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Yet another report on pensions

Yippie.

BagOfMoney

Some city leaders have spent years standing in the town square, hollering themselves hoarse that Houston’s financial footing is unstable, that huge pension costs threaten the city’s future ability to police the streets, pick up trash and maintain parks.

In recent weeks, they’ve been joined by two others with bullhorns: The Greater Houston Partnership and the Arnold Foundation.

The region’s most influential business group and one of its best-funded think tanks each has released a formal paper focusing on city finances and pensions, arguing in varying degrees that action – or at least an honest discussion of the way forward – is urgently needed.

Marc Watts, who chairs the GHP’s Municipal Finance Task Force, acknowledged some city leaders long have sought the partnership’s help in addressing their budget struggles.

“There were efforts in the past that were aborted because it can be such a contentious issue. But I think the issue now has got to be addressed, and we’re willing to be a partner to help solve the problem,” Watts said. “We’re going to push this to a solution to the maximum extent of our capacity. We can’t wait.”

Both groups’ initial papers were largely informational, covering few facts unfamiliar to those who have followed public discussion of city finances. Each organization plans to release more detailed reports in the coming months.

Watts said the partnership’s goal, for now, is voter education. He said his group views itself as most effective in a “fair arbiter” role.

“It’s not because we’re afraid to put forward a solution. It’s because we think that would make us less effective,” he said. “The partnership is not normally comfortable in a role of being out front on an issue that could be considered controversial. We’re only here because we feel like for the good of the city of Houston, for our families, for the future of all of us, somebody has to do it.”

[…]

The GHP’s report explains how dollars flow into and out of the city’s $2.4 billion general fund, which draws mainly on property and sales taxes to pay for basic services such as police, fire, trash pickup, parks and libraries. It also focuses on the rapid growth of pension payments and, because even these rising payments have not kept up with the growth in costs, the $3.2 billion unfunded liability that has built up in the police, fire and municipal pension funds.

The Arnold Foundation’s report accuses city leaders of mismanaging the pensions, in part by using risky assumptions about future investment returns to artificially depress the annual payments required from the city. Despite this, the city still has failed to cover these lower payments to fund the benefits being promised.

The report advocates for moving control of pensions from the Legislature to local leaders, for implementing what the authors argue are more prudent policies guiding how the plans are funded, and for paying the full annual amount that policy change produces.

[…]

Todd Clark, who chairs the fire pension board, said the GHP and Arnold Foundation reports do not change his views.

“They have their thought process on what they think needs to be done, but I’ll say it again: Pension reform is not the answer. The city spends their money on all these wasteful pet projects,” Clark said, mentioning hiking trails, bike lanes and dog parks. “They just keep on harping on this, and the bottom line is the city just owes the money and they need to pay what they owe.”

The fire pension has met its 8.5 percent investment return over recent decades, Clark said, and expects to over the long term, as well. The fund was on target to finish the last fiscal year well below its target, however.

Rhonda Smith, executive director of the city’s municipal pension fund, called for any discussion of city finances to include not only pensions but the slowing local economy and the voter-approved cap limiting the revenue Houston can collect in property taxes.

You can find the reports if you want. The GHP’s may be worthwhile, but I don’t trust the Arnold Foundation on this, any more than I trust them on education reform. They’ve got an agenda. Let’s be clear here that there are two issues with pensions. One is with the firefighters’ pension fund, which is well-financed but which is not controlled by the city. The city would like to have control over how much it has to contribute and how much of a cost of living adjustment the pensioners get – this is the short-term problem with pensions, as the city’s contribution amount has increased – while the firefighters point out that the city has this power over the other pension funds and has shortchanged them as a result, causing them to have greater unfunded liabilities – this is the longer term issue. I’m sure the reports make this clearer than the story did, but I trust we’re all familiar with the terms of debate here.

