Houston pension bond follies

In case you haven’t heard, there is an election starting next week around the state. In addition to a few changes to the Texas constitution, the City of Houston has a few fairly important items on the ballot regarding the city’s finances. One of those items addresses the shortfall that the city faces in its various employee pension funds by allowing the city to sell what is commonly referred to as Houston Pension Obligation Bonds. I had no idea how emotional people could get about this issue until this morning when I was called a stupid motherf**ker and accused of being paid to support the passage of this item. All because I said that if I lived in the city limits, I’d vote for the bonds. Well then.

The thing is, those types of emotional outbursts are the only ‘arguments’ I’ve heard against the passage of these bonds. Let them eat sh*t! Let them file bankruptcy! The taxpayers are bleeding! Libruls! Etc.

On the other hand, the very diverse group of people supporting passage are dealing in honest debate. Not a single one of them says that the agreement passed by the Legislature in the 85th Session is the be all, end all of the problem. They all acknowledge that the path forward is fraught with pitfalls and barriers and will continue to need to be monitored and adjusted. But they are willing to set aside various concerns and have worked out a compromise that while somewhere short of perfect, doesn’t leave either the taxpayers or the pensioners eating sh*t.

Back in November 2015, Governor Greg Abbott appointed economist Josh McGee to the State Pension Review Board and named him chair. Mr. McGee’s day job is as a Senior VP with the Laura and John Arnold Foundation focusing on evidence-based policy and public finance. Evidence-based. Imagine that. In addition, he is a Senior Fellow at the Manhattan Institute for Policy Research, a think tank whose mission is to develop and disseminate new ideas that foster greater economic choice and individual responsibility. He also holds a B.S. and an M.S. in industrial engineering and a Ph.D. in economics, all from the University of Arkansas. I say all that to say that maybe, just maybe he isn’t one of us stupid mf’s.

Before the Legislature’s final vote on the plan to reform Houston’s pensions, Mr. McGee wrote a paper titled A Pivotal Moment: Assessing Houston’s Plan for Pension Reform. It is a thorough look at the plan, its benefits, its problems, gaps, probabilities of success or failure, warnings, etc. The paper isn’t a tedious academic analysis, it is forthright and very readable. Click on it and see for yourself.

After the bill allowing the Houston pension reform was approved, Mr. McGee wrote an op-ed for the Houston Chronicle titled Pension plan is a sign of progress.

These days, many people are sick of politics. They think partisan posturing and political gridlock make it impossible to get anything done. But local and state leaders recently proved those naysayers wrong. Our elected officials showed the people of Houston, and indeed the nation, that they can – and will – come together when the future of our city is at stake.

Rising pension costs could all but bankrupt Houston. The $8.2 billion pension debt is four times more than the city’s total general fund revenue – and last year, Houston closed its books with an operating deficit for the first time in history. The city’s estimates indicated that in order to deliver on benefit promises, its pension contributions would total nearly 60 percent of payroll for the police department and close to a whopping 70 percent for the fire department. Facing the prospect of massive tax hikes, sweeping layoffs and deep benefit cuts, the need for reform took on a new sense of urgency.

The entire Houston community – including area business executives, labor leaders, finance experts, members of the Houston legislative delegation and city officials – knew there was no easy fix. They would need to work together to make extensive changes in order to solve the problem.

…

Clearly, there is a lot more to do – but let’s take a moment to acknowledge the significance of what local and state leaders have accomplished. Despite opposition from firefighters, city leaders and members of the police and municipal employee pension plans put the collective good before their own interests. They took on a contentious issue and did what their predecessors could not do. In an era of political polarization, they set aside their differences and figured out how to not only pay down the debt, but protect the city’s financial future.

As an economist with a focus on retirement security, I’ve worked with numerous cities and states facing similar pension challenges. They all want to know: How do we get people to come together and address this? I now have a new answer to that question: Look at Houston.

(click here to read on HoustonChroncile.com)

It is also important to note that Mr. McGee isn’t some disinterested academic in regards to this specific instance of pension reform. He lives in Houston and thus has a vested interest as a taxpayer. He is one of many non-stupid mf’s that know about public pensions that live and work in Houston, that are accessible and support this reform.

