Yesterday, the City posted more details about the proposed pension plan. The plan commits the City to pension payments in a range of approximately 27-38% of its payroll for the next 30 years. Based on the assumptions being used, the actual payments will almost certainly rise in short order to the upper limit of that range.
That means that the City will pay $26 billion in pension payments over the next 30 years. The payments will average about $850 million each year. But, of course, those payments are back-end loaded so that the current mayor and council will avoid most of the pain of paying for this plan.
But here is the real kicker. If you assume that property tax receipts will increase by 3% annually, the payments under this plan will equal about 50% of property taxes collected by the City for the next 30 years.
50% of property taxes! That is before you hire a police officer, buy a fire truck, fix a pothole or provide any of the services we expect from our City. Obviously, that is not sustainable. So get ready for you property taxes to skyrocket if this deal is enacted and voters remove the property tax cap next year.
Turner’s Bum’s Rush on $20 Billion Pension Deal
For the last month Sylvester Turner has been negotiating in secret with the same employee groups that donated hundreds of thousands of dollars to his campaign over the future of their pension system. No one else has been at the table, certainly not Houston taxpayers. Other than vague briefings to a few in the business community and think tanks, there has been a lock down on information about the new “plan.”
In the last week, the first details have begun to emerge about Turner’s proposal. Some of those details are encouraging, but other are equally troubling and there are still vast gaps in the information available.
Here are some of the things we do know and don’t know:
- There will be no transition, in the long or short term, to defined contribution plans. A transition to defined contribution plans for new employees is favored by 70% of Houstonians. Turner took it off the table because the employees would not agree to it. Exactly why our employees, most of whom do not live in the City, should have a say in what kind of retirement plan we, as taxpayers, offer to our new employees is beyond me.
- The plan will commit the City to spend $20-26 billion on pensions over the next 30 years.
- The City’s assumptions are based on the plans’ assets earning a return of 7% for the next 30 years, down from the old assumption of 8.5%. But in 2015, the plans earned less than 3%. They have not released their returns of this year. Rumor has it that they were less than 2015. The firefighters’ plan’s numbers were so bad this year it did not release the draft of the actuary report that was prepared.
- The employee groups’ leadership have tentatively agreed to about $2.5 billion of benefit cuts. This is about a 12% reduction. Various actuary groups are grinding away on whether the cuts actually add up to $2.5 billion, but my guess is that will be pretty close. It is less clear whether the rank and file in the employee groups are on board with their leadership’s agreement with Turner on these cuts.
- In exchange for these benefit cuts, the City will issue $1 billion of pension bonds and give that money directly to the pensions. This will be the largest general obligation bond issuance in the City’s history and there will be no voter approval of these bonds.
- The target contribution for the City is approximately 32-33% of payroll. That is, of course, a staggering number compared to private industry. But the plan will allow that level to rise to 37-38%, which is supposed to be the maximum the City will ever have to contribute. But the details of how that limitation would work have not been disclosed or apparently even worked out with the employee groups.
- The repayment of the pension debt is back-end loaded so that the real fiscal pain is conveniently delayed for about eight years. I am sure that is just a coincidence.
This is the largest financial commitment in the City’s history by far and may well be the largest it will ever make. Turner is asking Council to approve this plan after less than a week since he released additional, but far from complete, details about the plan. There are still enormously important questions for which we have little or no information. In fact, as of yesterday at 5:00 pm, Council had not even seen the language of the resolution they are being asked to approve.
What is the rush? Well, apparently Turner is going on his second foreign trip in as many months, this time to South Africa.
I have found in my business career that when anyone was trying to rush me to agree to deal, that was exactly the time I needed to sit down and take my time to make a decision. That is exactly what Council should do now. To vote on a $20 billion financial commitment that will obligate the taxpayers of Houston for the next three decades based on the skimpy information we have now would be irresponsible in the extreme.