Mason: Comparing the 2017 pension reform rhetoric with the latest actuarial results

Image credit: Nick Youngson/Alpha Stock Images (CC BY-SA 3.0)

by Craig Mason

I cringe every time I see local media (and certain politicians) describe the pension changes made in 2017 as “landmark pension reform.” Now that official post-reform actuarial results are in, I think the public would be interested in a followup report on the actual impact of the pension reform package. My analysis from the latest city’s Consolidated Annual Financial Report (CAFR) for the fiscal year ended June 30, 2018 (pdf link) actually indicates that the 2017 pension changes did virtually nothing to relieve the ongoing financial stress on the city attributable to pensions.

The 2017 pension changes affected the pension liability (debt) in two significant ways. As reported on page 130 of the 2018 CAFR (pdf link), the pension liability was increased by $1.876 billion due to the adoption of a more realistic, conservative method of measuring that liability and decreased by $2.377 billion due to some benefit reductions. Therefore, the net effect of the 2017 pension changes was a decrease in pension liability of $501 million, or only about 3% of the total pension liability of $16.2 billion for that year.

The total pension liability is to be paid for in the future with the current assets in the three pension systems’ trust funds, plus future investment earnings on those assets, plus future annual city and employee contributions to the pension trust funds, plus the city’s annual cost of servicing the pension obligation bond debt. With regard to annual city contributions to the pension trust funds, page 131 of the 2018 CAFR shows that the city’s combined actuarially determined annual contribution to the three pension systems after the 2017 pension reform remains at the unsustainable level of 30% of payroll, or $401.7 million – down less than 3% from $410.8 million before pension reform. That small decrease is offset to a certain degree by an additional annual pension cost required to service the new pension debt incurred with the issuance of $1 billion in pension obligation bonds. As a frame of reference, the city has only approved benefit levels which can be supported by annual contributions of about 20% of payroll for public safety employees not covered by Social Security and about 15% of payroll for civilian employees covered by Social Security.

In addition to the failure to relieve the financial stress on the city, the 2017 pension changes failed to make important structural changes in the way pension benefits are provided to employees. Structural changes are still needed to:

  1. Allow the city to deal directly with its employees on pension benefits as it does with all other elements of compensation;
  2. Preclude the state from preventing the city from making appropriate and timely changes to its pension benefit program;
  3. Discontinue the illegal practice of diverting city funded assets set aside to pay pension benefits to pay for lobbying efforts contrary to the city’s best interests; and
  4. Protect taxpayers from future unwanted, unanticipated increases in pension costs due to bad decisions made by inadequately informed elected officials or investment performance less than expected on the pension assets.

In my opinion, the so-called “landmark pension reform” is more akin to a “rearrangement of the deck chairs on the Titanic”.

Craig Mason served as the Chief Pension Executive for the City of Houston from October 2005 through September 2015.

Feel free to submit topical articles/essays/releases for our consideration to bloghouston@gmail.com. As with all of our publications, the views expressed are those of the author.