Houston Business Community Needs to Take Principled Stand on City’s Pension

I find it incredible that some elements of the Houston business community are still considering endorsing the pension “reform” plan that has been proposed by Turner.  Before getting too far off in the weeds on the details of the plan, let me pose five questions regarding this issue.
    1.  Do you think that the City should commit to maintaining defined benefit pension plans for the next 30 years, which will add tens of thousands of new employees to this broken financial model?
     2.  Do you think that the City should commit to 32%, and perhaps up to 37%, of its payroll to the pension system for the next 30 years?
     3.  Do you think that the City should commit 50% of the property taxes it will collect over the next 30 years to the pension system?
     4.  Do you think that the City should issue $1 billion of pension bonds, which will be the largest bond issue in the City’s history, without voter approval?
     5.  Do you think the City’s property tax cap should be repealed?
   If you disagree with any of these five propositions, then you should be opposed to Turner’s plan because each of them is a critical element of it.  While the property tax cap is not formally part of the plan, it is impossible to pay for it, even in the short-term, without the repeal of the cap and, of course, Turner has said that he intends to put the repeal on the ballot in November.
If you need more reasons to oppose the plan, consider the following:

     1.  Turner has claimed that there will be $2.5 billion in savings from the plan from benefit reductions and increases in employee contributions.  However, the City has refused to release the calculations from which these proposed savings were derived, notwithstanding the repeated requests to do so by third parties attempting to vet the plan.  From the limited information we have, most of those familiar with the plans have been unable to generate a number anywhere close to $2.5 billion.  Craig Mason, the City’s chief pension officer under Bill White, has flatly said the changes to the plan will not generate $2.5 billion in savings.

     2.  No drafts of the proposed legislation have been made public.  A secret draft of the legislation for the police has been circulated to some select organizations but not made available to the public.  Apparently some Houston residents are more important than others.  This week the City refused to release the draft of the police bill claiming it was exempt from the Open Records Act.  Of course, the mere fact that a “secret” draft is being circulated tells you all you really need to know about this process.   How can any organization or individual endorse the “plan” without the actual legislation being released to the public?

     3.  The only potentially redeeming feature of the plan is the so-called “corridor” which would limit the City’s contribution to 37% (as absurd as that level is).  According to the term sheets, once the contribution goes above 37% of payroll, the pension plans would either reduce benefits or increase employee contributions.  The problem is that the enforcement mechanism for even this minimal protection for the City has never been defined.  What exactly happens if the pension systems do not make the specified changes is anybody’s guess.  That kind of vagueness and the inherent complexity of such a mechanism virtually guarantees that the pension systems and the City will be in litigation for decades.

    4.  The plan uses a repayment schedule that negatively amortizes the pension debt for about the first six years.  Conveniently, the payments begin to dramatically ramp-up after the current administration will be out of office.  At the end of the 30-year period, the annual pension payments would be over $1 billion.

  Some have expressed the view that the current situation is so dire that any improvement is better than nothing and that since this is all Turner is willing to put on the table, the business community should support it.  Of course, it is remarkable that the business community now has so little influence that a mayor can now dictate terms to it.  But laying that embarrassment aside, a bad deal is not better than no deal.
    If there are no changes to the pension plans this session, the City’s payments will rise by about $200 million annually over the next two years.  That means the City will have to tighten its belt, which is not a bad thing.  And the higher payments will actually help shore up the plans’ financial condition.  But even more importantly, a little financial pain may pave the way for real reform in two years.  If Turner’s plan is adopted, real reform will be dead until the payments escalate beyond the City’s ability to cover them, probably ten years or so hence depending on whether the property tax cap is repealed.
    As many of you have heard me say repeatedly over the last ten years, there is no pathway to true reform of the pension system without a plan that phases out defined benefit plans.  Had the City started moving new employees to defined contribution plans ten years ago as many of us suggested, we would not be facing the crisis now before us.
    This plan, to the extent we can even discern what it really entails, is not true reform.  It is a complex shell game that does little more than kick the can down the road to the next administration.  It will make the City a financial cripple for the next 30 years and I believe will set off a downward spiral in City services that will hollow out Houston’s core much like we have seen in other cities.
     Houston’s business community failed our City by not being on top of this unfolding disaster over the last two decades.  Let’s not compound that omission by endorsing a plan that none of us would even vaguely consider for our own businesses.  It is frankly inconceivable to me that any serious business person or anyone who claims to be a fiscal conservative can even consider supporting this “plan”.
     It is time for our business community to make a principled stand and get our City back on the road to true fiscal responsibility.  That means some transition to defined contributions plans.  Anything short of that is not true reform and should be soundly rejected.