"First, rail's supporters say 'It's cheaper.' When you show it costs more, they say, 'It's faster.' When you show it's slower, they say, 'It serves more riders.' When you show there are fewer riders, they say, 'It brings economic development. When you show no economic development, they say, 'It helps the image.' When you say you don't want to spend that much money on image, they say, 'It will solve the pollution problem. When you show it won't help pollution, they say, finally, 'It will take time. You'll see.'"
Contrary to the claims of the Turner administration and the most media accounts, there is no cap on the City of Houston’s revenues. There is, however, a cap on how much the City can charge in property taxes every year. This distinction is important because property taxes only make up about 25% of the City’s total revenues and under the charter, that is the only source of revenue that is capped. There is absolutely no cap on 75% of the City’s revenues.
And even to describe the charter limitation as a “cap” on property taxes is somewhat misleading because the charter still allows the property tax collections to increase every year by the sum of inflation and population growth. And increase they have.
Since the charter amendment was enacted, the City’s property tax receipts have increased by 70%, rising from $646 million to $1.1 billion. The average increase since 2005 has been just under 5%. Twice since the charter was amended, the City has enjoyed double digit increases. For the last three years, the average increase was almost 7%.
And according to the City’s most recent monthly report, property taxes so far this year are up an eye-popping 15%. Eventually, that number will come down some due to refunds from value appeals, but the City is still projecting an increase of over 5% even with these refunds. I feel certain that the City has overestimated the amount of refunds since it is a little embarrassing to ask voters to repeal the property tax cap in a year when the property taxes are increasing by double digits.
Turner will inevitably make the case that he must be able to raise your taxes to pay for more police officers since everyone knows we need more officers. But you might recall that we have seen this movie before. In 2006, the City asked voters to increase the property tax cap by $90 million, which was supposed to be dedicated entirely to public safety. So, what did we get for that $90 million increase? A whopping increase in the HPD headcount of 212 (3% increase). And incredibly the Fire Department actually has 244 fewer employees than it did in 2006. I do not know what the $90 million was spent on, but it certainly was not spent on increasing the size of our public safety personnel. The City did, however somehow find the money to increase the headcount outside police and fire by over 1,000 employees.
But here is the real kicker. The charter provision that sets out the limitation on property taxes begin with these words:
“The City Council shall not, without voter approval . . .”
In other words, anytime the City administration and Council believe they must increase taxes by more than the cap, all they have to do is ask your permission. In the twelve years since the property tax cap was adopted, Council has never asked the voters for more money.
What Turner wants is the unrestricted ability to increase your property taxes. So far the cap has had relatively little effect on the City or taxpayers. But it has stopped City Council from indiscriminately increasing your property taxes year after year. And therein lies its true value.
Last year, Chicago increased its property taxes by over 20% and plans to increase them by another 30% over the next four years.
That will never happen in Houston . . . . as long as we have the property tax cap.
As you may have heard, the Texas Senate passed a bill yesterday which makes sweeping changes to the City of Houston’s pension systems. I am still reviewing the language of the final bill and will have a summary for you in a day or two, but one very important provision requires that future pension bonds be subject to voter approval.
There has been a long-standing tradition in Texas that bonds repayable from property taxes, referred to as general obligation bonds, must be approved by voters. In 1999, the Legislature formalized this tradition in Government Code 1251.
When the Legislature authorized pension bonds in 2003, the legislation was silent on whether voter approval was required. The Attorney General’s office has previously ruled that this silence on the voter approval allowed municipalities to issue bonds without voter approval.* So, the roughly $1.5 billion in pension bonds that have been issued by Houston, Dallas and El Paso, have all been issued without voter approval.
Senator Huffman made an early commitment to include a vote on pension bonds in her bill. Lt. Governor Dan Patrick and Senator Bettencourt both backed her up on the commitment. Turner initially railed against the provision, insisting it was a poison pill, but in negotiations over the weekend, Turner folded and agreed to its inclusion. Apparently the “poison” was not so lethal after all.
It is, however, unclear whether Houston taxpayers will get to weigh in on the initial $1 billion of bonds Turner intends to issue as part of the deal with the police and municipal plans for reduced benefits. This is because unless the bill passes both houses of Legislature by a two-thirds majority it cannot become effective until September 1. If it passes by a two-thirds majority, it becomes effective immediately on the Governor’s signature. The Senate easily passed the measure by a two-thirds majority, but if the House does not, Turner would have a three-month window to try and rush through the bonds before the effective date.
While issuing the bonds before the effective date would be an incredible slap in the face of Houston taxpayers, I am not particularly troubled by this possibility.
Many of you will recall that during the campaign I advocated using pension bonds to get benefit concessions from the pension plans, but always said any such deal should be submitted to voters for approval. Of course, during the campaign Turner was adamantly opposed to issuing pension bonds, but that is now the centerpiece of his pension plan.
The purpose of requiring voter approval for pension bonds, which are inherently risky financial instruments, is to ensure they are not misused. But the deal Turner struck, $1 billion of pension bonds for roughly $2.5 billion in benefit concessions, is a on balance a reasonable one. I would have preferred that they also be used to begin to phase out defined benefit plans, but there is some movement on that issue in the bill as well.
Polling shows that while voters strongly feel they should have the right to approve pension bonds, a majority would approve this particular deal, especially when it is explained that City employees made benefits concessions in exchange for the cash infusion which will be made from the bonds.
So, while I am philosophically opposed to issuing general obligation bonds without voter approval, I do not see any great harm if Turner issues the pension bonds before the effective date. And if the House ends up adopting the Senate bill by a two-thirds majority, this loophole will not be available and a vote will be required. Given the progress we have made on pensions generally in this new bill, if this proposition is submitted to voters I will support it.
Unfortunately, it looks like Houstonians will be the only municipal residents in Texas with the right to approve pension bonds. A bill authored by Paul Bettencourt to requiring a vote on pension bonds statewide easily passed the Senate but appears to be going nowhere in the House.
* Some lawyers, including yours truly, think the AG’s office got it wrong on not requiring a vote on pension bonds in their initial review. The AG concluded that at Govt Code §1251 (requiring a vote on GO bonds) and Local Gov’t Code §1.07 were in conflict and that therefore the savings clause in §1.07 controlled. However, a careful reading of the two sections suggests the two provisions are not in conflict. In that case, the voting requirement of §1251 should control. Hopefully Paxton will take another look at this issue.
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.