The full version of the Chron story adds a lot of detail.
Under the tentative deal, the funds would assume more realistic investment returns – 7 percent rather than 8 percent to 8.5 percent – and would recognize all recent market losses on their books at once. The city also would erase the plans’ underfunding within 30 years and make its full annual payment to all three funds.
These changes would help ensure the pension problem does not linger for decades to come, but they first make the hole deeper, increasing the underfunding to $7.7 billion.
To dig back out of the hole created by more realistic funding calculations, Turner asked the funds to reduce benefits enough to slash the underfunding by roughly a third, or $2.5 billion. That would put the unfunded liability at about $5.2 billion.
Turner stressed that he has left it up to each pension fund to decide how precisely to adjust benefits to achieve those cost reductions.
However, he said there is no way to achieve meaningful reform without reducing annual cost-of-living increases for retirees, workers and new hires, and changing the city’s deferred option retirement program, or DROP, which lets current workers eligible for retirement stay on the job and earn a salary while accruing the pension payments they would have received in retirement, with interest.
He also said employees would need to contribute more of their paychecks toward their pensions.
To further reduce the funding gap, Turner plans to issue at least $1 billion in bonds and invest three quarters of the money into the police pension fund and the remaining quarter into the municipal pension fund. The idea, common among governments with pension shortfalls but also deeply controversial among finance experts, is that the city would pay less interest on these so-called pension obligation bonds – say, between 3 percent and 4.5 percent – than it would pay at the pensions’ new 7 percent assumed rate of return.
Turner said this would lower the city’s pension payments so that the combination of funding retiree benefits, paying down past underfunding and paying down the pension bonds would cost the city the same amount it is paying today.
Arnold Foundation pension expert Josh McGee said he thinks the plan is a step in the right direction, but he worried about issuing so much in pension bonds.
“Pension obligation bonds are troubling, especially pension obligation bonds of this size, $1 billion,” McGee said.
If the interest the city must pay on the bonds exceeds the investment returns on their proceeds, McGee said, “you could end up in a situation where you cost the city more than if you’d just paid the money into the pension plan over time.”
The Government Finance Officers Association and the Society of Actuaries both oppose the use of pension obligation bonds.
Houston still has roughly $600 million in pension debt outstanding from former Mayor Bill White’s 2004 reforms that sought to shore up the funding while cutting benefits for new hires.
See here for yesterday’s post. We are still awaiting the specifics, and just because there is a plan doesn’t mean it will work out the way we want it to. The contingencies for when things don’t go as expected will be crucial. This is still a big step forward, one that has been very elusive in the past. I look forward to the council discussion when Mayor Turner brings it all to them. Campos has more.