Recently the Houston CPA Society presented a panel of three local expects to discuss the City’s proposal to be filed with the Texas Legislature to reign in Houston’s rapidly growing pension obligations. Given the need to understand the impact on the Houston Police Department (HPD) Officer’s’, Houston Fire Department (HFD) Firefighters’ and Houston Municipal Employees’ Pensions, we asked the panelists to appear on the STA Money Hour (950AM KPRC) Financial Planning Friday Show on Friday, March 17th at 12pm. Two of these accepted our invitation and will join Scott Bishop and Michael Smith to discuss the reforms needed and the possible impact to retirees Pensions. You can listen to our interview with Dr. Josh McGee, PhD from Friday, April 7th here.
- Josh McGee, PhD – Vice President, Laura and John Arnold Foundation and Chair, Texas Pension Review Board (12pm to 12:30pm)
- Jack Christie – Houston City Council Member and Chair of the Houston City Council’s Budget and Fiscal Affairs Committee. (12:30pm to 1pm)
These panelists will be live on the air Friday to answer our questions and we will have the phone lines open to answer your questions. If you are concerned about the changes in the Houston Pension System and the proposed reforms, please tune in to the STA Money Hour on Friday March 17th. If you would like a replay of the broadcast, please email me at Scott@STAWealth.com and I will send you a link.
Background – Time to Fix Texas’s Public Pension System:
At STA Wealth, we are working with several clients that are concerned about their pensions. Especially our clients that are Houston Police Officers and are relying on their retirement from the Houston Police Officers Pension System (HPOPS) and the related Deferred Retirement Option Program (DROP).
For a detailed Analysis of the Status of Texas’s Municipal Pensions, one of our panelists, Josh McGee, in the February 28, 2017 City Journal, wrote this:
Here is a Summary from the Article (History of Issue):
- Texas often gets hailed as a model of good fiscal management.
- A recent Moody’s analytics report, for example, rated the Lone Star State as the best prepared for the next recession among populous states.
- Yet despite its prudent reputation, the state faces at least one fiscal problem with the potential to damage its long-term economic health: underfunded public pensions.
- Unless Texas takes steps to improve its pension outlook, its citizens could soon be paying much higher taxes, even as they receive fewer public services. Fortunately, the state’s public pension challenge isn’t a crisis—yet. There’s still time to make reasonable, fair changes that would create sustainable retirement plans for future government workers, without jeopardizing prosperity.
- Like most of Texas’s plans, Houston’s retirement systems for firefighters, police, and municipal workers were all fully funded at the turn of the millennium. In 2001, the legislature, at the city’s urging, hiked benefits for all three plans, with some of the increases taking effect retroactively. Overnight, pension liabilities exploded by more than $1 billion, and annual pension contributions skyrocketed. The city expressed shock at the huge cost increases, claiming that it had received incorrect information from actuarial advisors.
- Beginning in 2004, Houston, working together with the police and municipal plans, implemented benefit changes that rolled back some of the 2001 increases and put in place much less generous benefits for new workers (the firefighters’ plan has thus far refused to make any changes). At the same time, though, the city took a number of actions that reduced its annual contributions well below the actuarially determined amount, and that meant yet more pension debt. According to Houston’s latest annual financial report, the city has accumulated nearly $6 billion in pension debt and pension obligation bonds. Actuarially determined contributions for the three Houston plans have risen from 6.7 percent of general fund revenue in 2001 to nearly 20 percent
- Pension costs became a major campaign issue in Houston’s recent mayoral election. Newly elected Sylvester Turner confronts a $160 million budget gap in his first full year in office; rising retirement costs are a major contributor. Mayor Turner has publicly committed to stabilizing those costs, but, as in Dallas, any long-term solution requires action from the Texas legislature. Some of the legislative changes are summarized below.
For too long, Texas has failed to hold its governments accountable for making responsible retirement payments and has let them make risky investment bets that will end up costing more in the future. The state’s pension debt keeps increasing and is putting workers and taxpayers at risk. If political leaders ignore this problem, many Texas cities could face the kind of financial turmoil currently plaguing Chicago, where adequate pension contributions are now consuming more than 50% of the city’s general fund. Pension reforms are needed in Houston to avoid going down that path.
Summary of Houston’s Pension Plan Reform Package Being Discussed:
Houston ‘s Pension Reform Package: Our Latest Analysis
Source: The Kinder Institute, October 25, 2016
- Assumed rates of return would drop from 8% or 5% to a more realistic 7% for all three pension systems.
- Instead of using an open amortization period that resets every year, the city would use a closed 30-year amortization
- These two changes, along with some other miscellaneous recalculations, meant the city’s unfunded liability would still be around $8 billion.
- The three pension boards would agree to then-unspecified reforms totaling around $2.6 billion bringing the unfunded liability down to $5.2 billion.
- Note: The $2.6 billion in reforms comes entirely from increased employee contributions and changes to the COLA (Cost of Living Adjustment) and DROP (Deferred Retirement Option Program).
- The city would issue a $1 billion pension obligation bond, which would bring the total unfunded liability down to $4.2 billion, though the city would still have to pay off the bond.
- The total annual cost – including the cost of paying off the bond – would be within the city’s current budgeted amount for pension
- The city’s Fiscal Year 2017 budget assumes that the pension payment will be 2% of payroll, or about $416 million.
- After accounting for changed assumptions and proposed reforms, but before accounting for the pension bond, the Fiscal Year 2017 pension payment would be 30.3% of payroll, or about $420
- Accounting for the $1 billion pension bond – which will be applied to unfunded liability for both municipal employees and police – the Fiscal year 2017 pension payment would be about $355 million, leaving $65 million to pay off the bond. This is sufficient to pay off a $1 billion bond at a 5% interest
Questions We will Ask Our Panel on the STA Money Hour:
- Can you discuss with us the “State of the Union” of the Houston City Pension?
- Can you give us some of the back-story as to why Houston has encountered these problems?
- Many city employees (including current HPD Officers) are very nervous about the state of their pension program and are looking to retire to get their lump sum. Would you feel that their fear is understandable?
- Under the reform package, the assumed rate of return will be dropping to 7% from 8% to 8.5%. The reason given for this is that 7% is more realistic. Isn’t 7% still too high?
- Could you explain why the reform package uses 30-year closed amortization period, rather than resting the amortization period annually? What is the benefit of the change?
- The reform package calls for the three pension boards to make reforms totaling $2.6 Billion. Can the boards really do this just by lowering COLAs and increasing employee contributions?
- Regarding the last question, will there be a cap on employee contributions or will we potentially see a situation where the employee contribution rises to 20% or more?
- Why can’t the city shift to defined contribution plans for new employees, as this seems to be the best way to make sure this situation does not arise again in the future?
- The city’s unfunded liability is $7.8 Billion. The reform package calls for the reforms by the pension board and a $1 Billion pension obligation bond. That would leave $4.2 Billion still unfunded. How is the $4.2 Billion unfunded liability going to be addressed? Can they curb it by the reforms listed above?
- How does the pension obligation bond work? If the city must pay off the bond (plus interest) how does this save the city that $1 Billion?
- Reform will reduce the FY 17 pension payment to 30.3% of payroll. How much of a reduction is that over FY 16 and will this be sustainable (budget wise) going forward?
- Looking into the future, 10 or 15 years out, what shape will pension systems be in?
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