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Parker proposes new firefighter pension plan

We’ll see about this.

Mayor Annise Parker

Mayor Annise Parker

With the city of Houston facing huge and rising pension costs, Mayor Annise Parker on Thursday unveiled a proposal to put new firefighters in a separate, less generous plan that would do away with expensive automatic cost-of-living adjustments.

The move would not affect current firefighters covered by the Houston Firefighters Relief and Retirement Fund, long insulated from reform by the Texas Legislature. It would be an unprecedented change to new firefighters’ pensions and would mark the latest chapter in the contentious relationship between Parker and the city’s firefighters. There are two lawsuits pending between the city and the pension fund; the fund is expected to sue the city over the latest proposal.

Creating a separate plan, Parker said Thursday, is her only recourse for reining in pension costs. Though the city long has had the ability to create the separate pension plan for new firefighters, Parker said, she has waited to do so until now because she wanted to attempt broader pension reforms first.

“But if I can’t solve that one – Legislature won’t help, I don’t have the ability to negotiate – let’s set up a separate pension and create one that is fair and sustainable for both sides,” she said.

[...]

Todd Clark, who chairs the fire pension board, told a City Council committee on Thursday that the proposal would “put a firefighter on welfare,” hurt morale and weaken the department’s ability to retain and recruit staff.

Council members Larry Green, Jerry Davis and Jack Christie pushed back, asking Clark whether there was room for compromise.

“I understand that you think the fire pension doesn’t have a problem, but as someone who has just gone through the budget process for the city of Houston, we have a problem,” Green said. “Our objective is not to become Detroit. What’s the solution?”

Clark responded, “The best thing you can do is just come up with the money. It’s not my job to balance the city’s budget. What the city should be doing is finding ways to meet the promises made, not trying to cut the benefits. No changes need to be made to our system. We’re a very strong and healthy pension system.”

The Mayor’s press release, with more details about her proposal, is here. I think Todd Clark is correct that the current pension is well-funded and in better shape than many others, but I think he’s got a tough sell politically to say that the city just needs to suck it up and pay whatever they’re told to pay, over which the city has no control. I’m not commenting on what’s right or wrong here, just saying that’s a tough sell. On the other hand, CM Costello, the biggest pension hawk on Council, wants this applied to current firefighters as well. That would have been the Mayor’s preference too, but she never got anywhere with the pension fund or the legislature, so it’s also a tough sell. There’s a dispute over whether this proposal can be implemented by Council or if it requires legislative action like any change to the plan for current firefighters would, so if it does get adopted expect there to be a lawsuit.

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10 Comments

  1. John says:

    Kuff

    your statement that the pension is adequately funded well is totally false. The accountants are playing financial games. The discount rate is conveniently not disclosed (or if it is I could not find it) in their 2013 annual report

    http://www.hfrrf.org/uploadedFiles/HFRRF/Content/Resource_Center/HFRRF%20Comprehensive%20Annual%20Financial%20Report%20FY%2013%20FINAL.pdf

    I am willing to be they use 8% or higher, while every public company uses 5 or 5.5%. So imagine how much more underfunded the pension would be if the discount rate dropped 300 bps. I am sure there are some CPAs out there who can calculate that for us

  2. Greg Wythe says:

    Last I checked, Detroit didn’t go belly up because of actuarily sound pension funds.

  3. John says:

    Greg

    my point is most of these pensions have clauses where is funding % falls below a certain amount cash (by the city) must be contributed. If they used a real discount rate (instead of fantasy they are using) then the COH would have to cut a big fat check. Look at Chicago pensions are killing the budget, same thing will happen in Houston just won’t see it for 15-20 years. Those of us who will still be around will have to pay

    John

  4. Steven Houston says:

    John, both public safety pensions use a rate of 8.5%. For the record, the Houston Firefighters Relief and Retirement Fund has surpassed that rate substantially in almost every year for the last 30 years, meaning not only do the employee contributions and fund returns greatly exceed projections but the additional returns made on the large balance of DROP accounts (if the system makes 20%, the difference between the capped rate goes to the system which saves the city millions each year) contribute as well.

    As far as Parker’s grandstanding on the issue, which is admittedly not as bad as Councilman Costello’s rabid claims, or inaccuracies in the article itself (the Municipal pension fund has had several reductions since 2004, not just one in 2007), I see this as more of an attempt to put the squeeze on the current pension system to reform. Half of city council will not vote in favor of the proposed plan without members of the old plan giving something up or contributing more.

    And let it be said right now that if the city is at all successful in this attempt at pension reduction, the other two are sure to take another bigger hit not long after. The city wants to remove cost of living adjustments and reduce or eliminate DROP for those under the old plans. Just as Houston stopped subsidizing retirees medical coverage years ago when Parker first took office as mayor (unlike most cities that completely cover retirees or heavily subsidize such coverage, coverage for an employee-only under the flimsiest of plans costs 6X as much when they retire), the Mayor will attack the other two plans afterward with Costello and two associates planning on demanding a lowered spousal coverage as well as losing colas and DROP. All three plans better stick together, made easier by the former police pension member coming to work for the fire plan not long ago.

    For those claiming the city gets enough qualified applicants for all jobs, read up on some of the wonderful employees under the new plan in the local headlines. Don’t worry if you miss one, there are many more to follow…

  5. Greg Wythe says:

    The discount rates you refer to were a legitimate issue when markets were down or when investment mixes are bad. If you look at the major problem cities, investment mix and funded ratio were significant drivers of the problem. Houston is a far cry from Chicago or Detroit.

