In discussions about Houston’s pension liabilities, the city of Detroit is often trotted out as an analogy and cautionary tale. There’s another city that may be a more accurate comparison, and it’s offering an illustration right now of what might happen if things proceed as many candidates for local office and the Houston Chronicle would like, and that’s Memphis.
Many states and cities are facing pushback from workers as they seek cutbacks on pension entitlements to existing employees—not just new workers or retirees—as they try to control their budgets and fill pension gaps. But Memphis is particularly notable because workers have moved beyond rhetoric and into action. More than 250 police and firefighters have quit and new recruits are proving difficult to attract, after Memphis opted to end its traditional defined-benefit pension and cycle a portion of retirement benefits for many current employees next year into a 401(k)-style account.
[…]
In Memphis, Mayor A C Wharton, Jr. said a widening retirement gap in his city left him with “no other option” than to trim guaranteed payments from an existing pool of employees. Obligations soared to $554 million as of Dec. 31, from a surplus of $94.1 million just six years before.
The Memphis pension’s investments were pummeled during the financial crisis, with its mid-2008 assets of $2.2 billion plummeting by 18% in a year to $1.8 billion. Its funded ratio sunk during that time from 104.5%—a surplus of assets—to 79.8%.
“We couldn’t invest our way out of this,” said Brian F. Collins, the Memphis finance director, who oversees the city pension’s investments.
Some 675 police officers, out of a uniformed force of about 1,300, took a sick day in early July to protest the proposed cuts. After a wrenching political debate, the City Council voted in December to end a defined-benefit plan common among public employers for more than 40% of its 4,100 employees.
In its place, the city installed a so-called hybrid system that moves a portion of worker retirement funds into a 401(k)-style account starting in June 2016. The changes affect workers with 7½ years of tenure or less. Memphis long ago opted out of Social Security, and the pension represents the sole retirement benefits for city employees.
Labor union representatives say they are preparing a lawsuit challenging the overhaul. The mayor said Memphis needs to attract more employers and the city’s poor fiscal health was an impediment.
“Defined-benefit pensions plans are like the dinosaurs now—they’re a dying breed,” said Mr. Wharton, in an interview from his seventh-floor office overlooking the Mississippi River. His retirement benefits with the city won’t be affected by the new changes.
Roughly 3% of the 1,500-person fire department quit their positions and dozens more retired last year amid mounting concerns about how the pension changes would affect them, according to the firefighters’ union. Both the fire and police departments are 10% below their desired staffing levels, according to union leaders, and recruiting efforts to replenish those ranks have failed to meet targets.
If you’ve read this blog for any length of time, you’re probably familiar with the comments left here by Steven Houston, who has had much to say about the pension issue. Steven’s main point is that the salaries Houston pays to HPD and HFD are low – in some cases, quite low – compared to other Texas cities. (This is also true for other municipal employees.) Pension benefits, which are tied to one’s salary level and which are really just deferred salary payments, make up some of that gap. Cutting pension benefits is therefore largely equivalent to cutting salaries and would have a very similar effect on Houston’s ability to attract and retain HPD and HFD staff. That remains true even if, as everyone is promising, any new less-generous “pension” system were only to be imposed on new employees. This should be obvious – jobs that pay less are inherently less attractive. (See the Texas Department of Criminal Justice and its ongoing prison guard shortage for a close-to-home example of that phenomenon.) I don’t know about you, but I haven’t heard much from the cut-the-pensions chorus about the likelihood of this effect, and what if anything they would do about it.
Having said that, there is another factor to consider:
Despite fewer employees, a city spokeswoman said service levels at the fire and police departments are largely unaffected.
That may well be spin, but there are objective ways to measure such things – crime rates and response times, for example. The WSJ story didn’t explore any of that, but it’s worth pursuing. Crime rates continue to be down nationally. A large number of arrests in Texas are for drug offenses, often minor drug offenses, for which there is a push in the Legislature to reduce penalties or even decriminalize them. There are fewer fires these days, thanks to better construction codes and safety mechanisms. We know that in Houston, the vast majority of HFD calls are for emergency medical services, not fires. Maybe a reduction in overall staffing isn’t such a terrible thing. Of course, right now we don’t really know what our staffing levels for HPD and HFD “should” be. There are a lot of issues relating to public safety that are not being addressed right now. When are we going to get around to that?
Phoenix might be most similar to Houston in terms of size and growth (although they have a water issue). The voters there actually recently voted against pension reform
http://www.azcentral.com/story/news/local/phoenix/2014/11/05/phoenix-pension-reform-next-steps/18546087/
However one should note- City of Phoenix pension costs
2002- $27.8 million
2014- $129 million
the law of compounding etc will only have that number increase and eventually that number in Phoenix (and in Houston) will really be big and put the city in a tough position.
