Mayor Sylvester Turner announced that his office has reached a preliminary deal with the police, fire, and city workers in hopes of avoiding Houston’s self-imposed pension crisis.
According to Turner, the series of proposals will immediately reduce the unfunded liabilities by $2.5 billion. The remaining liability will be paid off through a 30-year closed amortization schedule. Simply put, this is a 30-year payment plan to reduce the liabilities from an estimated $7.7 billion, as of June 30th, 2016, to zero.
Turner’s proposal assumed a 7 percent annual rate of return on investments instead of the 8-8.5 percent the city and pension boards previously used. However, many with intimate securities knowledge believe the 7 percent projection is still too optimistic given current economic conditions.
All three pension systems have identified cuts – or benefit changes – to reduce the burden imposed on taxpayers: police $1.1 billion, fire $800 million, municipal $700 million, totaling a 33 percent reduction in overall unfunded liabilities. However, at this point that is nothing taxpayers should count on especially since Turner wouldn’t go into specifics about what the changes are, only saying that they would be in the areas of cost of living adjustments, future benefit accrual rates, or the deferred retirement option program.
The city will also be required to make full annual required payments to the pension systems. It has historically made underpayments in the past, which is one of many reasons why the debt has skyrocketed to its current, unsustainable level.
While this all sounds promising, Houstonians should be weary that the proposal is calling for $1 billion in new Pension Obligation Bonds – a measure which taxpayers will be on the hook for long after Turner’s administration leaves office.
During the municipal election cycle, Turner’s opponent Bill King repeatedly laid out his plan for addressing pensions, which included issuing bonds as part of a larger scale reform plan. However, Turner always slammed that approach saying that taking on more debt is not the answer.
Less than a year later we are seeing Turner embrace the very concept he derided.
The bonds will allow city officials to continue to “pay down” pension debt, while conveniently disregarding the added $1 billion in a new category of bond debt and its 3-5 percent interest cost. Ultimately, the city would just be trading one debt for another for future taxpayers to pay off, all so that the city can avoid another credit downgrade. The Kinder Institute noted that a 30-year, $1 billion bond at 3.4 percent would require an over $50 million annual payment that the city would have to cover.
Where the plan gets dicey is with Turner’s “cost management component” which he says will act as a thermostat. If market conditions don’t prove to be as favorable as he anticipates, this new plan would force the city and pension boards back to the negotiating table, and this is where the firefighter’s draw the line. Although they aren’t on board with this aspect of the plan, Turner says it is non-negotiable and he will be moving forward with or without them.
Turner is stubbornly maintaining his stance on keeping “defined benefit” plans instead of transitioning to a “defined contribution” model. It’s shocking the City of Houston refuses to see what corporations saw decades ago—defined benefit plans are like Ponzi schemes, and eventually become unsustainable. Even Harris County switched to a defined contribution plan years ago.
Anything less than structural reform is basically a Band-Aid on a broken limb. Maintaining defined benefit plans continues to put all of the risk and responsibility on taxpayers.
And of course, a part of the plan is to fully repeal the voter-imposed property tax cap – undoubtedly to increase taxes to pay for the risky plans and pension obligation bonds.
Turner referenced, numerous times, the mistakes made over the past fifteen years. But it’s important to note that much of the current pension debt accumulated because of increased worker benefits approved by the legislature – through a bill carried by Turner during his time as a state representative.
Turner’s plan paints an optimistic picture, but the future remains bleak. While the pension boards give little, taxpayers are expected to accept bond issuances, get rid of their property tax cap, and continue to assume the primary responsibility of all municipal employee pensions.
While Turner’s plan is exceedingly hazardous for taxpayers in the long term, it amounts to nibbling around the edges rather than addressing the structural problem underneath. Changes will ultimately have to be approved by city council, the pension boards, and state lawmakers.