Bill Frazer's

Core Municipal Report

About Mayor Turner’s pension “fix”

Some observations on the current proposal to solve the City of Houston's employee pension plan debacle

“What do you think about the pension fix?”  Ever since the Mayor announced his pension proposal I’ve been asked this question everywhere I go and by everyone I know.

My answer: It’s not good for the City, it’s not good for the taxpayer and it’s not good for most employees.

As the chart below shows, it’s not good for the City.

For fiscal years 2010 - 2015, the City’s pension costs as a percentage of payroll increased from 24.6% to 36.0%. Based on information published by the Kinder Institute (see the article here), the estimated costs for the proposed fix won’t move the needle at all.  The projected first year cost will be at least 31.9%, and as high as 36.9% with the allowed 5% “corridor.”  More worrisome is that costs will go up even further if the pension trusts fail to achieve the planned 7% of returns year-over-year on their investments.

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According to the few details that have been made available by the City, COLAs have been cut, portions of DROP have been eliminated, employee contributions have been increased, and the City plans to issue $1 billion in taxable pension obligation bonds without voter approval.

And for what?  No cost savings for 30 years and the risk to the taxpayer remains.

Why does the City want to adopt a plan that purports to fix pension costs at record levels?

Maybe to try to stop the increases that were sure to continue. But just stopping the increases isn’t good enough; we need to reduce these expenses.  And since no details about the proposed changes have been released to the public there are absolutely no assurances the proposal will actually stop pension cost increases.

But the Mayor refuses to consider using a defined contribution plan as part of the solution, therefore leaving no alternative other than to continue to tweak a broken system.

A plan that sets costs at record levels and does not consider other viable alternatives is not a fix.  The failure to consider other options is just delaying the inevitable to future years when real solutions will be much more costly to taxpayers or even impossible to pay for.

Houston's pension plans were not negotiated in good faith a dozen years ago when originally adopted.  They have cost significantly more than anyone ever thought imaginable.  Trying to mend them now after 12 years of neglect and under-funding is bad public policy and bad government.

The taxpayers should be outraged.

In future posts, I will list other sensible options the city should consider and explain why most employees should want a defined contribution type plan instead of the charade they’ve been handed.

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