Noteware: The City: Fighting fire with firefighters?

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On Friday the 13th (March 13, that is), I was invited to testify before a special meeting of City Council, called by four brave members to hold public discussion on an “agreement” that Mayor Parker, State Representative and Mayoral candidate Sylvester Turner and State Senator John Whitmire (of counsel to the Locke Lord law firm that represents the Firefighters’ union) had announced between the City and its Firefighters’ pension fund.  The announcement stated that the agreement would save the City money over the next three years.

I understand that the proposed “agreement” resulted from the Firefighters pension actuaries re-estimating the costs of the pension program and therefore the “Actuarially Required Contribution” (known as the ARC); the Mayor and the Firefighters agreed to defer funding of $77 million of required payments for three years – thus, the apparent “savings.”

I also understand that this was the first time in the City’s history that members of Council had called such a meeting over the objections of the Mayor.  The meeting involved spirited discussion, but because time was limited, I was unable to present all of my prepared comments.  So, several Council Members asked me to submit a letter presenting my thoughts.  The purpose of this article is to summarize my comments from the letter.

I urged the Council to reject this agreement and referred the Council Members to my column published in that day’s HBJ, entitled, “Preparing for Pension Reform in Houston is as Easy as 1-2-3”.  My recommendation to reject the agreement is based on three factors:

First, it is deceptive.  The agreement will not save the City money.  It simply defers payments that are currently due, and continues to underfund the City’s obligations to its Firefighters’ pension fund.  The deferral is essentially a loan – at 8.5%, similar to the “meet and confer” agreements that the City has reached with the Police Officers.  The deferred amounts will be due – later, and in higher amounts.

The agreement is also deceptive in a larger and more important sense.  The actuaries have concluded that the costs of the pensions are rising significantly, and a higher annual contribution from the City is required to fund these costs – from $65 million to $90-95 million.  Discussion of this cost increase has not been part of the public dialogue urging approval of the agreement; I have seen no statements or analyses as to what has driven up the costs of the pension program.

Perhaps the cost increases are due to one or more factors – the aging of the firefighter workforce, the longer lifespans of the retired firefighter population, the size of the benefits under the program, and/or the administration of the program with the DROP provisions, spiking, etc.   “DROP” is the Deferred Retirement Option Plan that allows employees who have qualified for pension benefits to continue working at full salary while pension benefits they would have collected earn interest in a special account instead.  “Spiking” permits employees to earn extra compensation during their last years of employment from overtime pay, vacation time, bonuses, etc., to boost the basis for their pension benefit payments over their retirement lifetime.

To tell the public we are “saving money” by deferring the payments masks the reality that the costs are rising.  The rising costs should become the focus of the public discussion.

Second, this agreement reinforces the City’s pattern of balancing its checkbook by borrowing.  The last time the City truly balanced its budget – according to accrual accounting — was FY 2002.  Ever since, the City has met its legal requirement to “balance the budget” on a cash basis, which in reality is simply balancing its checkbook.  It has done so consistently by borrowing – a total of $2.6 billion since 2002.  This agreement is utilization of precisely the same technique.  If the agreement is approved, the City would just borrow the amount deferred from the Firefighters pension fund – again, at a high rate of interest.

The agreement, and resulting borrowing, also confirms that: a) the City’s operations are unsustainable; and b) the City is insolvent.  Deferring the Firefighters’ pension payments is a clear indication that the City cannot pay its bills when they come due.  This does not even take into account the concept of “service insolvency” where other public services are “crowded out” – have you hit a pothole lately or had a water main on your street burst?  The definition of bankrupt is insolvent.  If the City is insolvent, which it is, it is also essentially bankrupt.

Third, the agreement would prohibit true reform of the City’s pension program – at the very time when reform is most needed.  The City’s pension problems are the largest and most urgent contributors to the City’s fiscal distress.  By agreeing to this proposal, the City will continue to dig itself deeper into its financial hole, at an accelerating rate.  I also understand that part of the agreement requires that pension reform, at least with the Firefighters, could not be proposed again for at least three years.

And, as important as Friday’s meeting was, pension reform cannot be accomplished: in brief public meetings by those not fully informed and experienced in the technical aspects of pension program design, structure and terms; and consideration of numerous other variables and important trade-offs – staffing and payroll, infrastructure maintenance, revenue sources, actuarial analyses, etc.  These are the types of decisions for which officials are elected and for which they should seek comprehensive professional advice.

The bottom line is that I cannot imagine why any elected official could approve this agreement.  Why would anyone seek a vote from their constituents, then both decline to tell the whole truth to these very constituents and not do everything in their power to fix the problems facing the constituents?  Approving this agreement goes in the wrong direction on all fronts.

A version of this article appeared in the Houston Business Journal on April 7, 2015.

About Jim Noteware 18 Articles
Jim Noteware is a Houston-based real estate developer, focusing on suburban master-planned and urban infill communities. He also specializes in the turnaround of distressed properties, portfolios and organizations. He has served two big-city mayors, in Houston and Washington, D.C., working to improve the performance of large troubled public agencies.