This quote is either Twain or F Scott Fitzgerald (heard more attribute to Twain)
“At first you go bankrupt slowly, then all at once”
Kuff,
I think it should be pointed out that most public safety workers in Texas do not have defined benefit pension plans. All but the largest cities are in the Texas Municipal Retirement System which is a cash balance plan (sort of a DC/DB hybrid) which covers 150,000 employees. An even closer comparison is Harris County which employees about the same number of peace officers as HPD and also only offers a cash balance plan. No one has suggested they are having any difficulty recruiting new employees.
It may be that if we switch to DC plans for new employees that salaries will need to go up. The market will ultimately determine that. But, at least, we will be paying 100% of the cost of their services in the same year it is rendered and passing on the cost of services to future generations.
Your point on the correct level of staffing is dead on. The actual number of crimes reported to HPD has been trending down for some time as has the number of fires that occur in the City. On the other hand mental health calls to HPD and EMS calls to HFD have gone up. As nearly as I can tell, no one has tried to take these trends into consideration when setting staffing levels. This was something that was specifically recommended by the Long Range Finance Task Force Mayor Parker set up in 2012.
“The actual number of crimes reported to HPD has been trending down for some time as has the number of fires that occur in the City.”
There are a minimum of 10,000 fewer Police to citizen encounters per month (tickets). Considering how many arrests are made from traffic stops it is not a surprise to see that crime statistics are trending down. The next Mayor can have a major impact on drug crime statistics. How you may ask? Just do away with the Narcotics division.
Thanks for the nod, Kuff! A few points to consider:
TMRS: has been in such swell shape that Turner and others are trying to pour hundreds of millions into it to keep it funded.
HPD v. HCSO: Both has staffing studies showing them to be vastly under staffed, HPD’s independently conducted study making it clear that 1000 to 1500 more positions need to be filled. Harris County’s internal study was for patrol only, their numbers bolstered by the department forcing civic associations to pay millions collectively for contract deputies that rarely leave their contracts. HPD has higher hiring standards but both departments have great difficulty finding qualified applicants. For the record, HPD is substantially larger in terms of classified employees (5200 vs 3700), contrary to what Mr. King believes. HPD blows off tens of thousands of investigations each year due to manpower shortages, a great many crimes simply not reported knowing nothing will be done (suggesting cutting staff is a good way to losing an election, better to allow natural attrition rates do your dirty work for you).
Crime trends and emergency services needs as trends: The trends were taken into consideration by both the extensive manpower study for HPD and for several similar internal audits for HFD. One of the kickers that seems ironic is how some bash HFD’s pension for including overtime yet the city purposely under staffs the department many hundreds of classified employees who then pay into their pensions for decades but only increase their pension checks based on 36 checks; all the money going into the system for the other hundreds of checks never returning to the employee.
Long Range Finance Task Force: That it was discredited as a pension chopping witch hunt is a given, every statement, fact, and figure tied to the report immediately suspect given the agenda driven nature of the matter. But if you want to split hairs, to believe the report, the city would have to cough up 30 years worth of payments ahead of time and use incredibly low discount rates to keep all three systems solvent. HFD’s is doing well enough that it has offered deals to the city, HPD’s is doing well enough that no extra $50 million payment is needed to remain at 80% funding or better (and as those under the old plan retire ahead of predicted schedule, the conversion to the new plan is well ahead of schedule with all those lowered benefits), and the municipal plan is holding in there with great returns though it clearly needs a big boost at some point.
PK: Narcotics division is responsible for most of the big level busts and the asset forfeiture stuff so disbanding it might prove a costly mistake. To really save money, direct officers to write tickets for small levels of pot or trace cases (as long as you greatly simplify the rest of the procedures too). Just like those who think disbanding the Vice division would solve all the problems when it has under 50 officers (and does far more than strip club raids), getting rid of Narcotics division would be like getting rid of plea bargains for traffic court; sounds great until you see the results.
Mr. King HPD is offering signing bounces of $5000 and can still not fill academy classes. Then there is a large turnover rate after they are trained. Be a leader not political when you make statemnents. HFD is a national leader in Fire and EMS. ISO rated 1, largest nationally accredited Fire Department, response times under 6 mins. With approx. 600,000 responses a year and steadily going up. So while you and your Wall Street friends are trying to get your hands on public pensions to line your pocket, there are consequences for your actions.
Steve,
The fact that HPD and HCSO are understaffed have nothing to do with inability to recruit. It is the result of the City and County not being able to afford more positions. The current “all-in” average cost of a HPD officer is about $110,000. The pension add-on is current 36% of the base salary. If anything this kind of back-end loading of compensation discourages recruitment.
These plans do not exist anywhere in the state outside the 5-6 cities where the Legislature has mandated them. The overwhelming majority of first responders in the state do not have these kinds of benefits.
Mr. King,
it is laughable to say the County cannot afford more positions when you have Ed (Emmett) running around bragging about budget surpluses. From a recent story in the Chronicle: “Harris County is in its best financial shape in years with budget officials projecting a beginning fund balance of $515 million” and “Driving the uptick in the general fund is an anticipated 5 percent increase in property tax revenue. On the whole, the amount of money available will increase by 12 percent to $2.1 billion.”
