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Houston’s pension reform plan cleared the Texas Senate after bill author Joan Huffman (R-Houston) made concessions, allowing for the potential of cash-balance plans in the future. Huffman made the change after her original bill received pushback from conservatives who said it didn’t go far enough in reforming Houston’s public pension systems.

In short, the plan requires $2.5 billion in concessions from public employees in exchange for $1 billion in pension obligation bonds, pending voter approval.

Huffman’s plan was amended on the floor to include a provision allowing the employee unions to opt out of the benefit cuts if the city fails to deliver the $1 billion.

“The voters of Houston will have the ultimate say-so if this plan takes effect,” said Huffman.

While that provision does technically give Houston taxpayers an option, as noted previously,  it provides them with an unfair choice. Either they allow the city to continue down an indebted path or they approve pension obligation bonds which, while it may not be new debt, certainly is a new form of debt.

Also included in the bill was a provision requiring Houston’s pension systems to convert to cash-balance plans if the police and fire plans fail to exceed a 65-percent funded ratio and the municipal plan fails to exceed a 60-percent funded ratio by 2021 and 2027, respectively.

While cash-balance plans are an improvement, they are an imperfect solution and Houston should begin moving to a defined contribution (such as a 401k) system to truly address the problem.

Cash-balance plans still face the same problems of all defined benefit plans, but the benefits are defined in a term more closely aligned to that of defined contribution. These plans still guarantee a minimum annual return on investment to employees’ pensions. In other words, increases and decreases in plan value do not directly affect the benefits promised to the employee, so the burden still falls on taxpayers.

The reform plan passed the Senate by a 25 to 5 vote with State Sen. Sylvia Garcia (D–Houston) present, but not voting because she is a recipient of a Houston municipal employee pension plan.

All eyes are on the Texas House which is set to take up their version, HB 43, on Saturday, May 6th. If nothing else, the House should follow the Senate’s lead in providing a trigger for new hires if the funding levels dip below an acceptable amount.