Noteware: The firefighters agreement: What the city should do instead

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My previous column presented my reasons why the City should not approve the agreement with the Firefighters regarding deferring payments into its pension fund.

What City leaders should do, however, is at least two new things:  1) the City and the public should use the actuaries’ new analyses to demonstrate to the public the true costs and other terms of the pension system; and 2) the City’s leaders should do everything in their power to return control over its employees’ pension plans to Houston.

Receipt of the actuaries’ new conclusions is the perfect opportunity to make the public aware of the magnitude of the City’s true financial condition and the terms of its pension plans.  This true condition indicates that it is mathematically impossible to meet all the financial obligations that the City has incurred, including most especially funding of all its pension obligations.  The Firefighters themselves, who are the current and future beneficiaries of the pension plans, should be worried about the dangers of the under-funding of their pensions that this agreement would represent.

The Special meeting of City Council called to discuss the pension agreement with the Firefighters ended without a quorum or vote on the agreement.  It is unclear to me, however, who has authority to approve the agreement.  Currently, control over our pension plans lies in Austin, so it appears that an act of the Texas legislature is required.  Go figure.

Some Council Members tell me privately that the Mayor does not need Council approval — even to present the agreement to the State, since, “the agreement does not require City expenditure.”  However, with the new “Actuarially Required Contribution” (ARC), there is no doubt that the City must increase its expenditure — it will just not pay for it currently, in cash.  (Think of an analogy — you are driving around town and your gas tank is low.  You do not have cash in your pocket, so you fill up the tank and pay with your credit card.  Anyone would conclude that you decided to spend money when you pumped the gas; the only question is the timing and the terms on how you paid for it.)

The City of Houston’s pensions present large, complex problems and are integrally intertwined with numerous other operating and financial factors.  They are in desperate need of comprehensive reform.  This reform cannot be considered piecemeal as this Firefighters agreement attempts to do.  This agreement even prohibits consideration of pension reform during the three years it is in effect!

The City of Houston’s future will not be a continuation of the past – the City’s problems are too entrenched and poor financial management has gone on too long.  Dramatic pension reform is absolutely essential to the City’s successful future.

Unfortunately, our political leaders have chosen an incorrect path to portray a win-win-win result: Mayor Parker can point to current savings in an effort to “balance the budget”; Representative Turner can point to his ability to get things done in Austin as part of his campaign to succeed Parker as Mayor; and Senator Whitmire can point to representation of his firm’s clients to the best of his abilities.

In reality, however, this proposed agreement is lose-lose-lose:  a lose for the taxpayers who will find themselves deeper in debt and paying a very high rate of interest (where can you earn 8.5% on your money?); a lose for the Firefighters whose benefits are actuarially impossible to maintain and whose pension contribution has been reduced; and a loss to representative government when elected leaders chose political expediency over long-term, and much needed reform.  (Representative Turner’s literature now notes that the Firefighters have endorsed his campaign.  Surprise, surprise.)

Who is representing the interests of the citizens of Houston in this proposed agreement and the larger consideration of pension reform?

I began my testimony and my letter to the Council with a reference to the previous article on pension reform that appeared in the Houston Business Journal.  It is appropriate to end with another reference – from The Economist – that was published the same day as the Council meeting, Friday, March 13.  Following my quotation on the overbuilding of our local apartment and office markets, the author summarized Houston’s condition: “A property slump could hit Houston’s core city – which relies on property taxes – hard.  It is already running a hefty deficit and carrying a heavy pension burden.” (italics mine.)

The Economist sees Houston’s financial problems from a long distance.  I hope that our citizens and elected leaders can see them up close — and will act upon them NOW.

A version of this article appeared in the Houston Business Journal on April 15, 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.