for use in its forecasts of how much it will need to set aside annually to fund employee pensions. This fiscal year the city will spend $165 million of its general fund, and within three years that is projected to balloon by $100 million.

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In particular, the city wants information on beneficiaries of a deferred option retirement program, in which employees eligible for retirement continue working and start an account credited with the amount of pension payouts he or she would have received plus interest. City finance officials believe that some DROP beneficiaries’ pension benefits exceed their salaries through the program. Recent police and municipal hires do not qualify for DROP, but all firefighters still do.

While the city’s human resources department has data on individual salaries and ages, it does not have information on when employees enter DROP, making it difficult to calculate future obligations. Also, since DROP signals an employee is nearing retirement, such information would help the city forecast banked sick and vacation time payouts, which can run into six figures for some retirees.

Because state law governs the pension plans, all reform must go through Austin. Parker shopped pension reform legislation in Austin during the 2011 session, but could not get a single lawmaker to carry a bill.

Parker intends to go to Austin again next year. First, however, she intends to lay out a plan publicly. She said Thursday she will craft the specifics of that plan during the next three months.

Looks like I have a new question to ask State Rep candidates when I start doing those interviews. I can’t quit this stuff. As with the Long-Range Financial Management Task Force, the proposals Mayor Parker makes sound reasonable enough, though again I’d like to hear from those who would be affected by them before I made any decisions. Like it or not, we’re going to be talking about this stuff for awhile.

Along those lines, let me share with you the 2011 Actuarial Valuation Report for the Houston Police Officers Pension System, which was sent to me by Bill King. This was how he laid it out to me in the accompanying email:

1. The Executive summary is a good place to start. It lays out the basics.

2. On that page you will see that the current Unfunded Accrued Actuarial Liability (UAAL) for this plan as of 6/30/2011 was $770MM. The UAAL is, roughly speaking, the amount that the employer would have to contribute to the plan as of the report date pay for the benefits that have been earned through that same date, based on the assumptions used in the calculations. Again, roughly speaking, if the plan had a balance sheet this would the negative net worth of the plan.

3. Note the in “Assets” section of the ES, there are two values for the assets, the actuarial value and the market value. This is because the accounting rules allows retirement plans to defer their investment gains and losses over a 5 year period (kind of the opposite of mark-to-market accounting). Because some of the 2008-2009 losses are still being deferred, the market value of the asset is currently lower than the actuarial value. In my opinion a UAAL based on the market value is the real number. In the case of HPOPS, that difference is $187MM and means the UAAL is really about $958MM.

4. One of the crucial assumptions in this calculation is the rate of return the plan assets will earn in the future. On page 4, the report states that it is using an assumed rate of 8.5%. As nearly as I can determine this is the highest rate used by any plan in the country. BTW, only six plans in Texas use this rate and three of those six are the three City of Houston plans. I did not see a sensitive note indicating the correlation between a change in this assumption and the UAAL, but from looking at other plans that have such a disclosure, it is dramatic. For example, TRS has said that 1% reduction in the rate assumption increases its UAAL by 50%.

5. Table 15 (page 23) is a chart showing the historical funding status of the plan. HPOPS history is fairly typical of other public pensions. For many years, the plans were either fully funded or had small UAALs. However, beginning around 2000, the UAALs began to grow dramatically and the trend has only gotten worse as time goes by. In the 60-70 history of public pensions, there has never been this kind of ever growing deficit.

6. By far, the most important chart is found on Chart 11 (page 15 and reproduced below). The chart shows the actuaries projections for the next decade. This chart assumes that the City’s contribution to the plan will triple in the next ten years from $67MM to $183MM. Even with that enormous increase in the City’s contribution (which will not happen because it cannot afford it), the UAAL still doubles by 2021. And remember, this is assuming that the plan assets earn 8.5% over the next ten years even though the Fed has said it is going to keep rates low through 2014. If the plan misses the 8.5% return, the UAAL would balloon even more.

