From the inbox:
An Open Letter to City of Houston EmployeesRegarding Your Pension SystemsIn a few weeks, voters in the City of Houston will choose a new mayor. That mayor will be faced with many challenges, but none of greater consequence than dealing with the underfunding of the city’s three pension systems for municipal employees, fire and police.Let me start by making one point emphatically clear: I do not support changing the benefits that you as city employees and retirees have already earned. In Texas, a deal is a deal, and if I am elected mayor the city will honor the promises it has already made to you. After all, you have given the city your years of service based on those promises.If we do nothing about pensions, however, we are setting up a very real and deepening financial crisis that will pit future generations of taxpayers and public employees against each other as the bills come due for the promised benefits – and there is no money to pay them. A number of other cities and states are going through this painful process now. We simply cannot allow that to happen to Houston.Virtually everyone agrees that the current pension system is not sustainable. All seven of the major candidates for mayor, including the candidate endorsed by the employee groups, have stated that changes must be made to the current system. In addition, researchers at Rice University and the University of Houston have both reached the conclusion that the current system is unsustainable in the long run. So have each of the last three chief financial officers and Controllers for the city. The Houston Chronicle and the Houston Business Journal have both also called for reform. The Greater Houston Partnership poured tremendous time and energy into studying the problem, and issued a white paper this summer in which they declared: “What we cannot do is wait.”In fact, there is no one without a financial stake in the current plans that believes the current system is viable in the long run.And that brings me to a very important point. Last year, your pension plans spent nearly $60 million on administrative and investment expenses. That is up from about $50 million the previous year – a 20{997ab4c1e65fa660c64e6dfea23d436a73c89d6254ad3ae72f887cf583448986} increase in one year. There is an entire cottage industry of Wall Street bankers, lawyers, accountants and actuaries that make their living off of your pension plans. They know that the reform of these plans will disrupt their income. After all, the city was short about $110 million in funding your plans last year. Those administrative fees would have made up more than half of that deficit.In contrast, I have no financial stake in the outcome of the pension question.Some of the leaders of the employee groups have characterized my views as a Wisconsin-style, union-bashing, anti-public worker initiative. (I expect their name-calling to escalate in the final stages of the campaign.) Nothing could be farther from the truth. In fact, reforming these systems is the only chance you have of assuring that you will receive the benefits you have been promised.Instead of rampant rumors, let’s have some straight talk about the financial condition of each of the plans. The three plans are actually quite different, both in the amounts of the benefits and the degree to which the city has put aside money to pay those benefits.
- Ironically, the plan that is in the worst financial condition, the HMEPS, also pays the most modest benefits. According to the actuaries, hired by the HMEPS trustees, the city and the HMEPS members should have set aside about $4.3 billion to pay for the benefits the members had earned through June 2014. However, as of June 2014 the plan had assets of only about $2.5 billion in the pension fund to pay these benefits. In other words, the city and the HMEPS members have only put up a little more than half of what was necessary to pay the benefits that have already been earned. Since the city is obligated to see that these benefits are paid without any further contribution from the members, the city has in effect “borrowed” $1.8 billion from the HMEPS members.
- The police officers’ plan is in somewhat better shape. Again, according to the actuaries hired by HPOPS trustees, the city and the HPOPS members should have set aside about $5.4 billion to pay for the benefits through last year – but the plan had about $1 billion less than that as of that date.
- The plan for the HFD employees is in the best financial shape. As of the date of this letter, the HFRTS has still not issued a report for 2014 (more on that later). The 2013 report showed that the fund was about $500 million short, and that it had about 86{997ab4c1e65fa660c64e6dfea23d436a73c89d6254ad3ae72f887cf583448986} of the money it needed to pay the benefits that had been earned.
