Noteware: Preparing for Pension Reform in Houston is as Easy as 1-2-3

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Over the past few weeks, many of Houston’s leaders – members of City Council, business executives, journalists, etc. – have posed the question to me: “What can we do to fix the City’s pension problems?”  About half of the questioners express genuine concern about the problem and desire to find an equitable and permanent solution.  The other half, however, reflect a veiled desire to have me endorse their own proposals – reducing benefits across the board, offering new employees lower benefits than current employees, conversion to defined-contribution or 401(k) plans, or sale of more pension bonds, etc., etc.  My favorite is, “a deal is a deal – if we can’t afford it, we just need to raise taxes!”

The problem with each of these proposed “solutions” is that they are either: 1) inadequate (their anticipated savings or sources are too small to fund the current, let alone, future financial obligations); 2) they are incomplete (each would require additional measures to effect the changes they anticipate – for instance, a 401(k) plan only works if the City would also limit its employer contribution); and/or 3) they are legally or politically infeasible (they would require changes in state law or would cause immediate objections from other affected constituencies, such as the employee beneficiaries protesting the cuts to their benefits or taxpayers objecting to another increase in property taxes).  Most importantly, these proposals are divisive at a time when our citizens should come together to collaboratively devise an equitable and lasting solution.

  1. So, as urgent as our City’s financial problems are, in reality, we as a city are not ready to propose or evaluate specific proposed changes to our employees’ pension programs.  (Note my use of the lower case “c” which means the citizens of the city, as distinct from the upper case “C” which means the City government.)  To get ready:The citizens of the City must understand the magnitude of the pension problems and the institutional barriers to pension reform.
    To begin, let’s look at numbers: the latest estimate (6/30/13) of the total unfunded liability of the City’s three pension programs (Police, Fire and Municipal employees, including elected officials) is $3.2 billion.  On top of this is an unfunded liability of $2.1 billion (6/30/12) for retiree health care.   Thus, the total unfunded liability exceeds $5 billion and is growing more than $100 million per year.  The entire general fund budget is only $2.2 billion annually.  Thus, it is mathematically impossible for the City to ever pay all the obligations it has incurred under its existing pension programs.

    Further, there are at least two institutional barriers to reform: a) the terms of these pension programs are controlled by State law (while a discussion of the State law is beyond the scope of this article, suffice it to say that any pension changes and/or returning control over pensions to Houston will require changes in state law); and b) while the state law is in effect, the City’s employees have no incentive to cooperate in any effort that might reduce their benefits.  Not surprisingly, the public employees retain highly effective lobbyists to protect their existing position and benefits.

  2. All of the city’s elected leaders, including those representing the city in the State legislature, must publicly acknowledge the pension problems and commit to pension reform.
    While the numbers and the state law are public information, very few people are aware of and prepared to deal with their significance – our leaders and the media, until very recently, have not brought these issues to the public’s attention. Most importantly, however, we have an unacceptable stand-off: City leaders say that they cannot address the pension problem unless and until the state legislature agrees to fundamental changes, and state legislators say that City officials have not come to them with proposed changes.  So, all participants continue to “kick the can down the road” (the City’s recently announced deal with the Firefighters is a perfect example – more on this in future columns; these deferred payments, at 8.5% interest, compound the problems for future leaders).  Meanwhile, the City’s finances continue to deteriorate, as other services such as pothole repair are “crowded out” and City employees are frightened – terrified, really – that the benefits they have been promised will never be paid.

    We should be looking at this issue collectively – that is, in Houston, each of us votes for eight City leaders – the Mayor, the Controller, one district council member and five at-large members.  We also each vote for a state representative and a state senator.  So, why don’t we insist that the Mayor coordinate the City Council Members and Houston delegation to the State legislature in Austin and work together to forge a solution to the problem?  Hope is now on the way – State Representative Jim Murphy and newly elected State Senator Paul Bettencourt have offered to carry appropriate legislation during this bi-annual term that has just started.  And, both our new Governor, Greg Abbott and Lieutenant Governor, Dan Patrick, are from Houston; thus, each should have a sincere interest in pension reform for Houston.

  3. The first step in pension reform is to return control of the City’s pensions to the citizens of Houston.
    State control over Houston’s pensions, especially specific law targeted only at Houston, makes no sense from any perspective that I can discern. Pension reform cannot be solved in Austin – and control of our local decisions must be returned to Houston.  This can be addressed by either: a) changing state law returning control to Houston, which in turn will require the members of Houston’s state delegation to deal directly with the lobbyists and other entrenched interests opposing legislative change; or b) passage of a City Charter Amendment, that, attorneys advise me, in a sovereign home rule city like Houston, would take precedence over the state law.  This charter amendment would require Mayor leadership and City Council approval, and then an affirmative majority vote of the citizens of Houston – hence the needed public understanding and collective leadership commitment noted in #1 and #2 above.

The conclusions for beginning pension reform in Houston are clear – the public must understand the magnitude of the City’s pension problems and our leaders must act quickly and decisively to return decision making to Houston.  This will require our new Mayor, Controller and members of City Council to rally support throughout the City for pension reform and our State’s legislative representatives to overcome the institutional barriers to change in Austin.   As long as the Texas legislature controls Houston’s pensions, we are no longer the land of the free and unless and until our legislative leaders confront and overcome the barriers to reform, we are no longer the home of the brave.

A version of this article appeared in the Houston Business Journal on March 10, 2015.

Jim Noteware
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.