King says “this is just math”, and I can certainly see what he’s getting at. But I know just barely enough about accounting to know that it isn’t math, not really – it’s assumptions, terminology, and a whole lot of other things at which I am not an expert. So let me invite those of you who know more about accounting than I to comment on King’s analysis.

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9 Comments

  1. joshua bullard says:

    Again,on this issue i would like the record to show that the mayor had alot more courage than i would ever have-if i where the mayor i would not have the courage to approach this issue and would side bar it and sweep it under the rug even though i know its long over due to be addressed.

    good luck mayor with whatever results you achive with this issue. bullard ben joshua

  2. Steven says:

    Limiting the comments to just the police pension system since that was the focus:

    1) Executive Summary, check.

    2) The UAAL is largely the result of the city paying around $50 million a year too little for 10+ years, the bulk of the difference made up by the market returns such monies would have accrued if available to invest.

    3) 2008/2009 were the rare years when the world markets virtually collapsed, even now market returns are averaging out much higher to restore funding levels which expect good and bad years over the 30 year schedule the plan currently uses.

    4) Their pension averaged 17.4% returns for the last two years, their long term, 30 year average above the 8.5% Mr. King finds fault with.

    5) The city decided to give a deferred pension benefit circa Mayor Lanier in the mid 1990′s instead of raises. Their last across the board raise of note was in the 80′s by this point, the city figuring it would keep employees longer as a result. This worked but it pushed the costs into the future, employees hired since 2004 losing many benefits such as this one as well as getting a smaller percentage and having to stay until they are at least 55 years old regardless of how old they were when they started.

    6) The city has to contribute $10 million more each year until the system is restored. Naturally, it should be based on actuarial data rather than an agreement by their board but this is the saddest point of all; the employees who gave up the most and worked with the city during tough economic times are now being punished for it, the false implication that it was greed on their part that caused the underfunding problem just rubbing salt in the wound.

    Currently, the city still funds a lot of frills and refuses to prioritize spending. While any group of folks could sit down and debate what constitutes a “frill”, most would accept the need to pay for promised benefits and contracts. There is a lot of talk that this whole thing is about scaring off an extra 500 officers into early retirement, the resulting savings enough to cover more pet projects and keep things going. I don’t know about that but lets place the blame on those most deserving and act accordingly.

    Each Mayor since Lanier was warned about the consequences of these acts yet none saw fit to resist. The same holds true for each city council member, only a couple voting against these matters such as Bruce Tatro. The state pension overseers warned Brown and others too but it did not matter. For the record, employee contributions, now up to 10.25% unlike HFD and municipal workers, and pension returns account for most of the returns, making it a wonder that it is financed to the 80+ percentage level.

    I understand that pushing veteran employees, the ones that cost so much more, in favor of younger, less expensive officers might make financial sense (they not only get much lower pension benefits but also have to stay longer and get many fewer days off thanks to a recent contract). I also appreciate that this is how the private sector did so many employees wrong in the past. What seems wildly inappropriate is that those that gave the most to help the city are being so harshly attacked as though it were their fault.

  3. City Resident says:

    None of these pensions are in danger of failing right now but something needs to be done. I saw the numbers presented last year and both the fire & police pensions are mostly self sustaining. The public safety workers give twice as much as the municipal workers do and that plus returns bring in 75 to 80% of the money needed to pay pensions. Changes in 2013 are not going to solve this without the city cutting other spending, maybe making employees pay more for covering family members medical coverage would help?

  4. Bill King says:

    City Resident,

    I don’t know what numbers you saw on the fire and police plans, but neither is close to being “self sustaining.” The police plan is in worse shape. The actuaries predict that if the City triples its contribution over the next ten years and the plan earns 8.5% on its assets, the unfunded liability will still double by 2021. The fire plan is in better shape by will still take a contribution by the City of $38,000 per fire fighter by 2021 to support the plan.

