Houston's Pension Controversy: Part 5
I haven't commented on Houston's pension plan controversy lately, even though I've been promising to do so, because I've just sort of been soaking in the news coverage since my last post on the topic. Unfortunately, the local news outlets have been more of a cheerleader for Mayor White's efforts to opt out of Proposition 15 than a very objective source of information on 1) how we came to be in this mess and 2) the range of options available to the city to fix the problem. I'll start with what we know at this point about how we got here. Unlike some folks in town, I actually believe that it would be useful to know how we got here before we decide what needs to be done next.
This is a long post, so click on the [Read More] link for the rest.
The $Billion+ Hole: What Happened?
In a typically vacuous op-ed, the Comical issued a broad assessment of blame for the unfunded liability in the city's municipal employees pension plan that included former Mayor Brown, City Council, the Pension Board, the Legislature, and even voters who approved Proposition 15! Predictably, the Comical neglected to criticize its own poor coverage of city hall during the Brown administration (or its repeated endorsement of this man it now claims was asleep on the watch). And as I noted briefly in this post, the Comical was way off the mark in its assessment of blame in any case. For one thing, the pension board's obligation is primarily to its members, and to securing the best possible deal it can for them. While the financial health of the plan is, of course, a concern (and the city has been represented on the board), it's not fair to hold the board responsible because some people feel the city made a bad deal. Nor is the legislature to blame. While municipal pension plans are indeed enshrined in state law (and thus are legislative business), the process tends to be fairly consensual -- that is to say, generally municipalities and pension boards work up a plan that is adopted by the legislature without much controversy or debate at all, a process that the Comical seems not to understand. Finally, passage of Proposition 15 has little to do with the unfunded liability the city is facing. Federal law (ERISA) already protects promised benefits for vested members of pension plans of private companies; Proposition 15 was/is basically an extension of those protections to municipal/state employees in the state of Texas (who are, of course, not covered by the federal law), and is not unlike provisions found in many other states. The amendment basically raised an issue of fairness in extending a provision of ERISA to state/municipal employees; its overwhelming passage is neither surprising nor an oversight by voters, as some have suggested.
Note that I have not excluded former Mayor Brown (and his administration by extension), City Council, and the Comical from blame. Previously, I did not mention the actuarial firm (Towers Perrin) employed by HMEPS, but since they've been fingered by quite a few people, I'll throw them out as well.
In fact, maybe it's wise to begin with them and the annual reports that have been certified by them over the years. They're on the web back to 2001, so the information contained therein should not shock anyone. If a person looks at the annual report for 2003, Towers and Perrin clearly presented projections that the pension's unfunded liability was growing, that it would reach nearly $1 billion in 2003, and that by 2006, it would top $1.5 billion (page 53). Furthermore, it projects that the city's actuarily caclulated contribution rate would have to grow by a significant amount. And on Page 52, the report clearly indicates that the city's actuarily calculated contribution rate had not grown to the required amount (17.7%), nor had it done so in the period from 2002-2003 (when it would have had to be 31.8%), but remained at a flat 10%. Changes in assumptions and methods (presumably gleaned from experience under changes to the system enacted in 2001) accounted for most of the estimated shortfall.
In a letter to the Comical, former Mayor Brown assigns blame to Towers Perrin (and everyone but himself):
In the 2001 session of the state Legislature, there was a proposal for a complete rewrite of the pension law for the municipal pension system, which included improvements in pension benefits for all municipal employees. This was discussed in an open meeting of the City Council. We were all told that the city's contribution would go from 11 percent to 14 percent. The actuarial firm told us that this would not be a significant financial impact on the pension fund, rather it was cost-neutral....First, Towers Perrin denies that it gave City Council any advice regarding actuarial performance of planned pension plan changes here:Why do we have this problem?
· We were given inaccurate information by the actuarial firm of Towers Perrin.
· There are fewer employees contributing to the fund because of positions being eliminated.
· A large number of employees switched from Plan B to Plan A.
· The performance of the fund plays only a minimal role in contributing to the problem.
In 2001, the City agreed to benefit improvements that have increased the estimated liabilities of the HMEPS pension fund.One can consider this a case of he said/she said, I suppose, except for the fact that Mayor Brown contradicts himself here:Towers Perrin believes that those involved in negotiating and implementing the benefit improvements, particularly the 2001 benefit improvements, understood that this would be the ultimate effect.
The City of Houston was not Towers Perrin's client. Our client is HMEPS, although the City does have representation on the HMEPS Board.
Towers Perrin did not represent the City of Houston in evaluating or negotiating the 2001 benefits improvements nor did we provide advice or actuarial consulting services to the City concerning the improvements.
Towers Perrin did not participate in the negotiating sessions between the City and HMEPS relating to the improvements nor did we advise the City that it could "afford" to adopt any particular benefit provisions.
