Pension reform deal may not be perfect, but it’s good for the city
Polling has found that a majority of Harris County voters are in favor of Proposition A, which asks Houstonians to authorize a billion dollars worth of pension obligation bonds.
Experience shows that a majority of Texans don’t vote in off-year elections, even if the stakes are as high as they are in this one. Passage of Prop A may be “absolutely critical to Houston’s financial future,” as my colleagues on the editorial board put it. Its failure would mean the city begins the next fiscal year with a sizable budget hole. Even so, early voting began on Monday, and people are not yet stampeding to the polls.
And the measure, like everything related to politics, is controversial. In September, David Jennings noted that in a post for his blog, Big Jolly Politics, suggesting that I should take a look at Prop A and render my verdict.
“If she is able to complete my assignment,” Jennings wrote, “you will have a very good, very trustworthy analysis to use to help you make your decision.”
I was honored by his confidence and can understand why some readers might be skeptical of it. I arrived in Houston less than two weeks ago and still haven’t figured out where City Hall is. But I do like writing about budgets, and innocence might be an advantage, in this context.
Everyone agrees that Houston needs pension reform. The city has three public pension funds, for police, firefighters, and municipal employees. They are, as it stands, only 55 percent funded. The unfunded liabilities work out to $15.7 billion. The city’s share of that would be up to $8.2 billion, depending on how shrewd the fund’s managers might be.
Sylvester Turner campaigned on the issue while running for mayor in 2015, and the pension obligation bonds are part of the plan he proposed this year and pursued in the 85th Legislature.
The result, after extensive negotiations, was Senate Bill 2190, authored by state Sen. Joan Huffman, RHouston. Its terms call for city employees to contribute more to their pension funds and accept $1.8 billion in benefit cuts in exchange for an infusion of cash via the pension obligation bonds. It also limits the risk of future cost increases, through a financial corridor provision that caps the city’s contribution rates.
Firefighters opposed the deal, as did some conservatives, for various reasons. But it had the backing of many Republicans and business groups, as well as Houston police and municipal employees, and was signed into law by Gov. Greg Abbott after being approved by the Texas Legislature. Option of ignoring
The question at hand is therefore whether Houston should issue the pension obligation bonds, which city leaders already agreed to do, as part of the pension reform deal, which took effect on July 1.
The deal itself is not perfect, for a variety of reasons, and conservatives may see it as a BandAid, because city employees would still be enrolled in defined-benefits plans. Fiscal conservatives are wary of that approach, in general, because if the benefits are defined, the costs of the plan itself are necessarily indeterminate. They can easily be higher than expected, and often are.
During the 2015 mayoral campaign Bill King, the runner-up, had accordingly argued that new city employees should be enrolled in definedcontribution plans, and over lunch this week, he told me that he still wished Turner had pursued that option.
“The can will be smaller when we get to it next time, but it will still be a can,” he said.
Still, King was planning to vote for Prop A. The deal Turner negotiated wasn’t the one he would have preferred, he explained, but Turner won the election and, in his assessment, it was better than nothing.
Other conservatives, however, see that as the problem. In the public sector, at least, employers who offer defined benefit plans often have the option of ignoring the problem until someone else has to deal with it, and Houston leaders have exercised it.
In 2001, for example, the Houston Municipal Employees Pension System proposed overhauling their plan to expand benefits — an effort that was supported by then-Mayor Lee P. Brown.
In a 2004 op-ed for the Chronicle, Brown explained his reasoning. The city’s budget was stretched thin. Municipal employees had been forced to go without a raise. And Towers Perrin, the actuarial firm that evaluated their plan, concluded that if the city just increased its contributions, there would be no impact to the fund.
“At the time, it was a reasonable thing to do,” wrote Brown.
That’s assuming, however, that the city would actually pony up, rather than merely promising to do so someday. Houston firefighters, as it happens, have been sticklers on this point, but police and municipal employees have not. The Houston Firefighters’ Relief and Retirement Fund, as a result, is in pretty good shape; the other two pension funds are not. ‘A failed system’
All of this raises some reasonable questions about the city leaders urging voters to approve the pension obligation bonds, as it might if someone asked you for a loan so they can pay off their credit card. Another loan, that is; Houston already has about $600 million in outstanding pension obligation debt.
“Issuing the bonds eternalizes a failed pension system,” argues Bill Frazer, who ran for city controller in 2015.
I can see where he’s coming from.
Still, I disagree with his conclusion. A billion dollars is a lot of money, but Houston voters are already on the hook for more than that. And passage of Proposition A would help lessen the burden, in addition to its sting. Interest rates are low. Houston’s municipal debt has a decent credit rating. The deal, as mentioned, includes significant benefit cuts — which can be rescinded, if the city doesn’t come through with the pension obligation bonds.
And so the question Jennings asked me is, after all, a straightforward one. In my view, the passage of Proposition A would be a good thing for Houston. The measure is reasonable in itself, and it’s only one part of the pension reform deal — a deal which may not be perfect, but is already done.