  5. Joseph Houston says:

    If the city refinances much of its current debt with these historic low rates, it will save enough to cover both pension obligations and health care costs for years. If the public can get the city leaders to stop spending so freely on other things, it can even pay down much of the debts related to pensions and capital works, an austerity budget for ten years making the city finances superior to any others in the state.

    By assigning some of the total employee costs to various enterprise funds as other communities do, this process can be accelerated, the city further able to complete this financial makeover by working in conjunction with the county and state on projects such as the crime lab. Does it mean cutting some popular programs, yes, but in using a life cycle costing approach and fiscal restraint, the growth of the city and strength of its finances would be assured.

    Cutting medical support to employees family is not a good idea unless you want to put many of them out of the system but the idea might be fairer to those who are single that currently subsidize those with large families.

    Bilking, as the other guy said, the police pension is only 80% funded because the city made a conscious choice to underfund it. Its costs will go up because their deferred retirement program is finally accommodating their hiring spree of the late 1980′s to mid 1990′s. The good news is that if their market returns hold true for several more years, all amounts in excess of the maximum 7% interest they earn will go to boost the bottom line of the pension itself. It might not happen every year but historically it happens more often than not and by a fair amount, many millions of dollars placed in their system without an extra penny from taxes.

  6. Houston citizen says:

    The reasons the pension systems are set up the way they are are to protect the thousands of honorable people who serve this city and make it what it is. The city itself agreed to these circumstances when the systems were so bad the city wanted to wash their hands of them, much like they want to push out the jails to the county now. When the hard working people of Houston was able to turn the systems around, now the city wants at them. These pension systems are this way because historically, the city does not take the responsibility to sustain them and the state makes it a law that they will. There are thousands of people who have worked many more years than this mayor will be in office to secure a future for themselves. This used to be supported by even the private sector, but it is sad that it is not. While the Mayor gives Kroger sales tax breaks ( http://blog.chron.com/houstonpolitics/2011/10/2-5-million-tax-break-for-kroger/#comments ) she wants to fleece the people who make this city work. Every time the city gives a sales tax break, it’s not like the customers of Houston don’t pay those sales taxes, the business just keeps it. Kroger and Wal Mart are two that have received them and I personally don’t believe that two companies that make more than the general budget of Houston needs them. Those proposed “created jobs” are not created by Kroger, they are created by the taxpayer. Give me $2.5 million dollars and I can create 200 jobs also. Kroger and Wal Mart are not that valuable, Houstonians are that valuable.

  7. Jules says:

    Hlouston Citizen, I totally agree. And HEB got one too – just for “contemplating” closing the Gulfgate HEB.

  8. Joseph Houston says:

    Target also received such a break as do some of the upscale neighborhoods in the form of Tax Increment Reinvestment Zones (TIRZ). What is not spoken of very much is that these handouts to retail outlets DO NOT create any net jobs, all it does is shuffle existing jobs around the city. By opening a Krogers north of Washington Avenue, it merely draws existing sales away from the Montrose location and the store off of 11th. The accounting process justifying these giveaways requires the use of blinders, the kind of accounting no one would use on a successful business.

    Cut loose such deals, TIRZs, and any number of frill spending to free up the needed money. Then, reissue bond debt at the current historically low rates available for more funds, sitting down with employees to discuss the matter in a holistic sense rather than just tell the employees they get too much.

    I’m curious is Kuff is going at ask Ms. Parker about her statement anytime soon though: “Parker intends to go to Austin again next year. First, however, she intends to lay out a plan publicly. She said Thursday she will craft the specifics of that plan during the next three months.” The three months is up next week and she is legally prohibited from talking smack about the pensions per their agreement last year to defer even more pension contributions. The budget workshops should be going full steam ahead on figuring what to do but let us see what she has to say about her promises now.

  9. [...] can see a copy of the lawsuit here. As the story notes, Mayor Parker spoke of this back in February. The story at the time said “the city wants information on beneficiaries of a deferred option [...]

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