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?”

[If you would like to be added to my distribution list, please send me your email address at weking@weking.net.  Also, previous emails are posted at www.BillKingBlog.net]

Secret Pension Plan Revealed

A few days ago, I received an unmarked envelope.  Inside the envelope was a copy of the draft bill that the Turner administration is proposing to amend the police pension plan.

Because of the secrecy in which this process is shrouded, I am not certain that I have the most recent version.  The mere fact this process is being carried on in this cloak-and-dagger fashion is shameful and, of course, very telling about the proponents’ confidence in this plan.  Of course, we still do not have any of the financial data that backs up Turner’s claims about the plan.

You can review the police pension statute as it would be amended by this bill by clicking Article 6243g-4 – Police (w proposed changes).  The comments in the margin are mine.  Also, you can read my detailed analysis of the bill by clicking WEK Bill Summary.

But here are the highlights:

Not a Permanent Solution – At the outset, everyone should understand that Turner’s proposal is not a permanent solution to the City’s pension woes.  It does, however (1) represents about a 14% cut in the City’s costs of the pension plans and (2) establishes a hideously complex mechanism that, if enforced in good faith, would limit the percentage of payroll the City must contribute to the pension.  These improvements are not trivial, but neither are they an ultimate solution to our pension woes.  As I have said many times, there is no pathway to real pension reform that does not entail phasing out our defined benefit plans.

However, if defined contribution plans for new employees were added to this plan and the “corridor” mechanism were tightened to be both effective and enforceable, especially restricting the issue of pension bonds, we would be much closer to a real solution.

Pension Debt Not Paid in 30 Years – Notwithstanding the Turner administration’s repeated promises that the plan would retire all of the City’s pension debt in 30 years, that is clearly not true.  Any year in which the pension plans do not make the 7% investment goal as they have not in three of the last five years the losses for that year are added as an additional layer of debt that is amortized over thirty years from that loss.  For example, if the plans miss their investment goal in 2037, 20 years from now, that ensuing debt would not be paid off until 2067!

No Vote or Restriction on Issuing Pension Bonds – Part of the Turner plan is to issue $1 billion of new pension bonds without voter approval.  But worse, this bill imposes no restrictions on future pension bonds nor does it require voter approval.  The bill has provisions that may require additional bonds to be taken into account when calculating the City contribution, but it also appears to allow the City to borrow its annual contribution each year.

Future COLAs (Cost of Living Adjustment) Tied to Investment Returns – This may be the most surprising, and potentially most impactful provision of the plan, both to taxpayers and retirees.  In the term sheets, future COLAs were frozen for some retirees for three years and then tied to Social Security’s COLA adjustment.  But in this bill the COLA is set to 5% below the pension plans’ investment return.  Over the last ten years the plans have averaged about 5.5%.  If that trend continues, this provision would virtually wipe out COLA adjustments for all retirees.  While the current COLA provisions are unrealistic and need to reworked, this provision would dramatically impact older retirees, especially those who retired prior to the big run-up in pension benefits at the end of the Lee Brown administration.

Pension Debt will go Up, not Down – As we suspected from the term sheets, the bill adopts a repayment schedule that negatively amortizes the pension debt.  If the City’s contribution hits the maximum allowed by the bill, which just about every expert predicts it will, the pension debt will go up an additional $1 billion.  In addition, because of other factors (e.g. lag times, asset-smoothing, etc.), it is a virtual certainty that the pension debt will rise for the next decade or so, at least.  We could easily wake up 10 years from now with several billion dollars more in pension debt than we have today.

No Consequences if “Corridor” is not Enforced – This may be the most serious concern I have about this bill.  There is no consequence to the City if it elects not to enforce the corridor mechanism.  The bill requires the pension plans to reduce benefits if the corridor maximum is reached.  But the bill does not specify what happens if they refuse.  The only remedy would be for the City to sue.  First, do we really have confidence that an administration and City Council that accepts hundreds of thousands of dollars in campaign contributions from employee groups would really initiate such litigation?  And even if they did, the complexity of the plan and the glacial pace at which our courts move would keep enforcement action in limbo for years.  I think we have been in litigation over the drainage fee for seven years now and it still is not over.

