Uptown Bus Lanes Already $30 Million Over Budget

     One of the worst public works boondoggles in our region is about to get worse unless our elected officials step in.  In 2014, the Uptown TIRZ proposed to build dedicated bus lanes down the middle of Post Oak Boulevard.   The cost of the project at that time was estimated to be $196 million, with over half that amount coming from local property taxes and the balance coming from State and federal transportation funds.  Last week, the Uptown TIRZ went to the Transportation Policy Council asking for an additional $30 million for the project.  And trust me, this will not be the last time Uptown comes back with its hand out.
     Most of you have probably never heard of the Transportation Policy Council (TPC), but it wields enormous influence over regional mobility projects.  It is a committee of the Houston Galveston Area Council (HGAC), which is one of twenty-four regional councils of local governments that were established by the Texas Legislature.  Transportation policy councils in each of these regional organizations are made up of local officials who allocate State and federal transportation funds to various road and transit projects within their regions.
     There are 27 members on our TPC.  Most are elected officials but there are also some appointed positions (such as the Metro chair and TXDOT’s district engineer).   You can see a complete list of the members [here].
     The TPC was notified of Uptown’s request for additional State funds on September 22.  Because of the size of the request, it could not be approved until the following meeting.  Fortunately, both County Judge Ed Emmett and Commissioner Steve Radack expressed concerns about the budget overrun in the meeting.  From their comments, it appears they will likely vote against bailing out Uptown, especially since Emmett voted against the project originally.  You can watch the video of the meeting [here].  Uptown’s request is discussed in agenda item number 5.
     Personally, I am very skeptical that the proposed bus lanes will ever achieve the projected ridership or congestion mitigation Uptown claims.  We have seen time and again that ridership projections are almost always overly optimistic.  Of particular concern is that the project is based on the assumption that commuters will either drive their car or take a park-and-ride to one of the ends of the bus lanes, then switch to the buses for the final leg of their trip.  In the transit world this is known as “two-seat trip”, meaning that the commuter must change modes during trip.  Historically, commuters have been reluctant to take two-seat trips except in the most congested areas, such as Manhattan.
     And the project will undoubtedly impede the flow of vehicular traffic in the Galleria.  There is a particularly problematic proposed interchange at Post Oak and the Loop where the bus lanes will transition onto the Loop.  I cannot imagine that traffic will not be permanently snarled at that intersection.
     But regardless of the future effectiveness of the project, it is simply an idiotic use of $200 million of taxpayer money.  I could come up with a list of at least 100 other transportation projects that would represent a better value.
     This project was pushed through by TIRZ bureaucrats trying to justify their existence and special interests along Post Oak, some of whom have received multi-million dollar right-of-way payouts.  It is wildly unpopular with most of the businesses along Post Oak and residents in the Galleria.  Post Oak went from being one of our signature boulevards to a war zone.  I cannot even imagine what a nightmare the traffic is going to be during the holiday season.
     Much of the work that has been done so far is utility work and right-of-way expansion.  Almost nothing has been done to actually begin construction of the bus lanes, which means that it is not too late to scrap this project.  A good step in that direction would be for the TPC to turn down Uptown’s request for additional funding.
     So, I am encouraging everyone to first call Judge Emmett and Commissioner Radack to congratulate them on questioning the request and to encourage them to vote against it when it comes back to the TPC for final approval.  You might also consider calling Houston City Council Members David Robinson and Larry Green, who also serve on the TPC, and ask them to vote against the increase.
     Finally, it is also time for residents in the Galleria to make it clear to the Uptown board that they are opposed to this project.  You can reach the Uptown office at 713-621-2011 or you can email it [here].   You can see a list of their directors at http://www.uptown-houston.com/about/page/tirz-uda-board.  If you know any of these members, call them and let them know you are opposed to the project.
     This project is crony capitalism at its worst.  TIRZs were originally established to help “blighted” neighborhoods.  This project is using $200 million of taxpayer money to subsidize a project intended to benefit the most expensive real estate in the City.  In the meantime, there are many neighborhoods in our City going begging for basic services, like flood control projects!
It is time to put an end to this boondoggle.
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Many Questions Need to be Answered Before Raising the City’s Taxes

    Harvey was an extraordinary event and calls for an extraordinary response.  That response may include raising more revenue for flood projects in our region.  But the proposal by Sylvester Turner for City Council to immediately raise the City’s property taxes by $113 million raises a number of troubling question.