So, according to the most recent reports available, the city is about $4 billion short of having set enough money aside to pay the benefits that have been promised to its employees. That is not the end of world, but it is something that should concern every city employee and retiree.You will hear frequently from some of your leadership that this shortfall is the result of the city not making the required contributions “for decades.” This is not true. As the chart below shows, as late as 2000, the pension trust funds had enough money in them to pay all of the promised benefits.However, from 1999-2002, the city and the State of Texas agreed to some very large increases in the benefits in all three plans. These increases applied retroactively. Of course, not enough money had previously been set aside to pay for these increases to the benefits, so the plans instantly became underfunded by the cost of those new, higher benefits. In just three years, the plans went from being fully funded to $2.5 billion in the hole.Once a plan becomes underfunded, as these did in 2000-2003, it becomes very difficult to catch up. At that point, the employer and employees must contribute more every year: not only what is necessary to pay for benefits earned that year, but also an additional amount to try and make up the shortfall. The city has failed to do this since 2003, so it has gradually fallen deeper into debt to the pension plans, such that it now owes something closer to $4 billion.There are many ways to address this problem. Private industry did so 20-30 years ago, mostly by adopting strategies that transitioned from defined-benefit plans to defined-contribution or 401K-like plans. This is the path I favor to resolve our pension crisis – placing new city employees, hired after a date in the future, in defined-contribution plans.Why? Because defined-benefit plans allow politicians to promise public employees a retirement benefit without going through the painful process of asking taxpayers to pay for those benefits. Instead, the liability for the promised benefits is kicked down the road to our children and our grandchildren.In defined-contribution plans, however, the full contribution must be funded each year.There are other ways to address the problem, but continuing on the current path is not an option. It will result in a financial disaster for everyone – massive tax increases like we are seeing in Chicago, drastically reduced benefits for current retirees, and more.Fortunately, our situation is not that as dire as many other cities … yet. But if we continue to ignore this problem, it will only get worse.If you are a city employee or retired from the city, I would encourage you to read the actuary report for your plan. The municipal employee plan can be found [here], the police [here] and the fire department plan [here]. The most recent reports for the municipal employee and police plan are as of June 2014.The fire department plan decided not to issue a report this year because their results were so poor, so the most recent report publicly available is from June 2013. (It is a clear red flag when your board is not issuing reports on an annual basis.)These are extremely complicated to read, especially for those who do not have a financial background. However, the most important number is the Unfunded Accrued Actuarial Liability (UAAL). This is an estimate by the actuaries of the amount that your employer would have to put into the plan to pay for the benefits that have been earned so far. I would also encourage you to look for the page entitled “Outlook” which shows a 10- or 20-year projection for each plan. In each case you will see that the plans’ financial condition continues to decline as the city goes farther into debt to each one.There are very powerful interests that do not want you know how serious this situation is. As a result, these interests attempt to discredit anyone who warns you about the problem. But while those who make their income off your pension plan can cast all the aspersions they want about how that this is some effort to beat up on public employees, it does not square with the facts.The numbers do not lie.It would be profoundly irresponsible for our generation to leave this problem for our children and grandchildren. Facing up to and dealing with it, honestly and fairly, would be a great legacy to leave them, whether they will be future public employees or future taxpayers. We can do this. We must do this.If you help me become the next mayor, I will not let you down.If you have any questions or need any help trying to analyze the financial condition of your pension plan, please do not hesitate to contact me at [email protected].Bill King
Houston, Texas
November 12, 2015
That was well done. Every employee of the city and every voter in the city needs to read that in full.
Michael R Wimberly says
I hope the City employees understand the golden opportunity they have to fix their retirement fund’s problem now. Don’t be fooled and let it get any further out of hand.
The one thing Mr King did not tell you – private industry has a poison pen option the City doesn’t. And that is what my employer did to me. At age 58 they cancelled my defined benefit retirement plan and handed me a check which was converted to an IRA. The problem is these plans are back end loaded meaning at age 58 I was cut off from the lions share of the principal. I really don’t think there was a way I could ever increase the asset value to produce the $3,500 per month payment I was promised.
I finally got the principal up by investing which was hard work paying me about $2,200.00 but with CD and Bonds rates forced so low by our Government I am lucky to make $250.00 a month.
Don’t look a gift horse in the mouth – do the right thing that will protect you and your loved ones and act on Bill recommendation.
Michael R. Wimberly
Ross says
Effectively, King wants the employees to take all of the risk of future poor market returns. Saying that “business did this a long time ago” ignores the fact that every business that converted to a defined contribution plan cheated employees out of a large portion of their pension, and laid all of the return risk on the employees.
