This deserves more visibility than it’s gotten.
Representatives of Houston’s three employee pension boards told a Houston City Council committee Monday that the sky is not falling and pleaded with council members to be patient in examining the city’s pension obligations.
The presentations from the firefighters’ pension, the municipal employees’ pension and the police pension were organized in response to an informational presentation from the city’s chief pension executive, Craig Mason, before the same Budget and Fiscal Affairs committee last month.
Mason’s presentation had examined how the city’s liabilities would increase or decrease if the pension plans were to change their assumed investment returns, their annual cost-of-living adjustments or made other adjustments. He made no recommendations.
[…]
City Councilman Stephen Costello, chair of the budget committee, began Monday’s meeting by saying the city won’t be able to fund the pensions in the future without reform. The city’s unfunded liability stands at $2.5 billion, he said.
“This year alone we will pay $242 million in pension costs and in five years our costs will increase by another $110 million. By the year 2020 it’s projected that the contributions will be between 30 percent to 45 percent of payroll, which in my opinion as a business owner is unsustainable,” he said. “It’s obvious the city cannot sustain this rate of growth without having to cut services, lay off employees, or raise taxes. This is not a problem that is 30 years away. It’s a problem that’s within 3 to 8 years.”
Pension representatives responded that pensions are long term and stressed that the majority of retiree benefits are paid from investment returns and employee contributions, not city contributions. Cutting or threatening to cut benefits could spur waves of retirements from the city, they added, as changes to the police pension did in 2004. They noted Houston’s economy is strong and improving, and will allow the unfunded liability to be reduced over time.
Go give a listen to that interview I did with Todd Clark and Chris Gonzales of the firefighters’ pension fund if you haven’t done so, it helped me clear up some of my own confusion. I think the broad outlines of this debate are fairly well known by now, but the one factor I haven’t see discussed much is how the improved economy has affected the city’s short to medium term budget outlook. I would venture to say that if we hadn’t had the collapse of 2008 and the lean years that followed we would not have spent nearly as much time talking about pensions at any level as we’ve done. I’m very much looking forward to seeing the city’s budget numbers for this year to see how things stand now. I do think there will need to be some action taken to ensure that the city’s pension liabilities don’t become unmanageable, but I suspect there’s less we have to do now than there was a year or two ago.
Kuff
I think the major issues involve the assumptions, and the 8.5% return is pure fantasy. Plus with low interest rates (courtesy of the FED) it will be very hard for people to hit some of their return targets. I think Costello hit it on the head when he talks about the city’s ongoing costs for pension benefits, they are simply not sustainable. Sure it will be a slow loss, but all of the sudden you will get a spike in costs and the city will be crushed with expenses
The mark Twain quote about how he went bankrupt is quite accurate “At first, very slowly, and then, very quickly”
HFD’s rate of return has consistently been over 8.5% using a time horizon of 30 years, 10 years, and 5 years. HPD’s return has been similar, albeit closer to the mark, and the municipal pension system has come a lot closer than may seem to believe. Rates of return are not the be all, end all of the discussion; that would be the city refusing to pay in the actuarially required amount each year or borrowing from the pensions to pay back later. Out of the past 30 years, the city has underfunded most of the pension systems more than half the years on record, luckily the market was so strong for such a long time.
The city may well have to limit how many years those eligible for DROP can get the benefit, reduce COLAs to every other year, and/or increase employee contribution rates a few percentage points but Costello might want to consult with his old partner Abbott if he thinks cherry picking a few statistics is going to convince anyone serious about the subject.