Lest you think that he is some paid shill for the unions, you probably should read Promise Breakers: How Pew Trusts Is Helping to Gut Public Employee Pensions.

Josh McGee, a vice president at the Arnold Foundation and Draine, the Pew Center’s lead pension researcher, have appeared together at informal meetings and before state legislatures and city councils around the country. McGee and Draine typically turn up with studies and PowerPoint presentations that support scrapping defined benefit pensions in favor of 401(k)-styled contribution plans, cash-balance accounts or hybrid plans.

Or perhaps read Josh McGee: Playing both sides in Houston on ProtectPensions.org:

The Texas Association of Public Employee Retirement Systems (TEXPERS) and the firefighters, police officers, nurses, and other public employees it represents, stood as an advocate against any proposed legislation that would switch to 401(k)-style plans. If TEXPERS hadn’t exerted its legislative clout, McGee’s conflicting role with the Arnold Foundation might have helped get defined contribution amendments into the Houston bill.

…

McGee praises leaders for saving their pension funds. That applause is drowned out by his cheers of defined contribution plans.

So I don’t think that anyone can honestly say that McGee is a paid shill for the unions in this matter. I know that won’t stop them but remember, I said honestly.

So should you vote Yes or No? Like I wrote here, that all depends upon whom you trust. Only you can decide that.

But the least you should do is know the facts. And I think I’ve given you enough information to discern the truth. You just have to use it.

CONCLUSION

Houston’s $8.2 billion pension debt poses significant risks to workers and taxpayers. Without reform, citizens will be forced to make difficult decisions between cutting public services and raising taxes, while workers’ retirement security could be compromised.

Local leaders should be commended for their efforts to reach an agreement and develop a proposal that would improve the pension systems’ financial stability. The proposal would accomplish key goals of responsible pension reform by establishing a plan to pay off Houston’s pension debt within 30 years and by providing a mechanism—through the financial corridor provision—to control future cost increases. However, more will need to be done in the future to establish a lasting solution to the city’s pension problems.

The city’s proposal is an important first step. If state legislators give local leaders an opportunity to implement reform, Houston city officials will need to uphold their end of the bargain. They will need to make payments on time and in full. In addition, they will need to deliver on the promised pension obligation bonds, as workers have already agreed to a number of substantial concessions and are poised to bear considerably more investment risk.

Going forward, Houston should make additional changes to reduce risk and protect workers, including limiting the amount of money allocated to volatile, hard-to-value assets. The city will also need to closely monitor the effect of the corridor provision. If the plans’ assumptions turn out to be overly optimistic and pension costs dramatically rise over time, the corridor provision could place an undue financial burden on future workers. In such a scenario, the city and the pension plans would need to act quickly and make additional reforms to address the situation.

The city should also consider adopting retirement plans for new employees that are simpler and easier to manage. These plans would provide additional protections for new workers and taxpayers. While placing new employees in a Defined Contribution plan or a Cash Balance plan would not reduce current unfunded liabilities, it would help ensure that the city does not accumulate large and costly pension debts in the future. It would also provide Houston with the flexibility to respond to changing economic and demographic trends.

Mayor Turner and members of the pension boards have shown leadership in their willingness to address Houston’s pension problems. The issue now rests with the state legislature. There are just a few weeks left in the 2017 session—and without the ability to make changes to the pension systems on its own—the city is running out of time. Without changes, the debt could spiral into a full-scale financial crisis. The city cannot allow that to happen. Its financial future hangs in the balance and will be decided in large part in the next month.

Local leaders have made considerable progress. There is a deal on the table, and now is not the time to turn back. Houston’s proposal represents meaningful progress toward establishing a fair and sustainable solution to the city’s pension problems.

Paying off the pension debt will require shared sacrifice. The city must take action to improve the financial stability of its plans and protect workers and taxpayers. Pension reform in Houston would allow the city to deliver on its promises to workers and preserve critical public services.

Communities across Texas and around the nation are watching. If the Houston plan is enacted, it has the potential to serve as a model for others looking for solutions to their own pension problems.

Oh, one last thing. Did someone pay me to support the Houston pension bonds? Of course not. I’m a stupid mf for free, no funding necessary.

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