    First, let’s not kid ourselves that his money is going to be used to stem flooding.  Since 2012, the City has collected about $800 million in “drainage fees.”  A tiny fraction of that money has actually been spent on flood control projects.  Trust me, none of this $113 million will be.

     Under the property tax cap charter amendment, City Council can raise additional property tax revenue over the cap by an amount “necessitated by city expenditures related to the inclusion of the city in any declaration of an emergency or disaster.

     Therefore, the threshold question must be:  How is the $113 million going to be spent?  The only explanations we have gotten so far is that the City will have to pony up about $20 million for it share of debris removal expenses, needs to replace about 300 flooded vehicles and repair some unspecified damages to some of the City’s facilities.  But we have a $20 million “rainy day fund” (recently renamed the Budget Stabilization Fund) for exactly this purpose.  And it should not cost more than about $15 million to replace 300 vehicles.  So where is the rest of the money going?

     And were any of those losses covered by insurance?  I found a note in the 2016 Annual Report that appears to suggest that the City is covered for any flood losses over $10 million.  I do not know if that is actually the case or not.  But if we do not have any coverage, why not?  (And for that matter, why were over 300+ vehicles left where they would be flooded in the first place?)  

     How much of these expenses will be covered by donations?  Are there alternatives to raising taxes?  Can some of the TIRZ money be tapped?  City reports show there is about a $50 million fund balance in the “dedicated” drainage fund.  Can that be used?  

     City Council has an obligation under the charter to demand an accounting of what expenses are necessitated by the disaster before voting to suspend the cap.  To do otherwise raises the question of whether this whole exercise is just a pretext to accomplish what the advocates of repealing the property tax cap knew they could not do at the ballot box.

    There are two things that make me suspicious this is just such a pretext.   First, the increase is exactly (to the one-hundredth percent) the amount the tax rate has been decreased because of the property tax cap.  Are we to believe that the city expenditures necessitated by the storm just happen to come out to that exact number?  

     Second, Turner’s main surrogate for the repeal of the property tax cap, Council Member Dwight Boykins, made a telling statement.  He told the Houston Chronicle, “Anything to bust that damn rev cap, I’m in.

    I think Boykins statement reflects the true opinion of many at City Hall.  They resent that Houston taxpayers have limited the amount that they can increase the property tax and will use any device or excuse to get rid of the cap, including exploiting a natural disaster.  

     I think it is also noteworthy that no other taxing jurisdiction in our area has proposed increasing taxes in response to Harvey.  The County and HISD both had more severe damages to their facilities, as did several of our sister cities on a relative basis.  Why is the City of Houston the only jurisdiction that needs to immediately raise its taxes.

    There could also be an unintended consequence from a tax increase.  It could spark a taxpayer backlash that will show up at the polls in the November for the City’s bond election.  My guess is that the improvement bonds are already in trouble since they have no money for streets or drainage.  But this could also imperil the passage of the pension bonds, which have, at least to now, enjoyed a comfortable margin of support.  The additional revenue from this tax increase will pale in comparison to the costs if the City is forced to go back to the drawing board on pensions.  

     Many in this City are hurting right now.  True, the proposed tax increase will not make a significant difference to most.  But the optics of the City piling on to their misfortune are ugly and will do much to unravel the unity we have found through this ordeal.

    And it is $113 million that the City Council will decide how to spend instead of taxpayers.  That is $113 million less for Houstonians to repair damaged homes, replace flooded items and give to charities.  

     Every tax dollar is a precious trust and especially so under these circumstances.  There may be a case for the City increasing taxes.  But that case has yet to be made.

Houston Does Not Have a Revenue Cap

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.

