Leah Binkovitz | @leahbink | September 21, 2016
Experts organized by the Kinder Institute for Urban Research weighed in Houston Mayor Sylvester Turner’s newly-unveiled pension reform proposal at a panel discussion Tuesday — the same say ratings agency Fitch concluded that Turner’s proposal “could improve the sustainability of the city’s pensions.”
Several measures in the proposal will produce significant cost-savings, according to Turner, but without buy-in from all three pension boards, warned the panelists, challenges to any reforms could be hard to avoid down the road. Notably, while the city’s police and municipal workers have backed Turner’s plan, the city’s firefighters plan has not.
Each of the city’s three pension funds are underfunded, to some degree, and their funding levels have worsened since 2000, in large part due to lower-than-expected investment returns and underfunding by the city, according to a report from the Kinder Institute for Urban Research.
The mayor’s proposal includes both cuts to some retiree benefits and a lower assumed rate of return, as well as a set 30-year schedule to pay off the unfunded liability, which today is around $7.7 billion, according to the mayor’s estimates.
The city would also commit to paying the full contribution amount each year — something it hasn’t done for all three funds in over a decade. It includes $1 billion in pension obligation bonds, and a system of thresholds — right now, not publicly defined — that would trigger further negotiations between the city and the pension boards in the future, depending on changing financial conditions. Notably, the plan does not include a switch to the type of defined contribution plan that is offered to many private-sector employees.
The lack of support so far from the firefighters’ pension board is a potential roadblock that could prove critical for the plan, said Max Patterson, the executive director of the Texas Association of Public Employee Retirement Systems, during the Tuesday night panel.
But Patterson said Turner, with his relationships in both Houston and Austin, and his experience in the state legislature, is in a unique position to bring all three boards to the table and get the plan approved. “He has a great deal of respect in the legislature,” Patterson said.
“You don’t know until you get into the details,” he continued, noting that big costs like cost of living adjustments and the Deferred Retirement Option Program face cuts in the mayor’s plan. “You have to modify them to bring the costs down,” said Patterson.
Though Houston’s unfunded liability has soared in recent years, there are many other cities in similar positions, noted Liz Farmer, a public finance reporter with Governing magazine. “I wouldn’t characterize Houston as careening yet,” she said.
Turner’s plan includes several typical, proven steps that have been used by other cities that have sought to reduce their unfunded liabilities, she said, including lowering the assumed rate of return on investments to 7 percent instead of the current 8 to 8.5 percent, and closing the amortization period.
Others on the panel said they want to see more details about the plan. “We are excited about the mayor’s proposal,” said Marc Watts, chair of the municipal finance task force with the Greater Houston Partnership. But he expressed concern about the so-called corridor mechanism that would trigger new rounds of negotiations if the city’s contribution limits are reached. “The plan has some big uncertainties,” he added. “I wish the mayor had negotiated a little more for some savings.”
There were several notable items not included in the mayor’s reform, including a switch to a defined contribution plan as opposed to the defined benefit system used in Houston and many other cities. Watts argued that defined contribution plans were ultimately needed as an option to stop increasing costs, and he said they could help attract younger workers who want more flexibility in the early years of their careers. Defined contribution plans are generally more portable than defined benefit plans.
And the question of property taxes was also not addressed explicitly in the plan, though Turner called for a repeal of the property tax cap at the same time he pitched pension reform in his news briefing last week. “We need to see meaningful pension reform first and then we can talk about property taxes,” said Watts, echoing Turner’s own position that he will take up the city’s revenue cap after dealing with the pensions.
Others were skeptical of the usefulness of the $1 billion in pension obligation bonds the mayor says he wants the city to issue. “It really is just moving debt from one place to another,” said Jean-Pierre Aubry, associate director of state and local research at the Center for Retirement Research at Boston College, whose research formed the basis of the Kinder Institute’s pension report.
But perhaps most critical for the plan moving forward is its ability to win approval from all three pension boards. “Litigation is probably stop one of where it can go wrong,” said Farmer, drawing on the experience of other cities across the country. “That’s obviously a huge concern, particularly when you’re talking about a property tax,” she added, which some think may have to be raised along with the revenue cap to generate enough funds for the city. Even if all three pension boards sign on, litigation is still a possibility, she said.
Houston City Controller Chris Brown reassured residents that any increase in property taxes would translate to a minuscule bump for the typical homeowner. “I have a very high tax bill like the rest of them,” Brown said. “We’re all in this together,” he added, saying the growing city needs growing revenue to provide for its services.
More important to taxpayers than pension reform itself is the mayor’s ability to tie the plan — and any potential increases in taxes — to improved services for residents. “Voters care about getting their streets paved, things they can see and touch,” said Farmer.
Turner’s proposal will go before city council within the next few weeks, according to the mayor’s office, then it would need approval in the legislature.
“It’s a serious problem,” Patterson said. “It has been neglected for a long time. It’s going to get fixed one way or another.”