February 29, 2004
One billion dollars


The city of Houston's main pension program has a billion-dollar funding shortfall because benefits have been boosted so high that many employees will earn more in retirement than they received while working, according to a report obtained by the Chronicle. A few will retire as millionaires.

To properly reduce the shortfall, taxpayers would have to put nearly $100 million extra into the fund next year, according to an analysis prepared for the pension's board.

Further, the city cannot reduce the benefits for any employee who already has worked five years, thanks to a Texas constitutional amendment passed by voters last fall.

As a result, the city is considering closing the plan to new members and moving new employees into a less generous plan. The only alternatives might be a tax increase or widespread layoffs, city finance officials said.

I'm about to run out the door for the day, so I'll get back to this later. But for now, ugh.

UPDATE: Okay, I've looked at this again, and I'm appalled. The details are amazing.

Today's problems can be traced to 2001, when the pension, governed by a board whose majority is made up of current and retired city workers, asked the city to increase benefits. The city agreed, based on a Towers Perrin report that the city would not have to contribute more than 14 percent of its payroll.

The improvements to the employee-contribution program were substantial.

In 1993, the program promised 52.5 percent of income for a retiree with 25 years of service. The new program promised 88.75 percent.

To reach 65 percent of income in retirement, an employee now needs just 20 years of service, compared with the 25-35 years required by most cities.

Only one other city surveyed gives a surviving spouse 100 percent of the pension. Others require their retirees to accept smaller pension payments in order for their survivors to keep receiving benefits.

Houston gives a 4 percent cost-of-living increase, regardless of the actual Consumer Price Index computed by the federal government. Others give less or even none at all.

But the most expensive changes were revisions to a deferred retirement plan, available to any employee whose age and number of years of employment equal 70 -- for instance, an employee who is 50 years old with 20 years of service.

With a so-called "drop" account, the employee essentially "retires" for pension purposes but continues working at his normal salary. Meanwhile, his monthly pension benefit -- 65 percent of salary in the above example -- is paid into an account that he can't touch until he really retires.

In addition, the account receives whatever interest the overall fund is making on its investments, but always at least 8.5 percent, compounded daily, no matter how poorly those investments perform.

The employee also continues to contribute 4 percent of salary. And the monthly benefit gets an annual 4 percent cost-of-living increase.

In the case of a worker hired at age 22 who entered the deferred program after 24 years at a salary of $40,000 and retired for good at age 65, the lump sum waiting for him would be $2.75 million, Esuchanko calculated.

I'm not an actuary, but every one of these bullet items jumps out at me as a red flag. How hard could it have been to do some means testing? Give me the raw data and a few hours with Excel and I probably could have told you this was a lot more expensive than what we were told. How is it possible that someone who does this for a living screwed up so badly? I'm at a loss to understand it. I just hope there's a way to fix it.

Posted by Charles Kuffner on February 29, 2004 to Local politics | TrackBack

"It's not a matter of assessing blame," she [Annise Parker] said. "But the Brown administration just kind of said we would leave it to the next mayor to figure out."

Does anyone else interpret this the way I do: "I'm not blaiming anyone, but it's Brown's fault."

Posted by: Greg V. on February 29, 2004 10:19 AM

Man, I am in the wrong damn line of work....

Posted by: Jack Cluth on February 29, 2004 8:59 PM

Greg V: It's a pretty tepid assessment of blame from Parker, though, since she makes it sound as if Brown played innocent bystander to pass the problem on to the next mayor, when in fact he approved the mess.

Posted by: kevin whited on March 1, 2004 7:33 AM

How hard could it have been to do some means testing?

Pensions come with property rights. You can't means test a pension.

Posted by: Greg V. on March 1, 2004 3:00 PM

Bad choice of words. All I'm asking is how hard it could have been to see if these projections were realistic. Whoever they got to do it the first time clearly did a lousy job of it.

Posted by: Charles Kuffner on March 1, 2004 3:09 PM

Whoever did it the first time was a beneficiary of the plan or hired as a consultant by a beneficiary of the plan.

Posted by: elliottg on March 1, 2004 3:24 PM

It's like everything else, it seems -- intergenerational wealth transfers. Social Security, Medicare, pensions, company-provided medical -- our fathers and grandfathers getting amazing sweetheart deals, their grandchildren getting shafted.

It's nothing new, really.

Posted by: Tim on March 1, 2004 5:21 PM