As for Todd Clark, I agree that the firefighters’ pension fund is in fairly good shape, but it’s disingenuous to claim as he often does that pension contributions are a relatively small part of the city’s budget, then blame items that are even smaller for the city’s financial troubles. Like just about everyone else in this debate, he glosses over the fact that public safety is two-thirds of the budget, and it’s been growing as well. Given that a large number of firefighters don’t even live in the city of Houston and thus would be conveniently unaffected by the cuts Clark prescribes, I find the attack on hike and bike trails distasteful. (Not to mention the fact that they’re part of a bond referendum that was approved by the voters.) Rhonda Smith is on the right track in calling for a broader discussion of finances than just pensions. I’m still waiting for this subject to come up.

I guess what really frustrates me about this issue and the discussion around it is that it seems to take it for granted that if the next Mayor just doubles down on trying to get a bill through the Legislature to wrest control of the firefighters’ pension fund back from Austin that all of this can be neatly solved. I’ve yet to see anyone explain what the next Mayor ought to do that Mayor Parker didn’t try, and I’m still waiting to hear how this solves the long-term underfunding issue for the other two pension funds that the city already controls. Maybe – I know this is crazy talk, but stay with me – there are ways to improve this situation without waiting till 2017 to do once again what we haven’t been having any success at doing in the past several years. Maybe offering a higher base salary in return for some cost certainty might entice the firefighters to negotiate. I’ve seen it suggested elsewhere that maybe the various TIRZes could be made to chip in a few bucks towards the pension funds each year. Maybe there are some other possibilities – I wouldn’t know, since that just doesn’t seem to be part of the discussion. And maybe this really is the most viable alternative. It would just be nice to have some confidence in that rather than have to accept it as an article of faith.

I should note that Steve Costello released his full pension plan yesterday, which claims to address these things I’m complaining about, while still starting with the premise that he can succeed at getting a bill passed; he cites the Murphy bill from last session, which never got a vote in committee, as his basis. I remain skeptical.

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17 Comments

  1. Greg Wythe says:

    GHP docs are here. The Arnold Foundation report is here.

    It’s also worth bookmarking the report that CM Costello commissioned while on Council and references in his campaign plan – as well as HMEPS response to that study.

    It makes for some fascinating bedtime reading and I haven’t gotten through it all myself. Two things to point out in case you see fit to prod a little more deeply in your interviews of Mayoral candidates:

    – There’s naturally a lot of reference and comparison to Chicago. The Arnold report suggests that Chicago’s system broke because of the mere fact that pension “Annual Required Contributions” equaled 20% of General Fund dollars. As it stands, Houston also has an ARC that equals 20%. Two problems in this are that: a) Houston doesn’t pay the full ARC – the last budget showed the city paying 13%, and b) in and of itself, the ARC level doesn’t cause any city to go bankrupt – quite the opposite. Had either Chicago or Houston paid the full ARC over recent years, then the unfunded liability would be reduced. It appears that what King and Costello are advocating is just “defining down” what a pension is for public employees.

    – I’m not as well-versed in how the DROP program works, but Costello advocates for “freezing” it. It may or may not be fair to assume that King’s “turn them all into 401(k)s” plan effectively ends DROP. But I’m curious what impact that will have in creating a “pension exodus” as retirees would conceivably lose some incentive to work beyond a date that they would otherwise be retiring. We had a taste of this in the Bill White years, as police officers left as pension rules were changed. Last I checked, nobody thought too much of the city losing police officers and the city’s ratio of officers to population has yet to rise. I’d love to hear how seriously Costello and King take that scenario for any combination of muni, fire, and police workers.

    All in all, the constraints posed by rising pension costs seems like an opportune time to have a more honest discussion about the revenue cap. At least according to the Arnold report’s causation, if you’re allowed to raise more revenue (presumably to the General Fund), then that 20% number goes down. Unfortunately, it seems like the only options discussed are ones that either break promises to current workers or settle for a more gradual bending of the curve by applying a diminished promise to newer, incoming workers.