Houston Pension Bill – As Passed

     As you have probably seen in media accounts, the Legislature has passed a bill making very substantial changes to the City of Houston’s pension systems.  The bill as passed was 260 pages and mind-numbingly complex.  When added to the existing statutory language, the Houston pension statutes will now run over 90,000 words, which in and of itself is absurd.
     The bill follows the general outline of what Turner proposed last October, but as the result of lobbying by the business community and grass roots activists, the Legislature made significant changes to Turner’s original proposal.  This is the first time that groups representing the taxpayers showed up in Austin to be heard on pension legislation.  In the past, local elected officials and the employee groups would make a deal and the Legislature would rubber stamp it.  That is not what happened this time.
Let me begin by emphasizing that while the final bill moves us in the direction of solving the City’s pension problems it is far from a permanent solution.  Many of the City’s claims about the virtues, like it will allow the City to pay off the pension debt in 30 years or it will save a million dollars a day, are patently false.  And other than the $1 billion in borrowed money, the bill actually allows the City put less money in the plans over the next 5-6 years.  Hardly a way to reduce the debt.
     So, the City will face another pension crisis.  The timing of that crisis depends in large measure on how the investments in the pension plans perform over the next few years.  If they continue to perform as they have in recent years (10-year average = 5.6%), that crisis will be sooner rather than later.
A detailed review of the bill is impossible here.  For those of you who want to take a deep dive, you can review the bill [here].  But here is the Cliff Notes version:
1.  Pension Cost Reductions for Infusion of Bond Proceeds – The only part of the new legislation that is likely to make any real difference in the City’s pension costs and debt are benefit reductions and increases to the employee contribution in the amount of about 15% or $2.6 billion.  It is important to emphasize that this reduction in pension liabilities is estimated because the actual amount of the savings is dependent on factors in the future, like interest rates.  Nonetheless, the savings are substantial and will bend the cost curve down in the future.
     The benefits reductions fall into two categories.
The police and municipal plans agreed to about $1.7 billion in cuts in exchange for the City’s agreement to infuse $1 billion from the issuance of pension bonds.  Some of you will recall that in the last mayoral campaign this was one of the scenarios I suggested as a tool to reduce the unfunded liability.  At the time, Turner was adamantly opposed, arguing, “You can’t solve debt with more debt.”  Fortunately, Turner changed his view.
     There are also benefit cuts and contribution increases totaling about $900 million for the fire fighters pension plan.  I have long criticized the fire fighters for being slow to accept that their benefit structure was unsustainable, but the changes to the fire fighter plan are deeply troubling to me.  Unlike the police and municipal plans, the fire fighters did not agree to the cuts in their benefits and will not get any bond money.
     Also, the cuts to the fire fighters’ benefits were dramatically more severe than those agreed to by the police and municipal plans.  The average benefit cut per member to the fire fighter benefits under Turner’s plan is about $150,000 compared to about $90,000 for police and $28,000 for municipal.
     There is no question that the benefits for fire fighters are the most generous benefits of the three plans and were badly in need of reform.  However, this plan does something that every candidate for mayor in 2015, including Turner, promised to never do – take away benefits that had been previously earned by our employees.  How many times did you hear all of us who ran for mayor declare “a deal is a deal” and promise that earned benefits would never, absent an agreement, be cut.  We, as a City, have now done just that and in doing so have clearly broken our word to the current and retired fire fighters.  That is not something that should be taken lightly or celebrated.
2.  Voter Approval of Pension Bonds.  One reform that was won by the business community and grass roots groups was the requirement that any new pension bonds must be approved by voters.  When the Legislature allowed cities to issue pension bonds in 2003, the legislation was silent on whether voter approval was required.  The Attorney General’s office has interpreted that silence (incorrectly I believe) to mean that voter approval is not required.  As a result, the City has already issued about $600 million in pension bonds without getting voter approval.
     That will no longer be the case.  The bill now requires the City to obtain voter approval before issuing any new bonds.  I have long said that pension bonds can be a tool to help manage our pension problems.  But like any tool, they can be used properly or they can be misused.  Voter approval is an important check to make sure any future pension bonds are not misused.
     You may recall that when taxpayer groups first insisted on a voting requirement on bonds, Turner declared it was a poison bill that would kill the bill.  But apparently after Turner saw polling that nearly 80% of Houstonians thought they should vote on any new bonds, the provision became less toxic.
