In the last few days we have heard more of the same old tired, debunked rhetoric from the Turner administration that the City cannot make the transition to defined contribution plans from the defined benefits plans that have driven it into insolvency.
Well, 150 of Houston’s top financial professionals and executives disagree. They recently sent a letter to the Legislature asking it to include moving all new employees to defined contribution plans. [Click here to read letter.] *
These individuals represent some of the finest financial minds in our City. The educational pedigrees include advanced degrees from universities such as Rice, Stanford, Harvard and Wharton, to name a few. Combined they have over 4,000 years of financial experience in some of Houston’s leading financial institutions and professional practices.
It should be noted that their letter acknowledges that Turner’s plans represents a significant incremental improvement in the overall pension quagmire. But they also conclude it does not go far enough in two critical regards. First, they believe that all new employees should only be offered defined contributions plans and that the voters should approve the issuance of any pension bonds to provide a check on the imprudent use of those risky financial instruments. These are hardly radical ideas.
The Turner administration has tried to make the case to the business community that his plan’s “corridor” eliminates the need to begin phasing out of the defined benefit systems. But there are several reasons to be skeptical about the efficacy of the corridor. First and foremost, it is hideously complex and its provisions are ambiguous. In my experience, complexity and ambiguity normally leads to litigation. But the truth is that no one knows how it might work because it has never been tried before.
But even if the plan works as advertised, its basic enforcement mechanism is to increase employee contributions if the plans do not make the new investment goal of 7% annually. Even a small miss on the investment goal would subject the City employees to crippling contribution increases that could not possibly be enforced. To make matters worse, the fire fighters pension board’s attorney has opined that the corridor is unconstitutional and vowed to immediately file suit if it is enacted. So it seems inevitable that we will be tied up in litigation for years, which will also mean that the bonds used to secure the benefit reductions will be as well.
Because of all of this complexity and uncertainty surrounding the corridor it is completely reasonable to provide for a back-up plan to control costs in the future, one that we know works. And that back-up is to begin moving new employees to defined contribution plans. We know that plan will ultimately work because the private sector has proved it works.
During the Senate negotiations on Turner’s plan, it was suggested that a “trigger” mechanism be added to force the conversion to defined contribution plans if the corridor did not work. The suggestion was that if any of the plans fell below a 65% funding rate (a dangerously low level by anyone’s standard) new employees would automatically be put in defined contribution plans. It was a reasonable compromise, but the Turner administration rejected it out of hand.
This should make everyone even more suspicious of the efficacy of the corridor. If Turner is worried that the corridor will not even maintain a 65% funded ratio for the plans, he obviously has serious doubts it will work as he has claimed.
Everyone agrees that we need to deal with the Houston pension crisis in this session and not wait until 2019 to try again. But Turner’s “it is my plan or nothing,” is a false dilemma. There is no reason that his plan cannot be supplemented to add something we know works.
The Legislature should adopt Turner’s plan but (i) remove the fire fighters from the corridor to reduce the litigation risk, (ii) add a provision to phase out the old defined benefit plans with defined contribution plans for new employees, (iii) require voter approval on any new pension bonds and (iv) exempt older employees with lower benefits from the COLA elimination. That would be real pension reform we could count on.