This is the second part of a two-part story on Houston’s pension crisis. The first part was published yesterday.
Pensions are swallowing the Houston budget.
Take Houston’s legendary dilapidated roads. Houston is spending six times more on pensions than road repairs, and even that’s not enough to cover the minimum payment on its ballooning pension debt.
On its present course, stressed by pensions and other post-retirement benefits, Houston will soon be forced to cut funding for police, firefighters, schools, parks, maybe even some bureaucracy, according to a recent study by the Greater Houston Partnership.
Houston is emulating Chicago, which is now considering a record-high property tax increase due to its pension debt, said Josh McGee, vice president of public accountability at the Laura and John Arnold Foundation.
“Mayor Rahm Emanuel’s plan to raise taxes by more than a half-billion dollars is a warning of what Houston can expect if it continues on its current path,” McGee said.
Officially, Houston has $5.3 billion in unpaid bills and accumulated liabilities for retiree health care. Add in outstanding bonds, subtract assets such as roads that the city’s unlikely to sell, and make a few mild tweaks to the official pension math and you’ve got a city easily $20 billion in the hole.
Yet somehow, Houston firefighters retiring after 30 years get an average of 94 percent of their final salary, plus a one-time payout of between $700,000 and $1 million.
Lee Brown and Bill White, the two Democratic mayors who preceded Annise Parker, set Houston on this perilous trajectory — Brown with a couple of catastrophic, borderline fraudulent pension deals in 2001. White, however, got the city a kind of Get Out of Jail Free card for pension debt in 2004, a card the city hasn’t yet played.
Since then Houston firefighters have refused to discuss giving away any part of that sweet deal.
“We don’t have a law that says we have to sit at the table,” Todd Clark, chairman of the Houston Firefighters Relief and Retirement Fund, told lawmakers earlier this year.
The city approved its deal based on a projection in a report prepared for the firefighters by Towers Perrin that firefighter pension costs wouldn’t top 14 percent of the firefighter payroll. By the end of 2003, the city was paying a 42 percent “contribution” on top of its regular payroll.
Houston is after more than a decade still considering suing the firm.
What was driving up those payroll costs?
Police unions were free to calculate an officer’s pension based on the highest two-week pay period, one packed full of overtime and any lump sum payouts due, rather than the final year of pay or a final three-year average.
The firefighters’ union-dominated pension board could increase benefits for members without city approval if their own actuary decided it didn’t pose “a material risk of jeopardizing the fund’s ability to pay any existing benefit.”
City workers got an even better deal. Employees contributing just 4 percent of their salary to the pension fund got a multiplier of 4.25 percent of final salary for each year worked, plus a 4 percent annual cost-of-living increase upon retirement after 20-plus years of service.
California cities bankrupted by pension costs, by comparison, typically paid their city workers a 2.5 percent pension multiplier and a 2 percent COLA raise.
By 2005, Houston owed a 52 percent annual pension surcharge for its non-public safety workers, an unfunded liability metastasizing ever since.
In Sept. 2003, Houston city officials joined voters across the state in support of a proposition blocking city officials from making any future cuts to retirement benefits that had already been earned.
City officials had been kept in the dark about the true condition of their pension funds for months.
A devastating report on the insolvency of the municipal pension fund that should have come out in January 2003 was kept secret by the union-run pension fund until just two days before the election, too late to make a difference.
White took advantage of language in the proposition and in a low-turnout special election the next May, 73 percent of Houston voters approved retaining the right to opt out of the proposition’s pension guarantees, a kind of Get Out of Jail Free card.
White brought the police and municipal workers’ unions to the negotiating table, winning a few concessions, but firefighters have refused to compromise. The city has never tried to play its card, in large part because the state Legislature refuses to surrender control of large municipal pension funds.
The result is a union leadership disconnected from Houston’s financial reality. At a legislative hearing April 20 for a bill to restore local pension control, Jim Smith, a member of the San Antonio Police Officers Association, testified pensions aren’t “what’s hurting these budgets…. What’s hurting the budgets are the capital projects that the city leaders keep wanting to do.”
Smith’s view hardly squares with the six-to-one ratio of pension spending to filling the city’s ubiquitous potholes and solving its choked freeways.
With $353 million in pension costs this year, Houston simply doesn’t have the money to fix its roads. The city’s 2016 proposal actually calls for cutting an already inadequate $59 million road repair budget and reducing by a third the number of roads to be repaved.
Houston would need to raise property taxes 50 percent over the next 11 years just to cover the $5.3 billion pension shortfall, oil executive Don Hooper told lawmakers. Even that won’t be enough if the city’s pension funds don’t produce annual returns of around 8.5 percent over the long term.
“If you don’t think our industry is worried about this, you’re wrong. Exxon moved” outside city limits, Hooper told lawmakers. “They left. There will be others that will follow. They’re going to be worried about paying this debt.”
There also remains an ethical question: how much are the workers rightfully owed?
In 48 states, workers are guaranteed what they’ve been promised. Sixteen of them take that to mean every pension benefit earned to date, 21 of them say it means employees get to work the rest of their careers under terms as good as the ones they started with, and in the rest, the courts will have to decide which it is.
Texas is different. It only protects municipal pensions, and that doesn’t apply to Houston, thanks to White’s Get Out of Jail Free card.
Since Houston’s got an easy way out, once local control’s re-established, the question becomes one of fairness and order.
The city can lock down a final debt figure for all the benefits earned to date, figure out a plan to repay those billions, and then fix stingy new take-it-or-leave-it terms going forward.
Or it can do nothing, make more false promises, run up more bad debt, and then skip out one day, leaving tens of thousands of retirees suddenly impoverished.
Correction: Due to an editing error, an earlier version of this story misidentified a 14 percent pension surcharge on firefighter payroll.