As far as the city is concerned, the current “all-in” cost of an officer INCLUDES the cost of their pension, perhaps not the past due amount but reportedly a true cost evaluation of the officer’s position. To suggest the city cannot afford more spots is not true but it does have to prioritize spending, meaning it cannot afford more spots without spending less in other areas. Nonetheless, both organizations have had significant difficulty hiring qualified people, the city reportedly expanding the geographic area to look for candidates, offering hiring bonuses, structuring their ENTIRE recent contract to upgrade pay primarily for new employees, and feeling forced to reduce their quota hiring from the last 25 to 30 years of practice.
And given the command staff of the city police begging for an additional slice of the budget to hire huge numbers of officers, you might want an update on your data. The political appointee in charge of the recruiting division has publicly stated that without the aforementioned changes, he couldn’t even keep the level of hiring high enough to replace those leaving.
As far as pension plans in general, the major cities offer them. That is a fact and each might make adjustments as needed to spending and such but they DO offer them. Given the largest cities in the state each compensate employees better than Houston (as do many smaller cities), your drive to lower compensation does not go unnoticed. The vast majority of large cities across the nation offer such pension plans, most of them more lucrative by far, as a means of RETAINING the best employees as well as recruit them. Houston currently loses out to other cities in and out of the state when recruiting from military sources, one of the most reliable sources of raw recruits because straight compensation comparisons are relatively easy compared to the days of old, every police forum out there for years bemoaning the city’s longstanding recruitment practices as well as position on the pay scale.
But don’t take any of that from me. Just use it as a starting point to see for yourself. Call up the city union head, go check with those in the military’s transitional units (that assist members leaving service to go back to the real world), or even get a confederate to discuss such matters at one of the local job fairs (hint: have him ask the city staff about county pitfalls and vice versa). Those of you running for office might want to keep in mind that you will be bound by past agreements you might not care for, especially those that will not allow you to lobby for those changes you want. I suspect they will fight tooth and nail to hold you to them and be more than willing to uncover trickery via the courts. Just sayin’
So Steven, just what spending do you think can be cut? Keep in mind that the City cannot raise more money due to the spending cap.
Ross, leaving the county portion of the discussion aside (after all, they are and have been flush with cash reserves for years while providing less than bare bones services), there are several opportunities. My first suggestion is to put to rest the TIRZ’s, phasing them out while charging them for all associated infrastructure costs and/or apportioning all city personnel costs accordingly. Currently, the Chapter 311 of the Texas Tax Code allows for broad discretion in the spending of the increment, the costs of personnel and general maintenance certainly increasing each year serving as a logical basis for doing so.
Council recently approved of several more of these structures, now being sold almost exclusively as a way around the revenue cap, to the point where the program covers almost 20% of the taxable value of the city. For those of you without financial training, ask yourself how long do you think keeping growing amounts of revenue from general fund use can occur before the vultures of the world start circling? I’m not dogging the entire program, a few of the areas have done pretty well, but most have largely failed in their advertised benefits. So while disbanding them entirely sends the money smack dab into the revenue cap, just applying the funds as described above for the remaining life of the individual zones for the direct purpose of paying down existing debt would yield significant cost relief. Currently, I believe the amount of the total increment is about $150 million, don’t you think that might be better spent on actual needs than merely as a tax dodge?
Then, despite the desire for a certain mayor to “leave a legacy”, the city crime lab should be disbanded and a deal worked out with the County lab to handle future tests. The cost suggested for basic to advanced testing by the county would be cheaper than could be done in house, the county avoiding the routine scandals that the city lab is STILL encountering. It is likely that some of the equipment can be transferred to the county as part of the financing but the savings would be in the millions each year and take advantage of the county’s excess capacity in most fields, helping the county become more efficient as well.
Other suggestions include no more 380 corporate welfare deals that allow multi-billion dollar companies to shuffle existing facilities to receive millions in benefits, much like allowing real estate developers to control the biggest TIRZs for personal gain. End the Council slush funds, $1 million to each district council member the year before serious deficits was crazy, and farm the zoo out to the private sector group that took over in 2002 to end the ~ $10 million a year subsidy (friends tell it is more now, some coming from different city accounts), want more?
There are ways to better utilize existing facilities and personnel as well, the ongoing suggestion that the city has scraped the meat to the bone about as crazy as Mr. King’s suggestion that the county “has no money” for more police while sporting half a billion in the bank and gaining more each year. I know changing or ending the TIRZ program would mean less big checks for local and state politician campaign funds, the 380 program also a favorite of the ultra wealthy set to personally benefit but just as I believe Turner or Bell are the only two Mayoral candidates with even a hint of a chance to work WITH employees for adjustments to compensation issues, there are many ways to fix any problem, starting with defining the problem.