  2. Steven Houston says:

    Greg, each pension system has a different variation of DROP, HFD’s system limiting how long you can be in it, while all police hired since 2004 lost the benefit completely, newer municipal workers also losing the benefit. The idea is that with the old police and fire plans, an employee did their 20 years but rather than leave to work for a second pension elsewhere, Mayor Lanier decided it made sense to reward those that stayed by giving them a deferred retirement benefit. With HFD, the employee continues to get a bigger base pension for each year they work (for the first ten years past their 20) at 3%, so if they stay for 30 years, they get a base pension of 80% of their biggest paychecks from their career, including overtime. The DROP benefit is basically the money the pension system would have given them had they left, saved in an account with a rate of interest set by averaged returns, HFD using a 10 + 3 year year calculation (the last 3 years has a smaller benefit). Lanier made it crystal clear that the DROP program was INSTEAD of giving them (and police) any real raises during his 6 years as mayor, while the nation’s economy was booming like crazy and every other police and fire department was getting double digit raises as well as to make up for the austere years during Whitmire.

    HPD’s DROP was less lucrative, not including overtime or any increases in pay after the 20 year mark (with one exception) so an officer gets 55% of their total pay (based on last three years worked) placed in an interest bearing account for as long as they stay. If one stays for a total of 40 years, he could build up a nice nest egg in those final twenty years but the money can’t be touched until he leaves. About half the department is under the old plan at this writing. The new plan lowered the base benefit to 45% at 20 years, additional years worked giving an employee a 2% increase (up to 80%), removes various incentives, and has no DROP. They cannot collect a benefit until they are 55 years old too, the belief being that raises since Lanier left make up for some of the difference. The officers under the old plan are leaving faster than anticipated, a number of them in programs that allow the city to slowly pay out accumulated time off many never used in exchange for lower medical costs but they do not report for work yet are still counted in official tallies of “manpower”.

    When Bill White changed the police system, retirement rates escalated to something like 300% of previous years, future changes likely to do the same. The city cut hiring as many to replace them which is why there were less “active” officers last year than in 2003, the hiring wave of the early 90’s the public demanded are leaving faster than they were being replaced but the recent contract makes new officers much more expensive, lowering the standards (less college for example) not really helping to find “qualified” candidates given the city’s long standing policies of preferential hiring of minorities and females.

    There are ways to “trim” benefits but as former city employee, and current city council candidate Manuel B. points out, there will be a huge backlash by employees seeing as how most gave up a great deal and retirees were screwed by 300%+ increases in medical costs despite it being called “off the table” by Parker before she hit them with it. Changing to a different kind of pension system is just code for cutting benefits and the pension hawks prove time and again that they are either ignorant of true and total city finances, employee benefits, and city spending habits, or they are liars. 😉

  3. Manuel Barrera says:

    Five years is normal for being there but not being there, comp time. I know four police officers that are retired but getting paid as if they were at work.

    Interesting article in Business Week, September 6, 2015. The health plan for the UAW retirees, they predicted it would fail instead it has been a huge success.

    http://www.bloomberg.com/news/articles/2015-08-27/the-uaw-benefits-failure-that-wasn-t

    I fail to understand why we want to put the same people that have problems keeping their promises in charge of all those billions of dollars (local control). As my brother said why are they always trying to screw the workers (the people that actually do the work)?

  4. Greg Wythe says:

    Always appreciate some 90s economic history, Steven. Thanks for filling us in.

  5. Jen says:

    I saw a suggestion somewhere regarding fire crews, that they are fighting fewer fires but doing more EMS service calls, so perhaps the EMS services could be spun onto a new entity. One which would have a different retirement arrangement, presumably.

  6. Steven Houston says:

    MB, I believe they have a limit as to how much time they can burn but more power to them for saving their time rather than rushing off to deer season or otherwise having vacations and such. It saves the city a great deal of money to allow people to burn it slowly than to pay a lump sum and they earned the time. You’re right about “local control” but as always, it’s just another code phrase for trying to cheat the workers while the fat cats wine and dine with some of the biggest compensation packages in the country, while other workers are paid the least).