3.  The “Corridor.”  The third major component of the bill is a complex mechanism that is intended to limit the amount that the City will contribute to the pension plans in the future as a percentage of payroll, which has come to be known as the “corridor.”  As nearly as I have been able to determine, no other entity, public or private, anywhere in the country, has ever implemented anything like the corridor.  It is a completely untested and experimental model.
     It is also hideously complex and the provisions are ambiguous and in some cases internally inconsistent.  That, in my experience is a recipe for litigation and I suspect you will see plenty of that in the future.  You will also see the administrative costs for the plans, which are already too high, rise even more.
     The real flaw in the corridor mechanism however, assuming it is actually enforced, is that it primarily relies on future increases to employee contributions if the City’s contribution rises above the limit.  It is highly likely this will occur because the plans are unlikely to achieve the 7% investment target over the long run.  And a small miss on the investment return equates to very large increases in the employees’ contribution.  These increases will be so large at some point in the future it will not be feasible to enforce the corridor.  That is the event that will likely precipitate Houston’s next pension crisis.
4.  Phasing out Defined Benefit Plans.  The biggest disappointment with the bill is that there is no immediate phasing out of the defined benefit model.  The bill does include a safety net of sorts that provides that if any of the plans fall below a 65% funded level, they must move all new employees to a cash balance plan.  Cash balance plans have some elements of both defined benefit and defined contribution plans.  Unfortunately, the bill also includes extraordinarily long grace periods (four years for police and fire and ten years for municipal) which will likely make the provisions meaningless for all practical purposes.  In all likelihood, the City will see its next pension crisis long before the expiration of those grace periods.
     Nonetheless, the inclusion of this safety net is an important symbolic victory, because it is a concession that phasing out defined benefit plans is the real solution to the City’s pension problems.
5.  The Constitutional Question.  There is one issue outstanding that may make this entire effort for naught.  There is a provision in the Texas Constitution that grants the right to set actuarial assumptions to the pension boards.  Of course, the entire point of the corridor is to force the pension boards to share that power with the City and the bill establishes certain limitations on the pension boards’ discretion in setting the assumptions.  While there is certainly an argument to be made that the pension boards should not be exclusively vested with the power to set assumptions, that seems to be what the State Constitution provides.  The fire fighter pension board has already filed suit to declare the legislation unconstitutional.
     The other boards currently have no plans to sue, but may find they are forced to do so to avoid liability from their members.  Also, it is possible that any member of the plans could bring such a suit.  Of course, that litigation will take time to resolve.  If the City implements the plan and then it is declared unconstitutional several years from now, we will have a real mess on our hands.
     Notwithstanding Turner’s public confidence that the City will prevail in this litigation, the City legal staff was manic during the negotiations to get the fire fighter board to agree not to sue.   I make no prediction about the outcome on the merits, but certainly on its face, the legislation appears to violate the constitution.
     There is also another practical effect of the fire fighters’ lawsuit.  The Texas Attorney General must approve the issuance of any bonds by local governmental entities.  Generally, their policy is to not sign off on any bonds when there is any pending litigation.  Whether the Attorney General’s office would find this litigation affects the issuance of the pension bonds is an open question.  But generally, that office has been pretty conservative in making such determinations.
6.  Conclusion.  Shortly after Bill White was elected in 2003, he received the bombshell that the pension plans were underfunded by over $2 billion.  White undertook a series of reforms that reduced benefits and he issued pension bonds to shore up the plans.  But he left the defined benefit model in place.  A dozen years later, our pension debt had tripled.
     White’s reforms unquestionably reduced the future costs of the pension plans, but ultimately his incremental approach proved not to be a permanent solution.  Such is the case with this plan.  It too reduces the pension costs immediately, but instead of biting the bullet and beginning the phase-out of defined benefit plans, it relies on an untested and what will be proven to be unworkable mechanism to do what moving to defined contribution plans would have accomplished without the cost, complexity, litigation and uncertainty of this plan.   And as a result, Houston taxpayers and employees will suffer in the long run.
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City’s Sales Taxes Drift Lower after Super Bowl

