Houston Mayor Sylvester Turner followed through on his timeline to roll out a pension reform plan this fall with his Sept. 14 announcement of a $7.7 billion plan that will pay off the city’s debt in 30 years.
To do that, significant benefit plan changes will occur across all three pension funds: the Houston Police Officers’ Pension System, the Houston Municipal Employees Pension System and the Houston Firefighters Relief and Retirement Fund.
The plan has almost received tentative approval from representatives from each pension fund, Turner said. However, it still needs to be approved by each fund’s board. From there, it will go to city council, as well as the state legislature before it becomes effect.
The first step was to establish what the actual unfunded liability for the city was. Previous estimates have put it around $5.6 billion, but that does not include $900 million in unreported losses across all three pension funds, as well as an overly optimistic discount rate of 8.5 percent. The discount rate represents the expected rate of return for the funds, and while the current rate reduces the unfunded liability, many have said the rate is too high and creates unrealistic expectations. The mayor has proposed lowering the rate to 7 percent, the national average for state and municipal funds is around 7.6 percent, which increases the unfunded liability by another $1.2 billion. Therefore, the city’s total unfunded liability is $7.7 billion.
Then, the mayor asked each pension fund to restructure their benefits packages so that the unfunded liability will decrease by one-third. Turner declined to elaborate on how the plans were being restructured, adding that he left it up to each fund to figure it out themselves. He added in a Sept. 14 press conference that specific aspects of the pension packages such as cost of living adjustments, future benefit accruals and the city’s deferred retirement option program, are likely to be targeted. The restructuring resulted in a combined $2.5 billion reduction in the unfunded liability. That amount comes from roughly $1.1 billion from the Houston Police Officers’ Pension System, $700 million from the Houston Municipal Employees Pension System, and $802 million from the Houston Firefighters’ Relief and Retirement Fund.
Next, with $5.2 billion in unfunded liability remaining, Turner then expects the city to sell $1 billion in bonds, including $750 million from the police fund and $250 million from the municipal fund, which would reduce the liability to $4.2 billion.
“The beauty of the plan is that you allow the employee groups to come up with suggestions that are in their best interest, but it achieves the objectives of the city,” Turner said.
With the unfunded liability established at $4.2 billion, the plan then calls for a 30-year set amortization schedule. Currently, the city is on an open amortization schedule that resets annually, making it difficult to determine the outstanding balance. Additionally, the city of Houston will set parameters to ensure the plans stay on track and the city continues to make its payments. This corridor, as Turner calls it, allows for an increase in the city’s payments up to a certain point, which has yet to be established. If payments exceed the agreed upon boundaries, the pension funds will be required to again restructure their benefits plans to bring the payments back into balance. This is the lone point of contention, Turner said.
“(The firefighter pension) is not yet on board with this concept. Hopefully they will be on board, but it is a non-negotiable piece for me,” Turner said.
Turner added that if these parameters had been in place in 2002, the last time the pension payments spiked, the measures taken wouldn’t have been as drastic.
“We’re going to have to do the major adjustments right now to get things back under control. From this point on, we can make modest adjustments if we need to,” Turner said. “But we’re doing the heavy lifting right now.”
Additionally, Turner reiterated his initiative to repeal the city’s revenue cap through a November 2017 voter referendum, something he has continuously said impeded the city’s growth. However, business groups including the Greater Houston Partnership have come out against a repeal of the revenue cap.
Joe Martin covers technology, money and law for the Houston Business Journal.Follow him on Twitter for more.