Police, city unions OK pensions
Mayor hoping firefighters join pact, which includes reduction of benefits
Houston’s police and municipal pension boards have agreed to a landmark reform package produced over months of intensive negotiations at City Hall, and Mayor Sylvester Turner hopes the firefighters fund will follow suit with a vote Monday.
The pending proposal, which puts Houston the closest it has come to solving a 15-year crisis that has contributed to recent credit downgrades and threatens to bust the city budget, would eliminate Houston’s pension underfunding in 30 years and avoid more than $2.5 billion in future costs by reducing benefits.
It also would limit the city’s exposure to future market downturns by assuming more realistic investment returns, and calls for issuing $1 billion in bonds to help close the funding gap.
The deal also includes a hotly debated provision that would require future benefit reductions or higher worker contributions if a market downturn or other factors drive the city’s contributions above a specified cap.
The next step is to take the agreement to Austin in the form of legislation, as city workers’ pension benefits are enshrined in state statute.
“We all recognize that
the course we were on was going to be destructive for everyone,” Turner said, making a rare appearance at a City Council committee discussing the reforms Thursday morning. “We all had to recognize there were going to be some changes. We tried to strike a balance. Under this plan there is certainty for all employees that there’s a retirement system they can count on that is reliable and sustainable, and we do not have to have this system be a political football year after year. I wish at the end of the day we didn’t have to make any changes at all, but that would be naive and unrealistic.”
Police and municipal pension officials declined comment.
Fire pension chairman David Keller said he can see his board’s vote Monday being decided by one member, or by a wide margin.
“I wish I had a crystal ball on this, but I really don’t know. It’s just hard to gauge what the outcome would be,” he said. “We’re proceeding with a great deal of caution.”
‘Severe issues’
If Keller’s board rejects the deal, city officials say it’s not clear what would happen, but sources close to the talks said the mayor has made clear to the firefighters fund that intransigence on a mutually agreed deal could result in the city writing less generous terms into the legislation on the fire trustees’ behalf.
Worker retiree representatives had mixed views, in part because some were not briefed on talks that had continued late into Wednesday night and, in the case of the fire pension, in the hours preceding the Thursday morning committee hearing.
Bill Elkins, executive secretary of the 1,700-member Houston Police Retired Officers Association, deferred comment until he had a chance to see the detailed deal.
Houston Retired Firefighters Association president Nick Salem said his group accepts changes must occur but is troubled by one of the several dozen benefit tweaks: a change that would reduce annual cost-of-living adjustments for firefighters who retired before 1997, prior to the generous benefit increases that first caused pension costs to skyrocket after 2001.
About 600 of Salem’s 3,100 members fall into that category, and he said many are near the poverty line.
Retired Houston firefighters do not received Social Security benefits.
“We don’t want to get in a big fight and kill this whole deal with the city because we want a deal with the city, but we’re having severe issues with this,” Salem said. “Some retirees are living on $1,000 a month. We’re not against the deal, but we’re against this one particular part. We’re trying to figure out what we’re going to do about it.”
Melvin Hughes, who leads the union of current municipal workers, likened the deal to medicine that has a foul taste but a good purpose.
“If you’re going to dig into it, fix it. I just don’t want to get to a point in life 20 years down the road where we have to do this again,” Hughes said. “City employees, I ain’t going to say we’re all happy with it, but we’re going to accept what’s going to make it better for our lives and our families and this city.”
Under the deal, the funds would assume more realistic investment returns — 7 percent rather than 8 percent to 8.5 percent — which first digs the hole deeper, increasing the city’s pension underfunding from $5.6 billion to $7.8 billion.
To dig back out, the funds would reduce benefits — items such as cost of living adjustments and employee payroll contributions — enough to slash the
underfunding by roughly a third, or $2.5 billion.
This includes a $1 billion reduction from the police fund, $802 million from the fire fund and $700 million in the municipal fund. To shave another $1 billion off the remaining gap, Turner proposes to issue bonds, pouring $750 million of the proceeds into the police pension and $250 million into the municipal fund.
The fire fund would receive no bond proceeds because it is the best-funded, as state law forced the city to make its full annual payments into that fund where Houston repeatedly has shorted its payments into the other two funds.
The ‘corridor’
A crucial element that arguably has caused the most heartburn for the pension funds is a concept Turner has called the “corridor,” which would prevent the city from facing the sort of multi-billiondollar funding gaps it confronts today and, Turner and finance director Kelly Dowe argue, would prevent workers from facing similar large benefit cuts.
Let’s assume the deal’s projections show the city should contribute 25 percent of payroll to one of the funds in 2020. That means for every $100 in salary for
that fund’s members, the city would give $25 to the pension fund.
If a market crash or worker pay raises led the city’s 2020 contribution rate to exceed the original projection by more than 5 percent of payroll — 30 percent or more in this scenario — it would trigger a renegotiation of benefits, such as higher worker contributions, lower benefits or a combination of the two.
At first, these talks would need to bring the city’s contribution rate down to 27.5 percent of payroll — 2.5 percent less than the 5 percent worth of wiggle room. But if returns did not recover within three years, further cuts could be needed to drop the city payment to the original projections.
On the other hand, a market boom could reverse prior benefit cuts made to stay within the “corridor.” A prolonged bull market could even see the pension underfunding paid off quicker, or, if the pension is already fully funded, a slight increase in benefits or reduction in employee contributions.
Turner will present a resolution to council next week, hoping to secure the group’s blessing, ahead of drafting legislation he expects to file next month ahead of the January legislative session.
“This has been a long time coming,” Dowe said. “It allows us to avoid significant, significant cost increases that are right on the horizon for us as a city, and allow us to show the Legislature in early November that we’re ready to move this thing forward and would like as-early-aspossible enactment.”
‘A pretty good plan’
Arnold Foundation pension expert Josh McGee said the latest version of the plan, which he has reviewed, answered many of the concerns he had after hearing Turner’s preliminary reform five weeks ago.
“It looks like a pretty good plan,” McGee said. “They’ve adopted better funding policies to be able to get up the difficult curve to paying the necessary amounts into these plans, they’ve asked workers for some reasonable concessions, specifically on COLAs, where most of the savings is coming from, and then they’ve also put in place this risk-sharing mechanism that looks like it has the potential to function pretty well, depending on how they implement it.” Bond uncertainty
McGee said there still is uncertainty about the $1 billion in bonds, including the interest rate the city will get on that money and whether that rate will exceed what the bond proceeds earn when reinvested in the market.
The Society of Actuaries and the Government Finance Officers Association recommend against pension obligation bonds, but Dowe noted Fitch ratings service blessed the city’s approach, given that the debt would be issued in tandem with benefit reforms.
“They’re getting a substantial reform as a trade for issuing those pension obligation bonds so it’s not automatically out of bounds for me,” McGee said, “but I think everybody needs to understand the risk they’re taking on.”
Much of the City Council discussion Thursday focused on the proposed $1 billion in debt, with some members pressing Dowe on whether there was an alternative, or worrying that interest rates will rise before the bonds are actually issued.
Dowe assured the council the city does not have another billion dollars sitting around, and said giving the benefit cuts are contingent on the funds getting that infusion of cash.
Councilman Dave Martin, who chaired Thursday’s hearing, called the proposal a “comprehensive, stable and fair” plan, and also backed the bond issuance.
“My analogy is I will give you $2.50 and in exchange you owe me $1, and the dollar is paid 3 cents every year for 30 years,” he said, comparing the benefit cuts to the bond issuance. “Who wouldn’t do that deal?”