     The Texas Comptroller reported today that the City’s sales tax receipts for June (based on April sales) were down by slightly over 2%.  After eighteen months of consecutive year-over-year declines, the City saw an increase in its sales taxes in March and April, reflecting January and February sales, which were boosted by the Super Bowl.  Sales taxes for those months increased by 6% from last year, about a $5.5 million pick-up. In May the City showed a slight decrease before posting this month’s 2% decline.
      In the last two years, Houston has posted year-over-year declines 20 times. For the FY2016-2017, sales tax collections were down by 2.5% from last year and the calendar year-to-date collections so far this year are down by 5%, even with the one-time shot in the arm from the Super Bowl.
     On the bright side, it does appear that the precipitous decline that began in late 2012 has flattened out. Of course, where we go from here will largely be dependent on oil prices.
     The sales tax receipts for Houston’s neighboring cities were mixed. Most saw increases, but several saw significant decreases. Generally, the suburban cities on the east side of Houston have held up better, probably because their economies are more closely tied to the oil and gas downstream, which continues to do well.  Also, the suburban cities that are farther from Houston have generally done better.
     The budget just adopted by City Council for FY2017-2018 projects a 1% increase sales taxes for next year. That may be achievable if oil prices recover. If not, it is probably overly optimistic.

Houston Gets Vote on Pension Bonds

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.

150 Financial Professionals & Executives Ask Legislature to Include Defined Contribution Plans for New City Employees

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.


 

* Additional names added after this printing.

Employees Likely to Face Massive Pension  Contribution Increases under Turner Plan

     The centerpiece of Turner’s pension proposal is its “corridor” mechanism which supposedly caps the amount the City will ever be required to contribute to the pension plans.  How the cap would actually work in reality is anybody’s guess.  It is a hideously complex, completely untested, experimental model, which has never been tried anyplace in the public or private sector as nearly as I can tell.
     But assuming it would be implemented as advertised, what would the effect on the City’s employees be?
     The proposal provides that if the City contribution exceeds the cap, the pension plans must decrease the cost-of-living adjustments (COLA), increase retirement ages and/or increase employee contributions.
     When you do the math, you find out that there is not much savings from further decreasing the COLAs or increasing the retirement age.  So, most of the adjustment will have to come from increasing the employees’ contributions.  The problem is that it will take huge increases in the employees’ contributions to make up even a small miss on the investment returns.
     The effect on the three plans is different.  Firefighters will be the most penalized.  The payroll for the fire department is roughly $300 million.  The firefighter pension fund has about $3.7 billion in assets.  If it misses the assumed rate by one percent (6% vs. 7%), that is $37 million that would have to be made up by an increase in employee contributions.  That means that the firefighters’ contributions would have to increase by 12.2% ($37 million/$300 million payroll).  The firefighters are already contributing about 10% toward their retirement, so this would take the required employee contribution to 22.2%.
     If you run the same calculation for the police plan you come up with 9.4%, which will take their employee contribution to 19.4%.  The effect on the municipal employee plan is not as great.  They would be looking at about an additional 4%.  One of the perverse outcomes of the corridor is that the better funded the plan, the harder the members of that plan are hit.
     If the investment returns are less than 6%, the increases in employee contributions would rise proportionately.   Keep in mind that the most recent 5-year average for the three plans is in the 5-6% range.
     Of course, requiring employees to contribute anything close to 20% is patently absurd and will never happen.  When we get to that point, and if the City were to actually attempt to enforce the increases, there would be mass resignations, strikes and, of course, more litigation.
     This is the fundamental flaw with Turner’s cap.  To claim that the City’s exposure is capped, it relies on a mechanism that will never be enforced because it is impractical.
     The timing of when employees will face higher contributions, and how high those increases will be, depends on how the plans do in the markets.  There are also a number of dampening features and trapdoors in the corridor language that will allow the City and plan administrators to manipulate the numbers to avoid hitting the cap, at least in the short term.
     But in the meantime, we are going to have to attempt to recruit and retain City employees with this sword of Damocles hanging over their heads.
     The corridor mechanism has been promoted as eliminating the need to begin the transition to defined contribution plans.  It does not.  There is no magic formula, no secret sauce.  The only real, long-term solution to Houston’s pension crisis to begin phasing out its defined benefit pension plans by moving new employees to defined contribution plans, just like 96% of the private sector has done.

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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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.