Unfurling extra safety net for city’s pension plan just makes sense
First, let me tell you the way I expected to start this column.
Mayor Sylvester Turner has been working a long and tedious 14 months with Houston police, fire and municipal employees to hammer out a solution to the city’s $8 billion pension crisis, which was 15 years in the making.
Turner has gotten farther than any previous mayor at reforms, but, after a series of challenges by conservatives, negotiations are down to the wire. Turner and his allies have only about a week left to seal the deal in the Legislature and save the city from impending doom.
And now some wiseguy in the private sector thinks he can pen an 11th-hour op-ed in the Chronicle boasting of a bright idea that could better the plan, reduce risk to both employees and taxpayers, and finally end the game of chicken between supporters and critics? I don’t think so! Yes, that would have been the easiest thing to write. But logic is a stubborn thing.
When I talked Friday with the aforementioned wiseguy, Christopher Zook, I couldn’t ignore that some of what he said made sense. “The mayor’s plan has a lot of good things, but what if it doesn’t work?” said Zook, a professional investor who serves as vice president of the influential “C” Club that promotes fiscally conservative policies. He said that his idea for an extra safety net only kicks in if a pension plan is “potentially in danger of going bankrupt.” Let me explain. The mayor’s plan has been widely praised — and endorsed by a bipartisan consortium including the powerful Greater Houston Partnership — for attempting to obliterate the city’s ever-growing $8.2 billion pension debt in 30 years, in part by cutting billions in employee benefits and prohibiting the city from underfunding its obligations.
But some conservative critics say the plan doesn’t go far enough. They want the mayor to
dump the traditional “defined benefit” approach altogether and force city employees into a 401(k)style plan. Definedbenefit plans guarantee employees a certain level of benefits regardless of market conditions and leave the city on the hook to make up the difference if pension investments fail to hit targets. Cash-balance plan
The mayor’s plan does reduce the city’s risk during market downturns with the so-called “corridor” provision: at a certain point, employees would be forced to bear more risk by increasing their own contributions or taking a cut in benefits.
Some worry that scenario, even if it’s a decade away, could be catastrophic not only for individual police officers, firefighters and municipal workers but for departments that could see a mass exodus and recruiting problems. Enter Zook. He’s pitching what seems to be a logical compromise called a “cashbalance” pension plan. It would work a lot like a 401(k), Zook says, with both the employee and the employer — the city — contributing. Members could take it with them, Zook said, if they change jobs and pass it on to heirs when they die.
But it would differ in that pension boards would still manage assets, and employees would be guaranteed a realistic rate of return, which would allow the city to more accurately gauge and control costs.
And the beauty of it, he says, is that it will never be used if the mayor’s bill works as planned. It would only go into effect if the funding ratio for a plan dips to a dangerous level, and even then, it would only apply to new employees.
Of course, Zook didn’t invent the cash-balance plan. He lists several law enforcement agencies that use it, including the Harris County Sheriff ’s Department. I’m told it was discussed from time to time in the crafting of the mayor’s proposal, and a narrow cash-balance provision even made it into the plan for municipal workers.
Former city pension consultant Craig Mason told me he once proposed a cash-balance plan to a former mayor, but it was rejected because it looked too similar to a defined contribution plan.
So, what’s the problem? Too late in the game
Marc Watts, who has studied the city’s pensions for years and represents the Greater Houston Partnership in pension talks, summed it up nicely: “It makes all the logical sense in the world to do it,” he said. “It’s just the question of ‘Can we get that accomplished between now and the end of the session?’ ”
His feeling late Friday was that it was too late in the game. It was a long way to come to get public sector employees to slash their benefits, and it would be longer still, he said, to get them to give up their traditional defined benefit plans.
Zook, meanwhile, is optimistic: “I believe with 100 percent confidence that if the mayor would support it, then police and muni (the municipal pension fund) would support it.”
Even he isn’t counting on the long-obstinate fire pension board to accept. Their refusal to part with gold-plated benefits have made them all but irrelevant at this point in the process, those close to the talks say. So much on the line
I wasn’t able to confirm by late Saturday where the others stand. The mayor didn’t respond to my request for comment. On Friday, his finance director Kelly Dowe said that asking stakeholders to agree to something they haven’t seen “is a challenge.” By deadline Saturday, those stakeholders had probably seen a more fleshed out version of Zook’s plan, but police officials who hold the cards in negotiations did not respond to my requests for comment.
My take? Yes, it’s late in the game. Yes, it’s crazy to think of tooling around with a delicately crafted piece of legislation that took in essence more than a decade to reach this point. Considering everything on the line for Houston — from our credit rating to potential layoffs of hundreds of police and firefighters — this pension bill is too big to fail.
It’s also too big not to get right. Zook’s idea is sensible. It deserves a fair review — albeit a prompt one. We got in this pension mess 15 years ago because some of the stakeholders were blind to some of the facts and some of the consequences.
This time, let’s do it right.