By Jon Cassidy | Watchdog.org
Houston’s debts are now bigger than Detroit’s.
According to one key measure of fiscal health, Houston’s situation is nearly as bad as that of Chicago, which is starting to collapse under its debt burdens.
The city’s financial reputation took a hit earlier this month when Moody’s Investors Service revised its outlook on Houston to “negative.”
Even that review doesn’t capture the depth of some of the holes the city’s financial planners have dug.
Moody’s has gotten a reputation for a taking a more critical look at municipal pension debt than its competitors in the ratings business, but it still works under the same structural conflict of interest all the other agencies do: they need these cities’ business. Moody’s will nip the hand that feeds it, but none of the agencies bite.
Moody’s still gives the city a strong bond rating, of course, because it doesn’t see much risk of bankruptcy on the horizon.
James Quintero, director of the Center For Local Governance at the Texas Public Policy Foundation, says the problem is structural, that defined benefit pension plans simply aren’t sustainable.
“Detroit didn’t become Detroit overnight,” Quintero said. “It took them 60 years to go from a thriving metropolis to third-world status.”
When Detroit declared bankruptcy in 2013, it had $19 billion in debt. Houston officially has $17.2 billion in debt, but that’s due to comically understated pension debts of $1.1 billion. As Quintero said, “They’re using this funny math and their systems still look absolutely terrible.”
The pension funds themselves report debts of $3.2 billion, but the real market value of Houston’s unfunded pension liability is $13.7 billion, according to a study published this year by Joshua Rauh, a finance professor and Hoover fellow at Stanford University.
Houston’s debts include $11.2 billion in outstanding bonds. If you subtract the city’s capital assets, such as buildings and roads, which aren’t likely to be sold off, and then compare the remaining liquid assets against non-pension debts, Houston is in the hole by $12.3 billion.
Add in the real pension debt, and you’re looking at a $26 billion debt for one city.
Now, Houston has three times the population of Detroit, so this isn’t meant to suggest Houston is on the verge of bankruptcy (although it is worth remembering city debts can drive off residents, as in Detroit, creating something of a death spiral for the remainder).
Rauh’s study came up with one measurement that’s very troubling, even if it doesn’t fit in a headline.
Rauh took the five biggest cities in the country, and the five cities most troubled by pension debt (excluding Detroit, due to its bankruptcy), and compared each city’s annual revenue to the size of its market value pension debt.
In household terms, this is like comparing your salary to your credit card debt. (You could compare bond debt to a mortgage, if you like, as both correspond to capital assets, but pension debt is an unpaid bill for services rendered.)
This measurement also helps make sense of mind-bogglingly large figures.
For example, New York has real pension debt of $182 billion, which would send anyone else running for the hills. But the city is so rich, that’s only triple NYC’s annual budget. It’s a burden, to be sure, but in the mad math of pensions, it’s just a hair behind Boston, which had the best situation of all 10 cities.
By comparison, the worst city on the list was Chicago, whose $72.2 billion in real pension debt was more than 10 times its annual revenue. Jacksonville was in second place, with pension debts equal to 730 percent of revenue, with Houston just behind at 710 percent.
That means Houston has a bigger pension affordability problem than Los Angeles, Atlanta, San Francisco, Philadelphia and Baltimore.
The good news is Houston shapes up much better when the debt is divided up by household.
The bad news, again, is that Houston’s numbers are artificially prettier, because its teachers aren’t included in the calculation. They’re part of the state Teachers Retirement System, which also has tens of billions of dollars in debt.
Rauh’s figures are still more useful than the official reports, as city officials use every trick in the book to minimize their pension debts, from asset “smoothing,” to backloading payments, to pretending the city’s investments are going to grow at an absurd 8.5 percent rate.
When New York lowered its assumed rate of return from 8 percent to 7 percent, then-Mayor Michael Bloomberg said the figure was still indefensible.
“The actuary is supposedly going to lower the assumed reinvestment rate from an absolutely hysterical, laughable 8 percent to a totally indefensible 7 or 7.5 percent. If I can give you one piece of financial advice: If somebody offers you a guaranteed 7 percent on your money for the rest of your life, you take it and just make sure the guy’s name is not Madoff.”
Contact Jon Cassidy at [email protected] or @jpcassidy000.