It’s widely known that city officials’ funny numbers understate debt costs in the Bayou City. Continuing the dissection of the pension problem, it’s important look at how officials use inflated projected returns on investment (ROI) to understate pension debt.
When discussing Houston pension systems the number $3.1 billion gets thrown around a lot. While it is correct, in a sense, looking into how that figure is constructed unveils a larger issue.
Houston’s three pension systems have a debt of $3.1 billion. It comes as a result of postponed and reduced payments, market downturns, and unfulfilled promises from past politicians. The problem is, as more benefits were promised and payments were missed, the debt grew, but the funding plan remained the same.
Along with a funding plan that doesn’t maintain a sustainable repayment schedule, officials use a percentage for ROI on the city’s retirement plans that’s speculative at best. According to Public Plans Data, a project of The Center for Retirement Research (CRR) at Boston College, the national average percentage used for public retirement plan’s ROI is closer to 7.5%. Houston uses a projected rate of 8.5% for Firefighters and Municipal employees, and 8% on police pensions. A number that many say relies more on hope than fact.
A report issued by the Arnold Foundation adjusted Houston’s ROI percentages to that of the average, which helps illustrate the severity of the issues the city will face when it has to come to term with market realities. The highest percentage plans, which also happened to have one of the highest percentages of any plan nationwide, are Fire and Municipal at 8.5%. At that high rate the plans are only 75% funded, and the police pension is only 72% funded. These percentages are what the city has the ability to pay.
As this graph shows, Houston has steadily been above the national average in pension funding ratio, but over recent years that number has dropped.
When adjusted to the 7.5% return on investment rate, the funded ratio drops to 67%, and even further to 63% when calculated at 7%. Also, to highlight the disparity in the numbers, at 7% Houston’s pensions go from the current $3.1 billion to $6.2 billion. So while their factitiously inflated numbers look bad enough, when you adjust them to accurately reflect the market, it’s worse than expected.
The Arnold Foundation said, “The city is taking on more risk than ever before and is setting itself up for a disaster in the event of an economic slowdown.” Attention is focusing in on Houston’s pension problem, but rhetoric serves no benefit when elected officials refuse to pursue actionable reforms to bring local control back to pensions.