Huge Loopholes in Bill – As you will see if you review my bill analysis, there are huge loopholes in the bill’s corridor mechanism.  Whether these are intentional or just oversights, I cannot say.  But if we are to go forward with the corridor mechanism, these problems in the draft bill must be addressed.

Conclusion – There are very significant issues with the changes to the City’s pension system that are proposed in this draft bill.  But, if it were amended to address some of these issues, it would represent a real improvement in the current situation.  The two most important changes to the plan are the addition of defined contribution plans for new employees and giving voters the right to approve pension bonds, and these points should be non-negotiable.  Anyone not prepared to support these common-sense ideas is not serious about pension reform and certainly not a fiscal conservative.

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.

Happy New Year from the City of Houston: We’re Insolvent!

     It has become standard bill of fare for the City of Houston to hold the release of its annual audit until sometime between Christmas and New Year’s Day, hoping that the awful news normally contained therein will go unnoticed by the local media, which it normally does.
     Holding true to form this year, the City dropped its audit for the fiscal year ended June 30, 2016 on the internet late in the day on Friday, December 30, notwithstanding that the auditors signed off on the report a month earlier on November 30.  You may recall that last year the City released its audit, which had been completed on December 2, at 4:00PM New Year’s Eve, which was also conveniently after the December 12 City run-off elections.
     The headline news from the report is that the City is now officially technically insolvent, that is, the City’s liabilities exceed its assets.  According to the report the deficit is a little under $100 million, although the real number is much larger (more on that in a moment).  The fact that the City was, for the first time in its history, insolvent was timely reported by the Chronicle.  [click here]  But unfortunately, the story also included the swill from Turner and our financial watch-dog turned lap-dog, Chris Brown, that the City going insolvent really was not that big of deal and that the solution to the City’s fiscal woes is to double down – for another 30 years — on the defined benefit pension system that got us into this mess.
     Turner was quoted as assuring everyone that the City had $2.5 billion of cash on hand, plenty to pay all its bills.  That is, of course, if you don’t count the $8 billion of pension bills the City has accumulated in the last fifteen years.  Nor does he mention that about 90% of that money is tied up in restricted accounts that are not available for regular expenses.
     There are hundreds of pages in the report, so there is much yet to be unpacked.  But here are some of the things that jumped out at me in the few days we have had to examine the reports.
     1. Are we insolvent by $100 million or $2 billion?  One of the more bizarre and deeply troubling aspects of these reports is that they continue to assume that our pension plans will earn an 8-8.5% rate of return indefinitely.  Of course, these assumptions are absurdly unrealistic.  Last year the plans, on average, lost about 2%.  It appears that the fire fighter plan assumption of 8.5% is the highest in the country and the only plan to continue to perpetuate this fantasy.  None of the other 10 largest cities in the country used a rate of 8% or higher in their most recent audits.  Even Turner has admitted as much by proposing lowering the rate to 7% in his new pension plan.  The police pension plan dropped its rate assumption last year to 7% and then arbitrarily raised it back this year to 8% notwithstanding it lost over 3% last year.
     The difference is not trivial.  Buried deep in the notes to the report is a schedule that shows the effect of lowering the plans’ assumption by a mere 1% on the city pension debt.  That small change balloons the pension debt from $6 billion to about $7.8 billion.  If the auditors had used Turner’s new numbers, the pension liability would have swollen to over $8 billion.  In other words, if the auditors had used the new assumptions proposed by Turner, the City would have been insolvent by over $2 billion instead of the $100 million it has officially reported.
