Mayor John Whitmire
The Texas Legislature, with Mayor John Whitmire’s support, is on the cusp of rolling back reforms to Houston’s police and firefighter pensions, worrying experts who call the changes premature, ill-considered, even “stupid.”
The proposal comes just eight years after the Legislature passed sweeping reforms to Houston’s employee pensions, which at the time were underfunded by $8.2 billion. That enormous debt, two decades in the making, helped spur a financial crisis that led rating agencies to downgrade the city’s credit. Efforts to address the problem spanned three mayoral administrations.
House Bill 2688, which passed both chambers unanimously late last month and awaits Gov. Greg Abbott’s signature, leaves most reforms intact but reverses two key changes: It would again let police officers and firefighters retire after 20 years of service, regardless of their age. And it would make them eligible for a controversial program that lets employees retire on paper but keep working while the pension payments they would have received grow, with interest, in their individual accounts.
Past reforms closed this deferred retirement option plan, or DROP, to officers hired after 2004 and to firefighters hired after 2017. Those reforms also required workers to be older, work longer, or both, before earning full benefits.
Craig Mason, a retired actuary who worked as a pension consultant under multiple Houston mayors, was shocked to learn of this year’s legislation.
“They lowered the retirement age, which is an inducement to retire, and then they add DROP, which is an inducement to stay on. That’s stupid. It’s cross-purposes,” he said. “This is just mind-boggling to me. They’re going backwards.”
The bill’s supporters say the measure is a way to retain police and firefighters at a time when both departments’ headcounts are down. They also insist the measure is cost neutral, pointing to actuarial projections submitted by the pension funds and deemed “reasonable” by the state Pension Review Board.
“I wouldn’t have passed this legislation if it walked back the important reforms from 2017, or put taxpayers, the pension plans and the city at risk by creating new unfunded liability,” said state Sen. Joan Huffman, R-Houston, who sponsored the bill in the Senate and also carried Houston’s 2017 pension reform bill.
Though the city did not take an official position on the measure, Whitmire, who as a state senator often carried bills the firefighters’ pension fund supported and served as a federal lobbyist for the fund in 1993, cheered the bill’s passage.
“It will assist us in recruiting and retaining firemen and policemen,” Whitmire said in an interview last week. “Our actuarial people say it’s cost-neutral. Sounds to me like a win-win.”
The mayor had hinted at the idea of reviving the DROP program for officers last fall. He also has given hefty raises to officers and firefighters since taking office last year, despite Houston’s long-running budget challenges. The deal settling a long-running pay dispute with the firefighters, in particular, worried ratings agencies.
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Josh McGee, a former chairman of the state Pension Review Board who played a key role in the 2017 reforms, pushed back on this “Oh, it will pay for itself” attitude.
The DROP program was not restructured so that the money it produces for the pension funds could offset the cost of other retirement benefits, he said. It was done to ensure the program produces enough money in good years to offset its own cost in a downturn – since the city guarantees DROP accounts will earn 2.5% interest annually, regardless of market conditions.
Nor would it take a serious downturn to increase what the city owes its pension funds. The city must contribute more anytime the funds earn less than 7% over a 5-year period – that’s the core assumption on which all Houston pension math is based.
“It’s cost-neutral under this one actuarial note, but if they miss their 7% return by just a little bit it will not be cost neutral – it will have a significant, meaningful cost to the city,” McGee said. “It’s based on a risky assumption. That’s part of the practice that got pension plans into the trouble they’re in to begin with.”
John Diamond of Rice University’s Baker Institute for Public Policy, who has researched public pensions, said the current DROP structure is “harder to take advantage of.”
“But there’s still a risk,” Diamond said. “And part of that risk is once they get all these people in, they’ll start expanding DROP benefits – they’ll start loosening the rules.”
Houston finance director Melissa Dubowski acknowledged the bill’s cost-neutral projections hold true only if the funds meet their 7% assumed rate of return in the market.
Still, she said HB 2688 does not increase the risk to taxpayers because the bill retained a provision of the 2017 reforms – dubbed the “corridor” – that would force the city and pension funds to negotiate benefit cuts if the city’s costs rise above a specified level.
Kelly Dowe, who served as Houston finance director during the 2017 reform push, said this view should not comfort taxpayers.
“The worry everyone had with the corridor is: What happens if you go out the top?” Dowe said. “The only remedy is the city and the pension funds must come to the table and agree. But there’s no mechanism for forcing agreement – and you’ll forgive me if I’m a little skeptical of what this administration would do if we go over the top of the corridor.”
I admit, I’m flummoxed by this. I can understand the desire to retain employees, though doing so by simultaneously allowing them to retire and also continue to work and thus enhance the value of their retirement seems like an awfully expensive benefit. And less than a decade after a multi-year, multi-session effort to reign in pension costs in the first place. It feels like we’re breaking out the ouija board and painting a new pentagram on the floor after finally getting a “no longer haunted” certificate from the exorcist. Like, what are we doing here?
Also, too, maybe we don’t need to hire a bunch more cops? Maybe we could do an efficiency study, like the one we just endured for the municipal workforce, and figure out how to better deploy our existing resources for cost savings and improved results? I know, that’s crazy talk, who could even imagine such a thing. Let’s just throw money at the problem, because nothing says “fiscal responsibility” and “we need to root out all the waste” like that. I’m sure it will all work out in the end. Reform Austin has more.