EXTEND AND PRETEND – REDUX?
The proposed “Solution” to repair Houston’s failing pension system includes a plan to issue $1 Billion of Pension Obligation Bonds (POBs). Voters will have a chance to approve or to reject the issuance of these bonds on the November 7th ballot.
I plan to vote NO on Proposition A, primarily because issuing the bonds eternalizes a failed pension system. Advocates of the proposed “Solution” seemed to recognize as much when they negotiated the so-called Corridor to hold future contributions to the pension systems within certain limits. The problem is, the Corridor contribution limits (as high as 35%) are unsustainably high. These high contribution levels will be allowed to continue for 5-10 years even if they don’t result in higher actual funding levels relative to pension liabilities. Our pension system needs to be reformed now, not 5 or 10 years from now.
City officials and other proponents claim the use of POBs will reduce the City’s pension liability and enable the City to fund future obligations. They also claim that the City will face financial disaster if Proposition A is not approved by the voters.
But financial disaster won’t come from a rejection of the POBs. The financial disaster has been in the works since 2001, beginning with the passage of major revisions to the pension plans during the Lee Brown administration. The changes recently negotiated by Mayor Turner, with support from Lieutenant Governor Dan Patrick and a host of other “conservative” Republicans, are not really reforms. It’s just another way to extend the problem into the future and pretend it has been resolved.
Houston has tried to “extend and pretend” with the use of pension debt before and the results have been terrible. Beginning in 2004, Houston issued $300 million in “pension obligation” debt. Mayor Bill White negotiated reforms to the 2001 benefit package, coupled with the agreement by the City to make extraordinary contributions to the pension funds. In a May 2011 op-ed, White cited an urban expert who called his reforms “a roadmap” for other cities. White noted that under his leadership, the City reached “agreements with the municipal and police pension boards, requiring longer service to earn benefits, beginning more affordable pension plans for new hires, increasing employee contributions” and ultimately cutting “the then-existing unfunded pension liabilities associated with the old plans by almost a billion dollars.”
In his op-ed, White wrote: “We planned to pay for a portion of the city's obligation to pay down the pension liability with bond issues financed within the existing property tax rate, offset by limits on debt-financed capital improvements.”
Mayor White’s words from 2004 sound eerily similar to those used today by proponents of the POBs.
White went on to write that this debt was “phased out over six years,” implying that it was paid off. In reality, the debt was refinanced just four years later and principal reductions were extended through the year 2037. Instead of being “phased out”, the obligations were simply recast into longer-term bonds held by the public. The City did not actually make a payment that reduced the principal of this note until 2014 – almost 10 years after the original note was issued!
Between the original issuance of POB debt in 2004 through 2013, the City’s POB debt climbed to over $600 million. Modest principal reductions that only began in 2014 have lowered the current debt to $586.2 million.
The chart below shows the extent to which the City has relied on POBs to fund its pension obligations over the past 13 years.
A Yes vote on Proposition A would expand the total POB debt to almost $1.6 billion. Proponents call this a “reduction in pension liability.” However, using one form of debt to pay off another form of debt is not progress unless it yields fundamental change, such as termination of the existing broken system coupled with the introduction of new plans that are financially sound and sustainable.
Proponents of the current plan falsely claim that opponents lack credibility because we have never offered any alternatives. This is false. I personally offered credible suggestions during my two campaigns for City Controller, and Mayor Turner’s run-off opponent in the last City-wide election offered very detailed and credible alternatives. The use of POBs to achieve conversion to a defined contribution system, or to a hybrid plan, was discussed at length during the campaign. I supported those ideas. Attempts by fiscal conservatives during the most recent round of pension negotiations were completely disregarded and shut off.
Furthermore, a fiscally conservative group filed a petition for a ballot initiative to force the City to change to a defined contribution type pension system for all City employees. The signatures for that petition, like too many other voter initiatives in Houston’s past, were never counted. Apparently, the sponsors of that petition elected not to challenge the failure to count.
Mayor Turner’s plan has significant support. It was unanimously approved by City Council and has been endorsed by conservative business groups such as the C-Club and the Houston Realty Business Coalition. The Greater Houston Partnership, Hispanic Chamber of Commerce, and the Houston Area Urban League support the plan. Josh McGee, chair of the Texas Pension Review Board, has praised the plan, as has the credit rating agency Fitch Ratings. Bill King has even said: “I am going to hold my nose and vote for the pension bonds.”
But I’m reminded of Lee Brown’s reflections on his original 2001 deal. “Clearly, if I had known of the negative fiscal impact when the matter was proposed, I would have opposed it,” he wrote. “I would never support a benefit that the city could not afford.”
We need to reform our pension system once and for all. We simply cannot afford to extend a broken system and pretend we are making progress by increasing our POB debt to record levels.
Bill Frazer is a Certified Public Accountant and former candidate for Houston City Controller