    Greg, you’re welcome. I think it’s pertinent to the discussion since most workers lost the DROP benefit and the hawks are trying to end it for others. In another ten years, relatively few under the old plans for municipal and police will be left, saving gobs of money. Parker and several on council made it crystal clear to HFD employees that they are not going to get substantial raises to come anywhere close to other large city departments “as long as I’m in office” so with that kind of attitude on the side of the city, I can’t blame Clark and his people for telling the city to piss off.

  7. Steven Houston says:

    Charles, I know you love those bike trails and parks but the money to pay off bonds still comes from the general fund. The one thing everyone agrees on is that changes need to be made by elected leaders or eventually by a judge who likely won’t give a darn about how many parks the city has or anything else. Believe it or not, employee benefit cuts are not usually in the first several rounds of cuts in bankruptcy courts, all discretionary spending scrutinized first and cuts to services that are not tied to public safety taking much more heat. Should the city continue to hand out millions for giant companies to shuffle employees from one location to another, no real net jobs created? Should we really be allowing TIRZ’s to be planning to spend a near endless amount on upgrading Memorial Park, so much that they stopped answering questions about cost long ago when estimates were ranging between $600 million and $1.5 Billion, everyone with any stroke adding in side projects to feed developers and long standing wish lists of the small percentage that use the park?

    As Bradford tends to point out, most of that public safety budget is comprised of salaries, not equipment, so expecting those budgets to yield any needed monies is a curious notion, especially when mayoral candidates are falling all over themselves promising to hire a great many more police and fire during their terms. Frankly, if they were paid like Austin or San Antonio there might be more wiggle room but they are not so more people means a lot more money needed. And as well meaning as some might be, EMT are in high demand so spinning EMT services into “a new entity” would have the opposite impact as they would still want compensation commensurate with their positions.

    But to keep it all in perspective here, the bulk of the unfunded portion is due to the city not paying enough in for 15+ years. We’ve had enough mayors and council members come and go during that time who played the same old game in order to spend more money on other things for me to think any reductions in benefits would instill a new found sense of moral responsibility in the next batch. So while I can come up with a hundred potential modest cuts employees might eventually agree upon, I doubt they will be willing to do so repeatedly as the fat cats continue to enjoy free reign on spending. Better to let a federal judge take over and look at how most libraries are virtually vacant during two thirds of their open hours, how few use parks and bike trails regularly, and how every other major city in the country charges for trash pick up. The notion of allowing all incremental revenue growth for infinity in 20% of the city’s geography, the biggest areas of development at that, to enrich a handful over the vast majority, or any number of other poor methods of spending limited monies seems almost alien to me but why let that stop the gravy train?

  8. Ross says:

    @Steven, we are charged for trash pickup, it’s built into the PWE budget, which has the advantage of not requiring an organization to bill and collect the garbage fee (yes, it could be added to the water bill, but are you going to cut off water for not paying for garbage pickup) or deal with the non-payment issues.

    I know the Midtown TIRZ gives money for police, that should be done by all of the districts. A TIRZ used correctly can go a great deal of good (Midtown). I have no clue as to why the Galleria has a TIRZ, since the property owners there could afford to do any improvements that might be necessary.

    The bike trails are a drop in the bucket compared to other costs. I would be happy to see libraries close one day during the week to open on Sunday, as well as change their hours to open later, say 12, and close later, so they would be more available to all.

  9. Manuel Barrera says:

    Only two TIRZ have large amount of money, and properties that they have purchased.

    19 million here, 19 million there, and soon we are talking real money;-)

    Five years is actually fairly common, dignitary comes some are getting comp time, the city does not have the money to pay them. Hurricane, bunch of someones get comp time, the city does not have money to pay them. Just like the fire department they have all this time and often are not allowed to take it when they want it.

    Ross, I am curious why your neighborhood is charged for trash pickup. According to the mayor and budget there is no fee for trash pickup. The only bill I pay is water and sewage so it would have to be hidden in there if in fact it is hidden in there.

    Ross there are tens of millions of dollars of engineering plans sitting on shelves, ever wonder why engineering are so prominent in giving money?

