The City of Houston has become swamped by its debt owed to employee pension funds.The Laura & John Arnold Foundation recently issued a very clear report on the condition of the City of Houston Pension funding. The eleven-page report is titled, “Swamped: How Pension Debt is Sinking the Bayou City,” is attached at the bottom of this article.
Houston has benefited from several years of strong $100 oil prices, job growth, and industrial growth. These have been the “fat years.” At $45 oil, Houston will be enduring the “lean years.”
In Biblical terms Joseph was praised for preparing ancient Egypt for the lean years by storing extra grain for the lean years. Today there is a reversal of Biblical conditions.
Those in fat years, those who raise city taxes; decrease city employee benefits; and demand high employee pension contribution would have been voted out of office and would have been discredited.
The reason we have a pension deficit is by law all Houston City budgets must be balanced. If income is less than expenses, just contribute less to the pension funds, simple, and balance the city budget.
What is new in the report is a study of Chicago over a 12 year period. In 2003, Chicago had a 19 percent Pension obligation contribution of the General Fund. In 2014 it rose to a 59 percent obligation.
Houston today has a 20 percent pension contribution of the General Fund. It is clear without pension reform we shall be in a comparable situation to Chicago in ten years.
Houston still looks to an 8 percent to 8 ½ percent returns on invested pension funds. Whereas the California Pension fund is getting less than 3 percent return. The short fall increases substantially if the return is not 8 to 8 ½ percent.
Also the final Pension control is not local. Control of the pensions rest with the Texas State Legislature. There is strong argument for local control of pensions with strong argument against local control. The Arnold Foundation supports strong local control.
The Arnold Foundation makes the following suggestions:
In order to ensure that workers receive the benefits they have earned and to protect funding for critical public services, Houston must obtain local control of its pension systems. Currently, state legislators from all over Texas, who may be unfamiliar with the funds’ financial status, are making decisions about the city’s pension systems. Local leaders need the authority to negotiate directly with workers and to enact any changes at the local level. While local control can only be granted by the Texas Legislature, there are other steps that Houston city leaders can and must take immediately to stop the pension systems’ downward spiral and improve the plans’ fiscal health. These include:
- Establishing payment schedules, as recommended by the Society of Actuaries Blue Ribbon Panel, that will allow the city to (i) pay off the pension debt in 20 years or less, and (ii) to remain debt-free in subsequent years.
- Setting forward-looking investment return assumptions according to market conditions as recommended by the Society of Actuaries Blue Ribbon Panel.
By implementing these changes, Houston can design pension systems that are affordable, lasting, and fair.
The City of Houston will hold elections in November to elect a new mayor and controller who will have to address the pension issue kicked down the road by the current administration. City Council seats and the Houston Equal Rights Ordinance (HERO) are also on the ballot.