     This kind of cherry-picking assumptions out of thin air allows the City to manipulate its audit results.  It is difficult to understand what the auditors were thinking about when they signed off on these absurd assumption.  Generally speaking, auditors are supposed refuse to issue a “clean opinion”if their client’s assumptions are patently unsupportable.  In their transmittal letter, the auditors specifically state: “Government Auditing Standards . . . require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.”  How is understating the amount of the City’s insolvency by 20-fold by using assumptions everyone agrees are not realistic not a “material misstatement” of the City’s financial condition?
     2. “Elite” Club of Bankrupts.  One of the City’s other favorite propaganda lines is to suggest that its financial woes are typical of other cities around the country.  Well, not so much.  I have looked at the latest financial reports for the 30 largest cities in the country.  While it is hard to compare the financial statements of one city to another, all must report their “net asset” position.  I have only found six others which are technically insolvent (New York, Chicago, Philadelphia, Jacksonville, Indianapolis, and Boston).  To be fair Baltimore has not issued an audit on the internet for over two years and is almost certainly insolvent.  Also, Dallas and El Paso will probably join the list when their reports are issued later this year as both are struggling with crippling pension debts as well.
     However, many other cities like Los Angeles, Charlotte, Seattle, Phoenix, San Antonio and San Francisco are still very much solvent notwithstanding their own pension issues.  So, while it is true that virtually every large city in the country today is struggling with financial issues to one degree or another, Houston’s predicament places it among those with the most grave fiscal challenges.
     3.  The Police Pension $676 Million Flip-Flop.  One truly amazing entry on the City’s books this year is a write-down, that is reduction, of the City’s debt to the police pension plan by $676 million due to “assumption changes.”  It appears that this is the result of police pension changing its investment assumption for 8% to 7% last year and then going back to 8% this year.
     Now just think about this for minute.  The amount that taxpayers supposedly owe just one of the pension funds changed by $676 million in one year purely on the whim of some nameless actuaries and a pension board which is mostly elected by the pension members.  By the way, that change is equal to more than half the property taxes collected by the City last year and about 15% of the total pension liability for that plan. And the taxpayers, rank-and-file police officers and even City Council had absolutely no say in the matter.
There cannot be a clearer example of the vagaries of the costs and debt associated with defined benefit pensions and the utter hubris that we can predict investment returns and demographics that will ultimately determine the true cost of these plans over the next 30 years.  This is why Turner’s plan to double down on defined benefit plans for another 30 years is such a dangerous idea.
     4.  Other Metrics
Here are a few other comparisons to the previous year noted in the report:
Total Revenues: Up 3.4%.
Total Expenses: Up 5.6%.
Amount Expenses exceeded Revenues: $288 million or 6%.
Increase in Total Debt: $820 million (larger than any bond issue ever approved by City voters).  Had it not been for the police pension’s flip-flop on its rate assumption, the increase would have been $1.5 billion.
Miles of Streets Resurfaced: Down by 42 (152 vs. 194, 28% decline).
Tons of asphalt used for pothole repairs: Down by 2,842 (13,130 vs 15,972, an 18% decline).
I expect to have more to say about the annual reports for the City and its pension plans after I have had more time to study them.  Till then . . . .