    The city could always increase the fees that are hidden in cable, light, telephone, gas, etc. a penny here and a penny there and soon one is talking real money. Well they are not hidden but most people don’t know they are there. That is how the state raises money without a tax increase.

    The city could get into the toll road business, the county does very well with that cash cow. I am waiting for that part between 59 and I-10 to be free as promised.

    The tow from the freeway was suppose to raise money, until the state got involved. Not sure how much Uber is paying if anything, but I am sure there is some money that could be raised there.

    SH there is quite a bit of money invested in cars, close to 4,000 cars x 20,000 about 80 million, life expectancy is not that great as they tend to get abused. Less time they did an inventory they could find where all the cars were. That is why take home cars were taken away from most officers that had them. Now they want people to move into Houston and park their police car there, crime deterrence. I used to have one of those parked in my drive way many years ago, I was not a police officer.

    Do we really want to outsource EMS? Your life or mine could depend on them getting there. When one calls the fire department someone will be there very quickly. Purpose is to save lives, not all lives are saved in fires, in fact most are saved by the EMS.

    One year the city did not want to give the police a pay raise, so they got 20 days for training (education), if memory serves me correct. That is 20 days that a police officer is not there.

  10. Manuel Barrera says:

    last time they did – correction

  11. Manuel Barrera says:

    Cars were taken to save money – another correction – Whitmire- Officer now have to pay a fee if they have a take home car.

  12. Ross says:

    Manuel, I didn’t say we are charged for trash in my neighborhood, I said we all pay for trash pickup via taxes. When we lived in a townhouse, we had private pickup, and the City refunded our HOA $7 a month per house because we weren’t using the City service. The advantage of using taxes to fund garbage collection is that property taxes generally get paid at a higher rate than direct bills, and don’t’ require any additional staff to process or chase delinquent accounts.

  13. Steven Houston says:

    Ross, I understand the benefits of charging for garbage in that manner but keep in mind that most multi-resident locations were never offered trash pick up by the city, the last 4 mayors pointing this out as measures to start charging fees came up or the discussion of “privatization” were explored. Why your town homes were given anything when apartments have not been offered trash pick up is probably some quirk in the system but I don’t profess to be an expert. That said, at $7/month per house, the city service is a bargain compared to otherwise low cost leader Waste Management or other large firms that charge significantly more, ask anyone out in the county where local government doesn’t include trash pick up at all just how much they pay.

    As far as the Midtown TIRZ hiring police, which is different than contributing to the city police budget, that is for officers to patrol inside the TIRZ only which amounts to an extra detail or side job for the officer as none of their pension, medical, or other costs are included. The same holds true for Uptown and other TIRZ’s that hire officers. My suggestion is different in that they would be required to pay for their portion of existing city services, the cost of which has gone up significantly in the last 20 years; the TIRZ increment to be assessed either according to manpower assigned to those areas or a geographic portion of the city. Off the top of my head, TIRZ’s rake in something akin to $165 million each year now, growing steadily at that, while city services cost more than they did when each TIRZ locked in the base rate. Even if they only contributed 10% of their take directly to the city to say, pay toward pension debt reduction, it would cover a large part of the yearly under funding and save Charles’ parks.

    The one thing that pretty much EVERYONE agrees on is the need for change. While pension hawks prefer to frame the change in terms of further cuts to compensation and employees prefer to focus on either increasing revenue or cutting spending that doesn’t impact them directly, there are two factors at work here. One is projected debt already incurred and the other is how much the true yearly cost is to maintain the status quo without the fiscal time bomb. Right now, the city pays in under 6% of the total budget to pensions and that doesn’t cover the bills, the amount needed varying depending on whether the three systems have a year earning over 17% as they did recently or if they make less than the 8/8.5% as they did this past year. Claims that the systems should use a T-Bill rate to eliminate all risk are silly given proven history of average returns in excess of 8.5% but the markets are changing so there’s room for discussion.