Don Hooper says
Another way to think about is to do something now or run the risk of having nothing. Exxon and Schlumberger have already fled the City. Don’t think that would not be magnified by a factor of ten if Turner was elected. The conquering horde, the Turner campaign, would soon loot and plunder the City, leaving nothing or very little options to repay any benefits. Look at last weeks Council meeting at Dwight Boykins delighting and the soon now fund money which was the Sunnyside TIRZ. he sponsored. Don’t believe for a second that these folks won’t leave you without a thing. They first have to finish feathering their own nests. You will be the last. They know you are mostly safety personnel that vote conservative anyway, what do they care.
Ross says
What makes you think taxes, pensions, or Parker (as you’ve suggested before) made Exxon and Schlumberger leave the City?
Clyde says
Bill King has said all along that all cuurent employees will not be impacted. New hirees will be
offered a defined contribution plan. Sylvester Turner was endorsed by the Unions and will kick
the can down the road until the City goes bankrupt. Then a Federal Judge will give retirees pennies
on the dollar. Let’s fix it now while we still can.
Eddie Cruz says
Which city are you referring to going bankrupt? Have you not seen all the statistics endorsing Houston as a strong growing and economic city.? Don’t believe Kings lies, Houston is no Detroit. Did you also know that John Arnold is one of King’s campaign contributors? The same guy who walked away with millions as Enron employees lost everything. He is also the same guy who has poured over $50 million dollars of his own money attacking city pensions across the country because he will profit from them. King isn’t looking out for Fire Fighters!! He’s looking out for his friends. Don’t be fooled.
Lance says
I guess you have not thought about what happens to the DB plan when the new hires are placed in a DC plan . Look at the states that have done this. , they went back to DB , way to expensive to fund both. DC is a bad idea.
Fred Flickinger says
Ross,
Please read the article again, there is no conversion to a defined contribution for EXISTING EMPLOYEES, only a change to benefits for new hires. Although you are correct in stating employees would assume some market risk, the risk of the city going bankrupt and thereby affecting the employee’s pension is eliminated.
Kevin W. says
If current pensions are not impacted at all, they will continue to affect city budgets for the next 30 to 40 years, Mr. King’s plan to pay off existing debt costing over 4 billion dollars up front. How much are unsecured general fund bonds costing in fees and interest right now, the city website providing a range of 2 to 8{997ab4c1e65fa660c64e6dfea23d436a73c89d6254ad3ae72f887cf583448986}. I just don’t see the existing employees continuing to accrue pension benefits under either candidate no matter what they claim.
Lane says
A haircut is needed. No carve outs for current employees. Everyone gets a trim or no one collects. That’s my deal; we risk sinking the boat if we maintain the bad deals made in bad conscience by prior political pimps.
Ben says
Do you want people to die trying to save your life? Yes? Then pay them their pension. We are not just talking about paper pushers and trashmen. NO ONE IS GOING TO RISK THEIR LIFE FOR YOU IF THEIR FAMILIES WILL NOT BE TAKEN CARE OF WHEN THEY DIE. Period. End of story.
Fat Albert says
You know Ben, people like you have been using that excuse for years – and nothing gets done. If you are serious in making that statement, then please, tell us how much you are willing to see your taxes raised in order to pay to continue the status quo.
Joel says
I doubt anyone commenting in this thread is aware of how much more is needed to fully pay for pensions each year. Less than fifty bucks per city resident, excluding all businesses and government organizations, more than is paid now stops this bleeding some of you claim.is bankrupting the city. That is out of a total city budget of over five billion dollars.
That won’t address the deficit you all allowed the city to build up but it puts into perspective how the time value of money works. Go look it up for yourselves and take a moment to look up how much better pensions and pay are elsewhere. If you want the systems to incur less future risk, kick that number up another hundred bucks so they won’t feel the need to average better returns. And if any of you think a garbage man deserves less, Houston sanitation workers having to stay until they are in their 60’s, consider that privatizing trash pick up would cost twice as much as the city pays now. Three separate studies were done to prove this and they were excluding recycling as too expensive to continue.