In its report to the pension board dated Feb. 14, 2001, the firm of Towers Perrin reported that the city's contribution would go from 11 percent of the total personnel costs to 14 percent. The proposal was presented as being essentially cost-neutral.Assuming the mayor's statement is even true -- and we have some reason to believe he hasn't a clue -- it should certainly have set off alarm bells (the actual increase was apparently from 10% to 14%, or an increase of 40% -- it sounds different put that way, eh?). Oh wait, it did set off alarm bells, at least with councilman Mark Ellis:
Even as Houston prepares for what likely will be a penny-pinching budget process, the Texas House on Wednesday gave preliminary approval to a bill, without opposition, that could cost the city hundreds of millions of dollars.It appears that the former mayor isn't being entirely honest about what he know and when he knew it in 2001. Indeed, even in early 2001 it was a point of controversy.Lobbyists for Mayor Lee Brown have championed the legislation, which provides sweeping increases in pensions for current and former city employees.
City officials, including Chief Administrator Al Haines, have said the bill would not cost Houston much, if anything, because of excellent performances of the pension fund's investments.
However, a state analysis is critical of the city 's financial estimates, and at least one City Council member, Mark Ellis, is concerned about the bill's impact on Houston's budget.
"I'm not trying to be the curmudgeon who doesn't want to give employees anything, but I also have to watch out for taxpayers," Ellis said.
According to the state analysis, the city 's contribution to the employees' pension plan would rise from 10 percent to about 14 percent - or about another $2,000 each year for an employee making $50,000.
The city contributes about $40 million each year to the pension plan. With the bill's changes, that figure would surpass $80 million in the next decade, outstripping inflation.
Initially, city officials said the pension bill would not cost the city more money, but they now say it may cost some money, but not a significant amount.
Despite a request to Haines for more information, Ellis said he has never received cost estimates for the increases in the pension plan.
Estimating the costs is difficult because numerous assumptions are needed, such as how long retirees will live. But the state analysis, performed by a Pension Review Board actuary, said the city 's "assumptions are very optimistic, and less optimistic economic assumptions would result in higher plan obligations."
Now, in March 2004, we do know that actuarial assumptions were off base, and that the city began to get feedback to that effect as early as 2001. Towers Perrin says they began to provide that feedback:
The need for increased City contributions to the pension plan began to emerge as early as November 2001, when Towers Perrin delivered to HMEPS the actuarial valuation of the plan as of July 1, 2001.Towers Perrin's actuarial valuation report of the pension fund as of July 1, 2002, which included another year of plan experience and investment declines, again reflected the need for increased City contributions.It is important to note that representatives of the city sat on the HMEPS board, and viewed this report. The director of the pension system confirms this:
However, the roots of this funding issue were apparent as early as December 2001, when the Towers Perrin Actuarial Report as of July 1, 2001 ("2001 report") was presented to the HMEPS Board of Trustees ("Board"), five of whom were City representatives (three City Council appointees, the Mayor's representative, and the City Treasurer). In the 2001 report, the unfunded actuarial liability was projected at $465.6 million for July 1, 2001, and increasing thereafter.The report clearly showed the City's projected contributions going from roughly $85 million in the year beginning July 1, 2003 to over $100 million in 2006, and thereafter steadily increasing to roughly $195 million in 2020. The 2001 report was provided to the City representatives on the Board, so the information was easily accessible by the administration and City Council.The smart reader who really cares about these matters will now be wondering why the December 2001 actuarial information referenced by David Long does not actually show up in the HMEPS Comprehensive Annual Financial Reports (CAFRs) that are available online until the 2003 CAFR. My understanding is that the pension board is only required to include such information in the CAFRs periodically, although it can choose to adopt the annual actuarial report for inclusion in the CAFR more frequently by a simple vote. Why didn't it adopt this early actuarial report indicating a deterioration in the health of the overall plan? I can't answer that important question. However, it seems clear that City of Houston representatives most certainly saw this information, that the information was in the public domain in 2001, and that it did not become public by the actions of the pension board, the Mayor, the City, or the Comical (at least not according to my search of their archives). Quite a few people knew about this issue by the end of 2001, but nothing was done.[snip]
HMEPS is a governmental entity, and the actuarial reports at issue are in the public domain. Each of the actuarial reports is presented to the Board at an open meeting and Board members receive a copy of the report for their information and use. For example, in December 2001, each Board member, including the five City representatives, received a copy of the actuarial report that contained much of the information at issue here. In addition, the HMEPS annual reports, which contain the actuarial reports and other detailed information about the pension system, are available on the HMEPS website and are sent to City administrative officials and City Council Members. The changes to the pension law have always been made in the legislature, which is a public forum. Information on those changes was readily available. The reports that are produced in legislative sessions, including the actuarial reports prepared by HMEPS' actuary, the fiscal note prepared by the Legislative Budget Board to estimate the probable costs that will be incurred as an effect of a bill, and the actuarial reports prepared by an independent actuarial firm for the state pension agency, are public and made available to those interested in the information.
Even in 2002, some cautionary notes were sounded in the Comical by Bill Coulter:
MAYOR Brown will have to find an extra $39 million next year just to pay the city's contribution to the three separate pension systems of the police, firefighters and municipal employees, and for city health insurance.Once again, the finger of blame is pointed at Mayor Brown. Interestingly, we even find the city's finance director trying to figure out how to avoid increased contributions that even in 2002 were recognized. And in 2003, Bill Coulter again was again raising the issue in the Comical:That won't be easy. Brown increased city fees and reduced city services to balance this year's budget. Houston 's economic prospects don't appear any brighter for the coming 2004 fiscal year, which begins next July.
