It’s pensions all the time around here.
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.
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.