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We must destroy the pensions in order to save them

There’s so much wrong with this I almost don’t know where to begin.

Houston is the Titanic – it certainly looks impressive, but icebergs lie ahead. That’s the image that mayoral candidate Ben Hall drew when he talked to the Houston Chronicle editorial board last week.

No debate here. Like an iceberg on the horizon, public pensions threaten the budget of our booming city. That danger grows because we’re sailing blind – firefighters have refused to open their books to City Hall. How much will taxpayers owe? We don’t know.

It may seem like an issue for accountants, but pension problems have repercussions beyond balanced budgets. Just look at Oakland, Calif. The Bright Side of the Bay spends 75 percent of its budget on police and firefighter compensation. Yet it has cut 200 police officers since 2008, and crime is skyrocketing. The culprit? Growing pensions. In its last budget negotiations, Oakland allocated more funds for veteran officer benefits instead of new hires.

Bigger pensions, fewer officers, more crime.

The lesson for Houston is that policy changes won’t do much to stop criminals if ballooning pension obligations prevent us from hiring brave souls to stand on that thin blue line. Hall brings this issue to the forefront in his five-point plan on crime, which includes stabilizing pension challenges.

Well, at least this answers my question about what pensions have to do with crimefighting. Too bad it’s based on a large pile of unfounded assumptions.

- There’s no clear relationship between the number of officers on the street and levels of reported crime. This holds true all over the world, and it is especially true for homicide rates. The Wikipedia entry for crime in Oakland, which notes that Oakland has only 18 officers per 10,000 residents, includes this sentence at the end: “As of 2010, the city of New Orleans, whose murder rate outpaces that of Oakland, had 48 officers for every 10,000 people.” Oakland’s homicide rate was 26 per 100,000 residents in 2011. For New Orleans in 2010, it was 50 per 100,000. That’s with nearly three times as many police officers per 10,000 residents. By the way, Houston’s homicide rate for 2012, based on the raw numbers, was 9.6 per 100,000 residents.

- Oakland’s pension problems have been there since the very beginning of its pension program over 60 years ago.

By all indications, the city never had a plan to pay for the Police and Fire Retirement System when it was started in 1951.

It had a $38 million hole from the beginning, said Bob Muszar, a retired Oakland police captain and president of the Retired Oakland Police Officers Association. Muszar has spent years researching the pension. He said that by the 1970s, the pension’s shortfall had grown to over $200 million.

So the city, police and firefighters agreed to close the pension to newcomers, which voters approved.

In 1981, the City Council approved a parcel tax, which costs taxpayers about $447 a year on a $283,900 home, the city’s median value.

But that wasn’t enough. In 1985, the city issued $222 million in bonds to cover pension costs. In the following years, the city refinanced those bonds, issued hundreds of millions in new bonds, and refinanced those bonds.

Then in 1998, the city once again refinanced bonds and also entered into a complicated interest-rate swap with Goldman Sachs that now costs the city $4 million a year and expires in 2021. “The more creative they got, it’s almost like they started digging a hole and they got deeper and deeper,” said Muszar, who feels retirees have been scapegoated for the city’s mismanagement of the pension.

Sure is a good thing that kind of scapegoating could never happen here, isn’t it?

- Oh and by the way, while it is true that crime is up in Oakland, it is also up in many cities neighboring Oakland. I’ll leave it to you to calculate the officers per capita and pension situations for each. Point is, there generally isn’t a simple explanation for these things. The causes are complex, interrelated, and sometimes just plain random.

Back to the editorial:

In his meeting last week, Hall said that this means transitioning from pensions to a defined contribution system. Under Mayor Hall, future police, firefighters and municipal workers would have something like a 401(k) – just like everyone else.

“We are going to have to redefine the pension benefits as a defined contribution plan,” Hall said. “No question.”

This change would be admittedly difficult to pull off. Pensions are controlled by the state government in Austin, and some of Houston’s part-time legislators have full-time paychecks from those pensions. But right now the point isn’t accomplishment, it is debate.

So far, Mayor Annise Parker has led the charge against out-of-control pensions. She’s implemented reforms to lower the city’s burden and worked to open pension books so the city knows what it’s paying for. Parker has said she thinks the city can have pension plans that work and opposes switching to defined contribution plans. That is where she, and the debate, stop.

Hall finally lends a voice to those who want to nix future pensions entirely.

Thank God, Bill King finally has a Mayoral candidate he can support. I just wonder if this is what the firefighters thought they were getting when they endorsed Hall. But like Mayor Parker, this is where I get off. Because let’s be clear on something, pension plans generate vastly superior returns than 401K plans. High income workers in the private sector may do better with 401Ks than they would with pension plans, but lower income workers and public employees do better with defined benefit plans. Employers may do better under 401Ks, but that’s because they get to contribute less. Of course, that comes out of the hides of the employees. Not a bad deal for the Bill Kings of the world, who somehow never call upon themselves to make sacrifices for the greater good, but not so good for the affected employees.

Finally, the conflation of the police and firefighters’ pension funds just serves to muddle what the issues actually are. The city’s complaint about the firefighters’ pension fund is that they don’t have any say over how much they have to contribute to it each year. (Perhaps not coincidentally, the firefighters’ pension fund is also one of the best funded in the state.) The city would also like to negotiate over and try to wring some concessions on things like the deferred retirement option (DROP) and automatic cost of living adjustments (COLAs). The city has already gotten most if not all of the concession it sought from the police and municipal employees’ pensions, and if you listen to my interview with CM Costello, you’ll hear him say that the city has largely solved its long-term problems with these pension funds. There are issues in the short to medium term, resulting in no small part from the city’s underpayments to those funds in recent years, but once we’re past that the system is sustainable. Mayor Parker will tell you that if the city can negotiate changes to DROP and get some discretion on COLAs, it will have a handle on the firefighter’ pension fund. Whether you agree with that or you agree with the firefighters, the point is that replacing pensions with 401Ks is hardly necessary. Making bogus comparisons to Oakland or Detroit isn’t helpful.