Then, according to projections the Chronicle requested from Phil Scheps, the city's finance and administration director, the city's contributions for pension and health benefits will roughly total $271 million, approximately $39 million more than the $232 million this year.
The biggest single increase is in the municipal employee pension fund. The city's contribution was raised in the last legislative session from 10 percent to 14 percent - a 40 percent increase. That increase in city contributions was promoted by the Brown administration with apparently little or no involvement by City Council before the fact.
As a result, the city's contribution to the municipal employee pension fund will take a huge bubble jump next year from roughly $38 million to $53 million, according to Scheps.
By fiscal 2011, just eight years from now, the city's contributions to the three pension systems and for health insurance will total $467 million.
That's more than double the $232 million the city is to contribute this year. Think about that. Twice the cost to the city in just eight years.
[snip]
Funding the pension plans and health insurance may well require higher property taxes and higher fees to maintain, and there is a moral, if not legal, obligation for the city to maintain them. Houston can't promise new hires (municipal employees, firefighters or police officers) certain benefits and then back out.
The city of El Paso is in a pension funding crisis. Its pension system for police and firefighters has been underfunded since 1994 and the city has hit its 18 percent limit on fund contributions. El Paso politicians don't know what to do.
It's important to the election of any mayor or council member to have the campaign support of city employees. Without it, they are more likely to lose.
On the other hand, mayors and council members should think beyond their six years in office. They should not tie the city and its taxpayers to financial obligations that will be hard to meet, as Mayor Brown has done.
Scheps says the city needs to convince the Legislature, when it meets in January, to reduce the big bubble increase next year. He says changing the law to permit a smaller increase next year to the municipal employee plan would reduce the city's budget pain in 2004. City contributions could be stepped up over the coming years in a way that municipal employees would still get the retirement benefits promised, he says.
Taxpayers should ask Sylvester Turner, Orlando Sanchez, Michael Berry, Bill White and any others getting into the mayor's race to explain how they would deal with the pension plans - how to fund them and how to prevent them from growing out of control.Unfortunately, there wasn't much discussion at all about the underfunded liability in the pension plan during the last mayoral race, even though it's clear that plenty of people, including Mayor Brown, had to have known about the looming problem. It's hard to say definitively why that discussion didn't take place, but it's pretty easy to speculate. As chair of a key committee related to the matter, Orlando Sanchez probably didn't want his role (or lack thereof) being examined too closely. Bill White wasn't necessarily in the know at the time, but if he was, he certainly didn't want to antagonize a constituency whose votes he desperately needed to make it into the runoff. It's not entirely clear to me why Sylvester Turner wouldn't have talked more about the issue. But what is clear is that this issue didn't just come up when Mayor White took office, and it's not a result of the passage of Proposition 15.Maybe one or two candidates will have some good ideas. Probably not, though. They all are fearful of making city employees angry, of course. That could cost them their election....
The city of Houston needs some smart new leaders who have the courage to take on public employee pension problems squarely and fairly for everyone involved.
It would be nice if our local media could devote a little more effort to getting to the bottom of this matter. Former Mayor Brown's blaming the actuarial firm is misleading at best, since we know his administration began to get a clear idea of the situation by the end of 2001 at the very latest. At the moment, the city of San Diego is being investigated by the federal government after city officials there admitted to intentionally underfunding its pension plan in order to cover budget shortfalls. The unfunded liability? $1.1 billion. That sounds a little too familiar simply to ignore how Houston got itself into our own $1 billion+ mess.
Next post on this topic: Now that we're here, what do we do next?
Posted by Kevin Whited @ 03/21/04 22:51 | Houston | Technorati
Previous Entry | Home | Next Entry
Comments
Kevin, Thankfully, someone brought your site to my attention. Having been with HPD for over thirty years, I wish I had found it earlier. Needless to say, I am in a panic not only over the pension issue, but that of the fiscal well being of city itself. Please continue to follow-up on these and related issues as an informed and well educated opinion is a welcome relief from the misinformation and political spin being fed to me and my fellow officers.
Posted by Bill Pudifin @ 10:02 on 05/13/04
Add Comments
While it is not required, creating an account for commenting provides a number of benefits (such as comment editing and bypassing the captcha challenge). You may log in to your account here.
No flames or impolite behavior. Any questions, see the site policies. Older posts are moderated (because of spammers), so if your post does not appear immediately, that could be why.
HTML will be stripped. URLs will be transformed into hyperlinks.
[b]text[/b] will produce bold text. [i]text[/i] will produce italicized text.
Comments for this post must be approved before being published. Thank you!
BLOG
» Create Account
» Log In
DISCLAIMER
Content and design copyright © 1997-2008, Kevin Whited.
Posts represent the views of Kevin Whited (and occasional guest bloggers) only, and do not necessarily reflect the views of employers, family, friends, or significant others.