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On to the next big financial issue for the city

It’s always something.

Mayor Sylvester Turner

Four years ago, the main source of Houston’s deteriorating financial health — billions of dollars in unfunded pension obligations — loomed over the race for mayor, promising a massive test for the winner.

Now, Mayor Sylvester Turner, having overhauled the city’s troubled pension systems, is running for re-election and touting the reforms as his signature policy accomplishment. He faces several challengers, including Bill King, the businessman he defeated four years ago, millionaire lawyer and self-funder Tony Buzbee, City Councilman Dwight Boykins who has clashed with the mayor over firefighter pay and former Councilwoman Sue Lovell, as well as a handful of lesser known candidates.

Whoever wins will be forced to confront another simmering financial problem: Houston’s $2.4 billion unfunded liability for retiree health care costs, the result of years of deferred contributions, an aging city workforce and, experts say, growing medical costs that outpace the city’s revenue.

The total has grown in recent years by an average of $160 million a year, or more than $400,000 a day. That is less than the $8.2 billion unfunded pension liability’s $1 million-per-day growth rate, but enough to require swift and sweeping changes, experts and local officials say.

“We’re in the earlier stages in this. It’s not a crisis by any means, but it would be better to address it now,” Controller Chris Brown said. “We don’t want to let this thing grow to another $8 billion unfunded liability. … Let’s pay a little now instead of paying a lot later.”

The unfunded liability refers to the city’s obligations in the coming decades for retired employees’ medical, life and prescription drug insurance, commonly called other post-employment benefits, or OPEB. Houston has covered its OPEB expenses through a pay-as-you-go system, akin to making a minimum credit card payment while the balance grows.

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“We have also been in discussions with the employee groups working toward consensus, while keeping in mind the sacrifices employees have made to help us achieve the city’s historic pension reform,” Turner said.

The proposals align with recommendations from a separate firm, Philadelphia-based PFM, which said in its 10-year Houston financial plan the city should eliminate OPEB coverage altogether for retirees or dependents who have access to other coverage.

Other cities have taken a similar approach, limiting cuts for retirees and older employees who were promised certain benefits, while requiring bigger sacrifices from younger and future employees with more time to prepare.

The good news here is that the city doesn’t need to go through the Lege to fix this, and the basic plan for a fix is already in the works. Mayor Turner will be proposing his plan later in the year, and most likely that will put the city on a path towards containing this problem. There’s still a big piece of the puzzle missing, though.

Even after reigning in the city’s OPEB liability, Brown said, the city faces numerous looming financial problems, including annual deferred maintenance and, in the recent city budget, recurring spending that outstrips recurring revenue. In addition, Houston has been operating under a voter-imposed cap on property tax revenue since 2004 and has trimmed its tax rate to avoid collecting more money than allowed.

“This is another piece of the larger problem that’s looming for the city of Houston, which is the structurally imbalanced budget,” Brown said. “Essentially, we want to be paying for all of our current expenses in the fiscal year in full. And we don’t want to defer anything out, i.e. kick the can down the road.”

Yes, the revenue cap, which costs the city many millions of dollars for no good purpose. There’s a lot the city can do to control costs, but not everything is within its power. Some things just get more expensive over time, and if the city is not allowed to reap the benefit of economic growth, it cannot deal with those expenses. If we can get past this issue, and Mayor Turner gets re-elected, then maybe, just maybe, we can get a rev cap repeal measure on the 2020 ballot. There will never be a friendlier electorate to deal with t.

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