    As it stands now, markets have gotten better (I blame Obama) and the firefighters’ fund earned 16% last year while new GASB rules already factor in an assumption lower than 8.5%. Likewise, rating agencies aren’t relying on fund assumptions when they make rating decisions. The problem Houston has begins with the fact that the city hasn’t paid their annual required contribution to the fund in the past 14 years.

    I realize it’s still a challenge to balance a city budget. And when things are tight, writing a check for retirees isn’t as much fun as building a new library or fixing a patch of bad street. They don’t call it eating spinach for nothing.

  6. John says:

    Steven

    you are confusing two different assumptions in the calculations. The 8.5% you refer to is the expected return on the investments, the number I am using is the discount rate applied to come up with the $ for total liabilities. If you look at every public company’s pension plan they use 5 or 5.5%.

    Greg- the discount rate has nothing to do with how the markets are performing it is based off the 10 yr UST/Libor/Fed Funds. How the S&P 500 does has zero to do with the discount rate assumption.

    In 20 yrs the pensions (if nothing is done) will bring down Houston just like they are doing in other cities. There is a reason public companies don’t offer them anymore

  7. Steven Houston says:

    John, you could ask them for any specific numbers you need. It is my experience (and no, I do not work for them) that they will answer you readily.

    Otherwise, it is okay to blame the employees for the mess the city is in, after all, it’s not like any of the decisions to underfund pensions were done by elected officials that kept getting re-elected as long as term limits allowed. Oh wait, that IS the case. Sarcasm aside, the city made conscious efforts to pay less each year as a means of buying more votes. Whether it was to build parks outside the city limits, hand out corporate welfare, set up quasi-governmental zones where additional taxes would stay in small areas, or a great many things, the city was doing the equivalent of using a credit card without paying the bill on time. In regard to pensions, former mayor White even stretched out the actuarial years to 30 as a means of cooking the books, other tricks applied as needed to bolster his run for governor.

    Houston already took huge action ten years ago by lowering pension benefits, doing so again with the municipal plan 7 years ago for a second round of cuts, and now wants to bust HFD. If Houston were the highest compensating city in Texas (pay + benefits + pensions), that would be understandable but they are at the bottom. This is largely because other communities did more than just talk about adding more police and fire, they taxed enough to pay for them when increasing the numbers. Our politicians used various tricks like Metro transfers and underpaying pensions as well as promising better pensions instead of direct pay. They did this knowing that term limits would see them safely out of office when the bills came due. This is nothing new and voters simply do not want to pay for services rendered.

    Like voters, employees bought into the promises as well, knowing Houston’s economy has been better than much of the country for decades. As mayor White continued to hand out his micro-cuts in property tax rates each year, again with aspirations of higher office, those funds that could have kept pensions better funded were kicked back in a display of swell financing, but only if you were in it for the short term. The answer to some of you is clear, become an even LOWER compensating city by drastic cuts in pensions. To be clear, earned benefits have already been EARNED and by definition that is where the majority of existing liability exists. Most city employees for ten years have lost the DROP benefit, have to stay into their 60′s or mid 50′s to retire regardless of years of service, and get less. A recent independent study showed HPD being under manned by thousands of employees to do the job properly and according to existing policies, and no one alive seems unaware of HFD’s under staffing since they get blamed for the existing overtime problem caused by the city refusing to hire enough folks.

    The solution is clear to some; either cut services right now or increase taxes. We’ve seen what benefit cuts have done to the police (scandals every other day) and they are running triage to handle calls for help as fast as they can. If you want HFD to follow that wonderful example, by all means accept less qualified people and pay on the back end when the lawsuits come and the level of service drops. There is no free ride so yes, do something constructive by requiring politicians pay the actuarially needed amount into pensions each year so that 20 years from now, you will not have the problems other cities may face.

  8. Ross says:

    Awww, City employees have to stay into their mid 50′s or 60′s to get the pension benefits. Ain’t that a shame. Welcome to the real world. In the real world, pensions, if available, are heavily discounted before age 60, and the Social Security portion isn’t available without discount until age 67. There is not a business I’ve ever seen where an employee can retire after 30 years, in their 50′s, with an 80% pension. That’s just excessive, and the City needs to fix it.

  9. Steven Houston says:

    Ross, considering city employees are paid much less than their private sector counterparts, the proper comparison point is to other cities. Houston compensates less which means even those that stay until they hit 67 will only get a partial pension, the classified always paid better for all the usual reasons. The city has long been a frontrunner in benefit cuts while keeping pay lower than other cities unless you count the mayor and her inner circle who are paid like they are running NYC or Los Angeles. But you probably knew all that…

  10. Greg Wythe says:

    John,

    Appreciate the clarity on discount rate. There are too many 8.5%s floating through pension debates. New GASB rules going into effect are addressing that issue. And every municipality that testified to the Lege said it wouldn’t have an impact. There’s a decent backgrounder on the issue from a 2013 Chron blog post: http://blog.chron.com/insidepolicy/2013/05/how-much-pension-debt-does-houston-owe/

    What confounds me is that if all city pensions use that and the only reason that the firefighters have the best-funded pension of the three is because of limitations in state statute, how does removal of those restrictions promise anything better for the fund? The biggest problem I see is the historical record of underpayments. If you look at the Detroits and Chicagos, that feature is fairly common. Taking the best operating (and smallest) pension here and promising to do to it what the city has done to the other two pensions isn’t terribly reassuring.

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