Secret $2.5 Billion of Pension Savings

     From the moment Sylvester Turner announced his new pension scheme roughly two months ago, the principal sales pitch has been that it would produce $2.5 billion in immediate savings from benefits reductions to which the pension boards had agreed.  At that original press conference, reporters pressed Turner for specifics on exactly what the cuts were.  He refused to provide details.
     Finally, about 48 hours before Council voted on the outline of the plan, the City provided some details about the benefit reductions.  They are largely cuts around margin, reducing the cost-of-living adjustments (COLAs) and making some changes to the deferred retirement optional plans (DROP).  While the benefits reductions outlined in the term sheets are substantial, there was no documentation or back-up on how these cuts totaled $2.5 billion in immediate savings.
     Many of us attempting to vet this plan have been asking for that back-up since the plan was announced.  Administration officials have repeatedly promised it was about to be released, but so far, nothing has been forthcoming.
     Last week, City Controller Chris Brown and I appeared at a forum to discuss the new plan.  When I pressed Chris on why the back-up on the $2.5 billion in supposed savings had not been released, he said that the City had signed non-disclosure agreements with the pension boards that prevented them from releasing those numbers until a bill has been filed with the Legislature!!
     I have skimmed through recent City Council agendas and I cannot find where any such agreements have been approved by Council.  But even if they exist, what possible justification can there be for the City agreeing to keep these calculations hidden from the taxpayers?  After all, they are the ones who are going to foot the bill for this debacle.
     Obviously, someone in Turner’s administration did some calculations prior to his press conference in October to come up with the claim that these changes would save $2.5 billion.  Where are those calculations and why have they not been released to the public?
     Being somewhat of a skeptic (understatement), I suspect the reason the calculations have not been released is that they will not withstand independent scrutiny and that, if we ever see them, we will find out there are not $2.5 billion of savings from the cockamamie plan that has been put forward.
     But, I could be wrong.  In any case, the issue could easily be resolved.  Release the damn numbers now!

Open Letter to City Employees & Retirees: Why You Should be Demanding Defined Contribuion Plans for New Employees

The City and your pension plans’ management are leading you down a path that will seriously impact your pensions for years to come.

Defined benefit pension plans are a broken financial model.  They were originally put in place in a time that most people only lived a few years after retirement and financial markets were much more stable.  Neither of those conditions exist today.  As a result, the costs of defined benefit plans have inexorably risen over the last several decades causing the private sector to almost completely abandon them.

Every new employee added to this broken model makes your pension plan weaker and your pension less secure.

This is not an opinion.  It is just math.

The latest data from the City (which is still unrealistically optimistic) shows that the City would have to contribute over $8 billion just to pay the benefits that you have earned so far.

The proposed plan represents an average 12% cut in the benefits you thought you were going to get.  Of course, this comes after City leaders repeatedly promised you they would honor all pension commitments.  And trust me, these cuts will not be the last you see.  In fact, this is just the beginning.

Automatic Future Benefit Cuts or Increased Contributions

The term sheets agreed to by your pension boards include automatic additional cuts if the City’s costs exceed the “corridor”.  The term sheets specifically say that once the corridor is exceeded that the pensions will further cut the cost-of-living adjustments (COLA), extend retirement ages, and/or increase contributions.

Of course, no one can predict the future, but it is highly likely that the corridor limits will be exceeded sooner rather than later, as was suggested by Tuesday’s Houston Chronicle story.   Many investment professionals question whether the new 7% return assumption is reasonable.  Warren Buffet has said that pension plans should not be using anything above 6%.  His company’s plan is based on 4.5%.   Over the last two years your plans have averaged returns of less than 3%.  Both the police and fire plans lost money last year.

You have been told that this plan provides certainty about your future benefits, when the exact opposite is true.  And the plan is so complex it will undoubtedly result in years of litigation over how it is to be interpreted, if it ever passes.

Forget about Future Raises or Increasing Staff

The proposed plan sets the target contribution for the City at 32% of payroll.  The upper limit is about 37%.  How can the City possibly afford to hire new employees and pay them a decent salary when it must put up an additional 37% in a pension plan?   And what do you think are the chances of existing employees getting any kind of respectable pay raises with a 37% add-on for pensions?

Practically speaking, you can also forget about there ever being two officers in a patrol car, the City ever building any new fire stations, or hiring enough building inspectors, or addressing any of the other hundreds of critical needs Houston is facing.

The Causes and The Cure

There are two reasons that the City is in this mess.  The first is that the increases to pension benefits during the Lee Brown administration turned out to cost vastly more than was understood at the time.  This is what is frequently referred to as the “legacy costs” and we must come up with a plan to deal with those costs.

