Pension dispute returns to court

Despite ruling, city still keeps some workers off payroll

The city of Houston’s effort to off-load some convention and facilities employees from its pension plan has hit what should have become its end — the Texas Supreme Court. But the city continues to keep these employees off its books long after the court essentially ruled against the practice.

At issue is whether the city can avoid millions of dollars in pension obligations by shifting workers from the municipal payroll to that of an employee leasing company. The Houston Municipal Employees System says no, and has gone back to court to force the city to turn over payroll records from the employee leasing firm and make contributions on behalf of these workers.

“We won every step of the way,” said Travis J. Sales, the lawyer representing the pension board. “I don’t think they want to acknowledge it, and they don’t want to pay for it.”

The dispute centers on Houston First, the taxpayer-funded authority that the city created in 2011 to take over its convention and facility management operations, and comes as city’s pension plans slide toward insolvency with nearly $5.6 billion in unfunded liabilities. The two major rating agencies, Moody’s Investors Service and Standard & Poor’s, cited this burden when they lowered the city’s credit rating earlier this year.

Soon after its creation, Houston First formed a separate employee leasing firm, Convention and Cultural Services Inc., to employ its workers and lease them back to the convention authority. The workers’ jobs didn’t change, just the name of the organization issuing their paychecks. But, according to the city, they were no longer eligible for municipal pensions.

The pension system, however, has argued that the move by Houston First — which is the sole client of Convention and Cultural Services — was an accounting maneuver designed solely to off-load pension obligations. The trial court of Harris County agreed. So did the Texas First Court of Appeals. A year ago, the Texas Supreme Court also sided with the pension system, finding that its trustees have the authority to determine that the “leased” employees belong in the city’s pension plan,

Well-used practice

It’s unclear how many employees could be affected, since the city nor Houston First Corp., Convention and Cultural Services refuse to disclose how many employees work for the convention and facilities authority. Initially about 75 employees were denied pension benefits, but Houston First Corp. has grown substantially during the past five years, said Sales, a partner at the Houston law firm Baker Botts. He estimates the city’s financial engineering cost former and current employees of the convention authority millions of dollars in pen- sion benefits.

Houston First declined comment, referring questions to the city. Janice Evans, spokeswoman for Mayor Sylvester Turner, said in a statement that the city believes the Houston First employees don’t belong in the pension system and the pension board’s claims are “unfounded and improper.”

The city and Houston First have used a wellestablished approach to lowering labor costs. For decades, U.S. corporations have outsourced any number of jobs and operations, often turning to staffing agencies to provide their workers as ways to avoid payroll taxes and benefit costs. In the 1990s, for example, Texas companies used employee leasing firms as a way to lower workers compensation insurance premiums because the new leasing firms didn’t have histories of on-the-job accidents that lead to higher rates.

Employees were typically fired and then immediately rehired by a leasing company, which became the employer of record. As in the Houston First offices, employees never changed jobs, desks or supervisors.

The dispute between the city and the pension board began shortly after the Houston First workers were moved to the employee leasing firm, taking a long and tortured path. A handful of eligible workers contended that since they no longer legally worked for the city, they could start collecting their municipal pensions. The pension system disagreed, arguing that they were, for all intents and purposes, still city employees.

The workers sued the pension board, and the city later joined the suit to establish that it was no longer obligated to provide pensions to Houston First employees. The courts, however, ruled in favor of the pension system and its power to determine who qualifies for the benefit.

Legal experts say the pension system is now experiencing the same frustrations that many other successful parties have. It’s one thing to win a judgement, another to collect on it.

In this case, while the courts have sided with the pension board, they provided no specific remedies, such as ordering the city to provide payroll records and make appropriate pension contributions for the Houston First workers. The pension board went back to court to obtain such a ruling, suing the city in June 2015.

New legal argument

The city has sought to have the suit dismissed by claiming sovereign immunity, a legal doctrine that protects governments from lawsuits. When the trial court rejected that claim, the city appealed to the Texas Fourteenth Court of Appeals, where the case is pending.

Martin J. Siegel, an appellate lawyer in Houston, noted that city isn’t challenging the Supreme Court directly, but trying a new legal argument to avoid paying up.

“That position sure seems to violate the spirit of the Supreme Court’s decision, if not the letter, and I doubt the Court of Appeals will play along,” said Siegel, who is not involved in the case. “The city looks like it’s playing whack-a-mole.”

Houston City Attorney Donna Edmundson did not return a call for comment.

Houston hasn’t contributed enough to meet its pension obligations for about 15 years, said Josh McGee, vice president of Houston’s Laura and John Arnold Foundation, which studies public policy issues, including health care, public education and public finance.

Houston would need to contribute 19 percent of the taxes and other revenues to shore up its pension program over the next 30 years, said McGee, coauthor of last year’s report, “Swamped: How Pension Debt Is Sinking the Bayou City.” But the city is contributing only about 15 percent, putting the municipal government — and taxpayers — into a deeper hole.

If the city brings Houston First employees into the pension system, the financial impact would be relatively small because the overall deficit is so large, he said. But the bigger question is whether court rulings would derail future efforts by the city to lower pension obligations through similar accounting maneuvers.

Former Houston mayoral candidate Bill King, a longtime critic of Houston’s chronic pension shortfalls, said he expects the city will try to move more employees off its payrolls to employee leasing firms as the pension system’s financial problems mount.

“We can’t afford these plans,” said King. “It will bankrupt the city.”