Why Not Put New City Employees into Defined Contribution Pension Plans?

     According to a recent CNN survey, 96% of private sector employees have a defined contribution pension plan.  The private sector phased out defined benefit plans over the last several decades because it is impossible to predict what their ultimate cost will be.   They have proven to be particularly problematic in the public sector where elected officials, unions and pension boards have an incentive to understate the costs by jiggering the numbers – like assuming an 8.5% rate of return on pension assets.

     Predictably, that kind of chicanery eventually catches up with the pension plans and the entities sponsoring them.  One city after another that has played this game has found itself driven into insolvency and without sufficient revenues to provide basic municipal services.  Which, of course, is where Houston finds itself today.

     Turner has proposed a mechanism, the so-called “corridor”, to cap the growth of the City’s exposure to rising pension costs.  No other entity has ever adopted such a measure.  It is completely untested and experimental.  It is also hideously complex.  Complexity leads to ambiguity, which in turns leads to parties gaming the system and litigation.

     Of course, you might want to ask yourself, if this is such a great plan, how come no one else has ever used it?  You would have to believe that the same financial geniuses that got Houston into this mess have suddenly become so brilliant that they have devised a solution no one else in the country has been smart enough to think of.  Excuse me if I am skeptical of that unlikely scenario.

     But the truth is that no one knows how well it will work, or if it will work at all.  I have previously expressed my doubts and reservations.  Others, like the Arnold Foundation’s Josh McGee, have a more favorable view of its potential benefits.  But I have not heard anyone, other than Turner and his surrogates, claim it is a permanent fix to our pension problems, because it clearly is not.

     If our goal is to limit, to define the taxpayers’ exposure to pension liabilities, we know how to do that.  We know how to do that because the private sector has already shown us the way — phasing out defined benefit plans in favor of defined contribution plans.  By the way, in addition to the private sector, other public sector organizations in our area, such as the Port of Houston and Metro, have already done this.

     The easiest, the fairest, and the least painful way to start the transition is stop offering new employees defined benefit plans.  It will take years to work out of the problem, but at least, we know there is an end someday.

     So, the question I have been asking for the last few weeks is this: Why not add phasing out the City’s defined benefit pension system in favor of defined contribution plans for new employees to Turner’s plan.  There is nothing that prevents us from doing both.  What is wrong with a belt and suspenders.

     The only answer I ever get is that the employees will not agree to that.  Huh?  Let me get this straight, 20,000 employees, over half of which do not live in the City, are dictating what kind of pension plan the other 2 million of us are going to offer to new employees!!  Are you kidding me?

     I completely support someone who came to work for the City being promised a defined benefit pension to demand they receive what they were promised.  But the employees have no right to veto taxpayers deciding to move new employees to defined contribution plans, something they favor by more than a 2-to-1 margin.

    So why would our elected officials bow to such an outlandish demand?  Well, as they say, follow the money.  The employee groups, along with the vendors that are feeding at the pension trough ($50 million last year), make very generous campaign contributions.  In the last City election, the “Workers’ Voice PAC”, which has a Washington, D.C. address, doled out over $300,000 alone.

     Of course, the ultimate irony is that a continuation of defined benefit plans is just as bad, if not worse, for the current employees as the taxpayers.  If Turner’s plan is implemented and really enforced, contributions from police officers and fire fighters are almost certain to rise to nearly 20% in a few years.  And COLAs, well, you can forget about those altogether.  What kind of luck do you think the City is going to have trying to hire new police officers when they tell recruits they have to contribute 20% of their salary to a pension that does not have a COLA?

     But, of course, it is the taxpayers who will, at the end of the day, be left holding the bag.  It is time for Houston taxpayers to take a stand and say, “NO MORE!”  If Turner wants to put his “corridor” in place, so be it.  But Houston taxpayers are entitled to a backstop in case the rosy promises we are hearing now end up being like the ones we heard about how the drainage fee was going to solve our flooding problem.

     We know that phasing out the defined benefit pension by switching new employees to defined contribution plans will absolutely make this problem go away, eventually.  So again, I ask the question, “Why not?”

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