    The thing is, with term limits, nobody wants to run on a platform of not handing out the goodies everyone wants but refuses to pay for, perceptions over true costs altered by years of not paying the bills as they come in. If the revenue cap was removed solely for the purpose of paying down debt or residents were charged even half what it costs to pick up their trash, it would go a long way. The belief that employee contracts should be easier to violate than bond payments or vendors expecting to get paid is a big issue, no responsible leader willing to take that approach. If push comes to shove, amend city ordinances regarding 4 men per truck (not advised by me) to cut FD overtime, telling the men to be less aggressive fighting fires like other major departments seem to be. Then tell the police to write tickets for small amounts of pot and focus their efforts elsewhere to get more bang for the buck while reducing both work forces several hundred employees; using the resulting windfall to pay off pension debts already accrued via a pay as you go system. Yeah, it will take longer to get help when needed but if you aren’t willing to pay the full cost for services rendered, you don’t deserve the service in the first place.

    MB, giving police extra time off is fine except it still doesn’t put food on their table, only shifts the cost to make them have to work extra details for some private employer in most cases. Given the potential for abuses, that is not a good idea in my opinion, If they assigned individual cars to individual officers like HCSO and departments like Pasadena do, the cars would be treated much better and last much longer but I concur that adding small amounts to existing fees, decreasing the number of fruitless engineering reports, and various other changes could yield significant results (as you say, it adds up).

  14. Ross says:

    @Steven, the townhomes are not multi-resident, they are a collection of fee simple single family homes where the HOA has contracted for trash pickup. The City apparently requires this because some of the houses did not have a public street frontage. Apartments and other commercial enterprises are not eligible for any sort of waste pickup under current ordinances.

    The Midtown TIRZ remits money to the City for increased public safety services. From the 2014 financials at http://houstonmidtown.com/wp-content/uploads/2015/03/MRA-Financial-Statements-and-Supplementary-Information.pdf the TIRZ paid the City $1,274,000 in June 2014. Total tax increment revenue for the TIRZ was $18,812,000. I cna’t find similar payments from other TIRZ entities, since their financials are harder to find. i agree that all of the zones should remit funds to the City to help with public safety.

    I am opposed to any City employee taking a car home, especially when those employees live in Conroe or Waller, or some other remote area.

    Overtime should be paid when earned, if only to reduce the long term liabilities of the city.

    If the city needs to raise the tax rate by ten cents, or some other amount, to cover pensions, then let’s discuss that. If businesses start moving out to the county to avoid the taxes, which I don’t believe they will, then an aggressive commercial annexation policy will take care of that.

  15. Steven Houston says:

    Ross, Midtown is proof that despite original intentions, TIRZ’s tend to grow and will always find reason to continue past their originally planned dates; it having been authorized in 1994. My understanding is that $1.2 million going to police is for an overtime program, not funding existing officers. As such, it doesn’t pay in for pension, medical, or “true” costs; it only augments the number of police assigned to that area. I’m not against affordable housing no matter how lousy government is at providing it or parks either but that $19 million a year in revenue is going towards such and off the table for most governmental services, growing each year. Other TIRZ’s fund extra patrols too but may do so in a different manner, part of the problem is they are rarely open about true spending, collectively.

    Take home cars for most city employees are restricted from going out as far as Waller or Conroe, even though police get the privilege of paying a substantial fee to use such cars.

    The overtime doesn’t reduce any liabilities, it merely increases the cost of service.

    To maintain current spending as well as properly fund growing pension liabilities wouldn’t take a ten cent increase but the problem is, as city revenue increases, elected officials continue to spend more than comes in. As a result, anything they defer spending on, be it pensions or infrastructure, will continue to grow. They have proven that they will circumvent any provision to dedicate funds to a specific cause too but annexation is largely off the table since previous changes in state law and federal interpretations in voting issues make it so tough. That is why the city makes deals with county MUDs to take money while providing no services.

  16. Paul kubosh says:

    You guys are killing it. Just saying. 🙂

  17. Steven Houston says:

    PK, in a good way I hope?!?