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11 Comments

  1. John says:

    Charles

    one thing to take into account is what the discount rate the City Pensions are using in the assumptions to measure the dollar amount of their liabilities. Moody’s (I know after 2008 they have no credibility) has been pushing the public companies to lower the discount rates used in calculating the total amount of their liabilities given 1) we are in low interest rate environment and 2) low return environment. I will be anything police and fire are still using a number between 7-8%. I tried looking on their website and reports and conveniently enough I could not find it, but somebody who is better at deciphering their websites can

    But I did find very easily in the 2012 annual reports (and I just selected 2 large companies) the discount rates used by GE and Exxon

    GE
    2010- 5.28%
    2011- 4.21%
    2012- 3.96%

    Exxon
    2010- 6%
    2011- 5.5%
    2010- 5%

    The pensions are using a much higher discount rate thus making their liabilities appear to be less than they are. You should reach out to the pensions and see what discount rate they are using and see what their liabilities would be if they used 4 or 5%. They are lying if they say they can’t calculate it, just changing one number in the excel model

  2. John says:

    typo- that last number of 5% for Exxon should be 2012 no 2010. So the trend for both is dramatically lowering the discount rate

  3. B. Lamore says:

    Both HFD and HPD provide easy to read reports, the HFD return on investment well above the stated 8.5% for almost every year over the past three decades. Here is the link to their reports: http://www.hfrrf.org/resource-center/publications/ . The police system has averaged less of late but has been reducing long term risk other systems, such as HFD’s has taken on to chase better returns. Their link is at: http://www.hpops.org/Public/PublicationsCAFR.aspx and provides better historical context with more reports included.

    As the city has been able to underfund the police and municipal funds for years thanks to Meet & Confer, it is not surprising that both are substantially underfunded. Since HFD does not participate in this process, the city has had to pay in most of the needed amounts, negotiating exceptions in order to keep jobs when Parker threatened to lay off hundreds of firemen if they did not cave in.

  4. John says:

    B. Lamore

    actually they don’t provide easy to ready reports, I see the returns (which are mediocre at best) my point was about the discount rate used to measure the total liabilities of each fund. I would love to see those numbers then compare to what they should be using

  5. Asn says:

    re: crime stats

    The comparison between New Orleans, Houston, and Oakland murder rates in relation to size of their police force per-capita is not really representative.

    It would make sense for a city with more crime to have more officers per-capita than a city will less crime. The question not is whether New Orleans having more officers than Oakland per-capita means that New Orleans will then have less crime than Oakland. It is whether having more officers in New Orleans in 2013 than in 2010 means that there is less crime now than then.

    It isn’t that Houston’s per capita rate of 23 officers per 100,000 are so much better at preventing murders than New Orleans’ 48 officers. It’s that you have more people likely to kill each other in New Orleans than in Houston.

  6. [...] Chalres Kuffner at Off the Kuff has some brilliant commentary on this topic. We largely agree on this issue, believing that pension [...]

  7. My point here, just so we’re all clear, is that the Chron’s assertion that fewer cops = more crime is wholly unsupported by the evidence. If we want to have a debate about defined benefit plans versus defined contribution plans, then by all means let’s have that debate. But please, let’s not distract from that debate by making bullshit claims about the consequences of one particular outcome in that debate. If this is the kind of argument that the pro-401k side is going to advance, then as far as I’m concerned they’ve already lost.

  8. John says:

    Charles

    the entire article which you reference mentions $ amounts and pension obligations. I never once mentioned 401K, my whole point was that pensions are massively underestimating their obligations due to faulty methodology in the discount rate. I see no reason in about 15-20 yrs that the city is toast due to the pension.

    Your words ” firefighters’ pension fund is also one of the best funded in the state” my point was use a 5% discount rate and see how true that statement is

  9. Yvonne Larsen says:

    The points neglected are the power of compounded interest, the significance of the individual relying on himself/ herself for retirement savings and the utter failure of anyone to report on the Obama regime’s absolutely SHAFTING of the government employees he claims he loves so much by NOT FUNDING their Thrift Savings Plan.

    I started working over 35 years ago and diligently contributed 10-15% of my paycheck to my 401K. Sure I was making less than $25K per year back then, but as I was promoted through the company and took higher paying jobs through my career (which means I never remained a “low income worker”..sheesh) I kept contributing. As I changed companies, the assets went with me. No one could tell me I could not take my assets with me when I changed jobs.

    No government or righteous Leftists will ever confiscate my savings and redistribute it for any purpose; read up on the nationalization of private pensions in Argentina and Poland …heck, go look at what’s happening in San Antonio…

  10. Steven Houston says:

    John, while I don’t speak for the other guy, both of those reports go into great detail about their actuarial assumptions (toward the latter third of the reports). As the HFRRF fund makes in excess of 9% on average while the Standards and Poor 500 was about half that, it is fair for them to keep any earned and negotiated benefits. If you want more information in that regard, you are entitled to submit an information request.

    Kuff, based on what literature I have seen over the years, there is a very loose relationship between sheer numbers of police officers and certain kinds of crime but generally not a causal relationship except in specific circumstances. Hiring another 2000 officers would cost the city tremendous amounts of money, even if they were not given a pension at all, but not likely impact the murder rate, robbery rate, and other serious crimes so much as provide some possibility that property crimes might start getting some form of actual followup that does not truly occur now. Of all the ways to spend that $200 million or so a year, more officers without a specific plan on how to use them is pretty low on my list of things to improve the community.

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