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A deeper look at the city’s pension funds

I appreciate this just-the-facts analysis of the city’s pension funds. It’s delightfully free of fearmongering and doomsaying, which tend to cloud most stories on the funds. I don’t have anything specific to say about the article, but I do want to make a few general points about the city’s pension situation.

1. I reject the idea that pensions “need” to be replaced by defined contribution plans. The only true winners in that scenario are the fund managers, and they don’t need the help. There’s no reason why the pension funds can’t be made solvent, and no reason to replace them given that.

2. That said, I don’t object to offering a “blended” defined contribution/defined benefit option, as long as it truly is optional. I don’t expect it to be much of a difference-maker if one is offered, however. Police officers and firefighters tend to be in it for their careers, and those that do leave early often do so either involuntarily or because of unforeseen circumstances, like a spouse taking a job elsewhere. Such people, unless they were unusually gifted with foresight, would have had no reason to eschew the traditional pension option. Perhaps this would be more popular with municipal employees, but again, my suspicion is it would be a fairly small piece of the puzzle.

3. For all the fuss over “meet and confer”, it should be noted that it’s a bit of a double-edged sword for the city. Meet and confer lets the city negotiate how much it pays into the funds each year. That gives it some cost control, but it doesn’t make the financial obligation go away. If the city had paid more into the police and municipal funds over the past decade, the problem we face today would be smaller. I don’t expect the city enters annual negotiations with an eye towards increasing the amount it has to pay that year.

4. The city would also like to negotiate things like the deferred retirement option and automatic cost of living adjustments with the firefighters. I don’t think these are unreasonable things to want to discuss. The firefighters maintain that Mayor Parker could negotiate with them any time if she really wanted to. Mayor Parker, I am sure, would say that it’s the firefighters that refuse to sit down with her. The only thing we know for sure is that there’s no love lost between the two sides. I don’t think it should be a requirement that the Mayor and the firefighters like each other for them to talk with each other. But if there’s no other way, then maybe we do need a law.

I don’t know how this story ends. So far all the talk is at the city level, but if anything fundamental is to change it will have to come from the Legislature, where much to the Chronicle’s dismay there’s no sign of any activity there. Maybe there will be in 2014, I have no idea. But this is where we stand now. If we’re still standing here when the 2015 elections roll around, I won’t be surprised. Texpatriate has more.

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  1. John says:

    I don’t have a chron account so I can’t read the story

    as I said before the discount rate used by the funds to determine the total liabilities (and thus funded status) is too high and makes the liabilities smaller than they are. So the underfunded status is too optimistic

    I think what happens in Detroit (that is obviously extreme 3 standard deviation event) will be interesting if the city is able to rid themselves of the obligations in the bankruptcy. That will be a blue print for other cities and states to lessen their obligation if Detroit succeeds

  2. Tory says:

    As far as #1, in either case there are plenty of money managers making money. Defined benefit plans definitely have managers. In fact, the way to avoid that would be defined contribution plans going into very low cost index funds.

    The core problem is that politicians *always* have an incentive to promise more and give less now to make it somebody else’s problem down the road. It is a fundamental flaw that can’t be fixed. Defined contribution plans completely avoid that problem.

  3. Steven Houston says:

    John, the argument for lowering the discount rate is based not on returns but on the security of the fund. HFD’s pension system has returns in excess of 9%, not just the 8.5% needed to fulfill their end of the bargain. Employees cannot “opt out” or get “payment holidays” like the city has negotiated; Parker threatening the department with massive layoffs if it did not allow the deferment. That is why they do not want to bargain with her because it is all a one way street with her.

    The idea that replacing one system for another, even in hybrid form, would save money relies on the amount of benefit being lowered. As it stands, Houston does NOT pay in enough to two of the systems and as a result their unfunded liability grows. This is slowly changing since the deal they have requires the city to pay more each year until full funding takes place, city contributions “catching up” in the next several years if all goes well. Another aspect some seem to have forgotten about is that just because the city moves to a defined contribution system, if allowed by the legislature that is, would not force it to pay in the needed amounts like a private sector system. Some of you scoff at the idea that the city could not underfund such a system but history often repeats itself and even the legal beagles out there can likely come up with scores of times the city 1) did not live up to a bargain, and 2) did not follow the law of the land.

    The only people that would voluntarily choose to go to a defined contribution system are those that intend on leaving sooner and not making the city a career. As benefits are cut further in the future, that number may grow but I doubt any public safety employees would agree to switching unless the city matching rate was astronomical (well above market; the county hybrid offering a 2.25:1 program currently for a smaller benefit). Municipal employees are already underpaid enough that the haters need to use studies in places far away to “prove” employee compensation is equal or close, the same statistical manipulation used to pool local pensions with far more lucrative pensions elsewhere.