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More on the pension deal

The full version of the Chron story adds a lot of detail.

Mayor Sylvester Turner

Mayor Sylvester Turner

Under the tentative deal, the funds would assume more realistic investment returns – 7 percent rather than 8 percent to 8.5 percent – and would recognize all recent market losses on their books at once. The city also would erase the plans’ underfunding within 30 years and make its full annual payment to all three funds.

These changes would help ensure the pension problem does not linger for decades to come, but they first make the hole deeper, increasing the underfunding to $7.7 billion.

To dig back out of the hole created by more realistic funding calculations, Turner asked the funds to reduce benefits enough to slash the underfunding by roughly a third, or $2.5 billion. That would put the unfunded liability at about $5.2 billion.

Turner stressed that he has left it up to each pension fund to decide how precisely to adjust benefits to achieve those cost reductions.

However, he said there is no way to achieve meaningful reform without reducing annual cost-of-living increases for retirees, workers and new hires, and changing the city’s deferred option retirement program, or DROP, which lets current workers eligible for retirement stay on the job and earn a salary while accruing the pension payments they would have received in retirement, with interest.

He also said employees would need to contribute more of their paychecks toward their pensions.

To further reduce the funding gap, Turner plans to issue at least $1 billion in bonds and invest three quarters of the money into the police pension fund and the remaining quarter into the municipal pension fund. The idea, common among governments with pension shortfalls but also deeply controversial among finance experts, is that the city would pay less interest on these so-called pension obligation bonds – say, between 3 percent and 4.5 percent – than it would pay at the pensions’ new 7 percent assumed rate of return.

Turner said this would lower the city’s pension payments so that the combination of funding retiree benefits, paying down past underfunding and paying down the pension bonds would cost the city the same amount it is paying today.

Arnold Foundation pension expert Josh McGee said he thinks the plan is a step in the right direction, but he worried about issuing so much in pension bonds.

“Pension obligation bonds are troubling, especially pension obligation bonds of this size, $1 billion,” McGee said.

If the interest the city must pay on the bonds exceeds the investment returns on their proceeds, McGee said, “you could end up in a situation where you cost the city more than if you’d just paid the money into the pension plan over time.”

The Government Finance Officers Association and the Society of Actuaries both oppose the use of pension obligation bonds.

Houston still has roughly $600 million in pension debt outstanding from former Mayor Bill White’s 2004 reforms that sought to shore up the funding while cutting benefits for new hires.

See here for yesterday’s post. We are still awaiting the specifics, and just because there is a plan doesn’t mean it will work out the way we want it to. The contingencies for when things don’t go as expected will be crucial. This is still a big step forward, one that has been very elusive in the past. I look forward to the council discussion when Mayor Turner brings it all to them. Campos has more.

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10 Comments

  1. Steve Houston says:

    All three pensions have averaged more than 7% a year so a few strong years will go a long way to advancing things, the down years relatively few and far between. Still, while I recognize the need for the city to use bonds for some of it in order to get the employees to give up so much, I just don’t see the leaders of the HFFRF signing off on provisions that allow such deep cuts and to limit the city’s future exposure without material increases in yearly pay. Conversely, unless all of that bond money is going into HPOPS accounts, I don’t see the police agreeing to such deep cuts UNTIL the HFFRF agrees to major cuts. And to stabilize the HMEPS fund will require such levels of cuts and need for contributions akin to the public safety guys that this is going to get interesting to say the least given they are half funded.

  2. We’re still waiting for City Controller Chris Brown to do a feasibility study on a Municipal Public Bank.

    I guess former city controller’s Annise Parker and Sylvia Garcia forgot to do one, along with a feasibility study on Paid FMLA for city employees.

  3. Steve Houston says:

    No Joe, they are currently addressing bigger issues rather than worrying about adding benefits and services. This is understandable when an organization is running a deficit (not paying enough into pensions each year amounts to running a deficit), then there’s the fact that most people accept that having the city compete with private lending institutions defies historical precedent (just how often do government bodies provide a service more efficiently than the private sector) and a proven lack of technical expertise combined with the fact that the city’s compensation rarely attracts the “best and brightest” to make such a bank feasible.

    Maybe next you’ll propose the city open a series of dry cleaners, sell car insurance, and open retail outlets to compete with the private sector, after all, there is money to be made or under served constituencies to be catered to. Isn’t that the basis for your suggestion?

  4. Steve Houston says:

    Joe, we’ve discussed this several times in the past and I’ve looked at your website. Whatever people have done elsewhere, the city of Houston lacks the core competency to compete with the private sector and has proven unwilling to buy the expertise with proper wages/benefits. If the cuts continue, it might make sense to establish a region wide public works organization to handle water, sewer, and related tasks because the best of them hopped ship years ago.

  5. I have yet to see anyone compare texas municipal firefighter pensions at 20 or 30 year retirement levels.

  6. Steve Houston says:

    Joe, all of the municipal pension funds do comparisons with each other across the state as a means of knowing where they stand. Rather than just provide a ton of links to the ideas of others as you do on your website, by all means offer original content by lining such benefits up side by side on a grid. Just don’t forget to include direct, pecuniary compensation as part of the equation as well as related benefits (some cities provide almost free medical coverage in retirement while others like Houston charge retirees virtually the whole cost, or more).

  7. The 4 lawyers and industry executives on city council should do that. That’s what we pay them to do, no?

  8. Ross says:

    No, Joe, that isn’t what we pay them to do. Weren’t you moving to DC?

  9. I guess we’ll find out November 9.