Editors note: This post first appeared on the Laura and John Arnold Foundation website and is reprinted with permission.
Houston, TX—This morning, the Laura and John Arnold Foundation (LJAF) held a press conference and released a new report on the state of Houston’s public pension systems, titled, “Swamped: How Pension Debt is Sinking the Bayou City.”
The report, co-authored by Josh McGee, LJAF Vice President of Public Accountability, and Michelle Welch, LJAF Public Accountability Research and Policy Manager, reveals that the city of Houston owes public workers at least $3.1 billion for retirement benefits they have already earned.
Houston’s pension debt is now a billion dollars more than the city’s total general fund revenue, and the city is at a tipping point. If political leaders don’t enact real reforms, the pension debt, which is continuing to rise, will threaten the city’s ability to give workers and retirees the retirement they were promised. In addition, taxpayers may be forced to pay the price through higher taxes or reduced funding for roads, infrastructure, parks, and other public services that help make Houston a great place to live and work.
“Houston’s hardworking public employees deserve the fair and secure retirement they were promised. But, for more than a decade, local leaders have played political games with workers’ pensions,” McGee explained. “The city can no longer afford to ignore its pension problems and kick the can down the road. If Houston fails to swiftly and responsibly address the pension debt, the city risks going the way of Chicago—and both public workers and taxpayers will pay the price.“
Houston finds itself at this tipping point due in large part to the fact that the city hasn’t been paying enough into the pension fund on an annual basis. Political leaders have failed to address this issue and, instead, are betting on unlikely investment returns to pay off the debt. For example, the pension systems for Houston’s firefighters and municipal employees use the highest investment return assumption for any major plan in the United States—8.5 percent. Meanwhile, the pension system for Houston’s police officers uses an investment return assumption of 8 percent, a number that is still higher than the national average.
At these optimistic, and arguably improbable, rates, Houston’s pension plans are only 75 percent funded, but if the projected rates of return were adjusted to a more reasonable 7 percent, the city’s plans would end up being only 63 percent funded. In other words, it is likely that the pension plans are in even worse shape than the city claims, and if Houston’s pension debt continues to grow, the city will face serious financial issues.
In the report, McGee and Welch present a range of fair and sustainable solutions that would address the growing debt and put the city’s pension plans—and the city’s financial health—back on the road to recovery.
These solutions include:
- Obtaining local control of Houston’s pension systems, which would give local leaders the authority to negotiate directly with workers and to enact any changes at the local level;
- Establishing a responsible payment schedule that will pay off Houston’s pension debt in 20 years or less and keep the pension systems debt-free in the future;
- Re-evaluating the risky assumptions underlying Houston’s pension systems and setting more reasonable rates of return for the funds; and
- Embedding accountability and transparency into the city’s pension systems, so that public workers and taxpayers alike have a clear understanding of the pension funds’ performance and the city’s overall financial health.
City leaders must make meaningful reforms and fix the pension systems once and for all so that Houston’s dedicated public servants receive the fair and secure retirements they deserve and were promised.
About the Laura and John Arnold Foundation
LJAF is a private foundation that is working to address our nation’s most pressing and persistent challenges using evidence-based, multi-disciplinary approaches. Its investments are currently focused on criminal justice, education, evidence-based policy and innovation, public accountability, and research integrity. LJAF has offices in Houston, New York City, and Washington, D.C.