But an equally important driver of the out-of-control costs is the City’s blind commitment to indefinitely continue defined benefit pension plans.  The notion that we can hire people today and promise them a benefit based on their salary thirty years from now and have any idea what that is going to cost is absurd.  If the City continues to cling to defined benefit pension plans, the City’s – and your pension plans’ – finances will continue to deteriorate.

The Right to Opt Out

In addition to other needed reforms, you should have the right to opt out of the existing pension plans and to put your money in your own retirement savings account.  That may not be for everyone, but if you want out of the interminable controversy that has been and will be the history of these plans, you should have the right to do so and to take control of your future.

Property Tax Cap Will Not be Repealed

Many of your leaders are assuring you that some of the financial pressure on the City will be relieved if voters repeal the property tax cap that was passed in 2004.  It is a fantasy.  It is not going to happen.  This issue has been polled extensively and over 70% of Houston voters oppose repealing the cap on property taxes.  And with tax bills already skyrocketing, can you blame them?


I am not predicting an imminent crisis or financial collapse of either the City or your pension plans.  But if we do not reform the City’s finances and begin providing reliable services at reasonable tax rates, the City will suffer a long, slow decline, or hollowing out, like other great American cities that failed to tame this problem.  And there will be a tipping point at which this becomes a crisis, just as it has in Dallas.  That should concern you because your benefits are paid over the long term as well.  If the City suffers financially, so will your pension plans.

We don’t know what all will be required to put the pension system on a sound footing and probably will not know for some years.  But the most obvious change that should be made immediately is to convert new employees to defined contribution plans.  This will not, by itself, solve the pension problems.  But as the old saying goes, when you are in a hole stop digging.

Every city employee and retiree should not only be supporting defined contribution plans for new employees; they should be demanding it.

Many of you have been upset with me for the last several years because I kept raising the alarm about the condition of your plans.  But I think if you look back at what I said and predicted about the City’s pensions, everything I told you or predicted was true or has come true.  In contrast, all the assurances you repeatedly got from your pensions’ management and the City, that there were not any problems, has proved completely wrong.


And please do not ever lose track of the fact that there is a whole cottage industry of pension executives, Wall Street bankers, lobbyists, accountants, actuaries and others that make a very nice living off your pension.  For example, why don’t you inquire about what the executive director of your pension plan is paid and compare that to your salary?

Last year, your plans paid $50 million in expenses.  That is $50 million that could have gone to shore up your pension funds, but instead went into the pockets of bankers, pension bureaucrats and lobbyists, to name a few.  They are petrified that their gravy train might end someday, which switching new employees to defined contribution plans would eventually do that.  So, they will continue to spread misinformation about your plans, just like they have been doing for the last 20 years.

I, on the other hand, have zero financial interest in this issue one way or the other.  My only interest is seeing that the City I love so dearly does not go the way of Detroit.

So, before you blindly follow your leadership and the City into yet another plan that is going to kick this can down the road until the current elected officials are out of office and your current leadership is retired, perhaps you should consider what is best for you. And believe me, that is not the continuation of defined benefit plans for new employees.

City Sales Tax Take Serious Nose Dive: Worst First Half-Year Since 2013

Any hopes that Houston’s sales tax decline was about to ease were dashed yesterday when the Texas Comptroller reported that the City’s sales tax receipts for December were down by 7.5% from last December.  In the last ten years, Houston has only seen a 7% or greater decline in monthly sales tax nine times.  Three of those have been in 2016.

The report is based on October sales and completes the first six months of the City’s fiscal year.  Year-to-date collections are now off by 4.4%, which is the worst start for sales tax collections since 2013.  Year-over-year collections have now declined for 16 consecutive months.

The last time the City saw a year-over-year increase was August, 2015.  The trend line on collections has been in decline since October, 2012.  This the longest period of depressed sales tax collection for as far back as I can find records.

It is time for the City to stop whistling past the graveyard and realize that it is in both cyclical and structural deficit and take action accordingly.  It is certainly no time to be committing 50% of our property taxes for the next 30 years to pension contributions.