InsideOut at City Hall
by Annise D. Parker

BUDGET BUSTER

The city confronts the pension-fund debacle in a May 15 vote

The upcoming city budget will be the toughest balancing act since the 1986 oil bust.

Fixed expenses will jump $156 million, but revenues are expected to climb only about $43 million. Like many cities, Houston faces steep increases in employee health insurance premiums—26 million more next year. We’ll also pay $50 million more to police officers for raises promised in their contract.

Sales tax revenue, which accounts for about 25 percent of the general fund budget, is finally beginning to inch up again after dropping or staying flat for two years. The recession even slowed property tax collections, which make up about 45 percent of the general budget.

Then there’s the pension fund shortfall you may have read about. That will account for almost $58 million of the increase.

The pension fund crisis isn’t just an esoteric issue affecting only city employees. It could affect the level of city services and has certainly precipitated a crisis in public confidence. Everywhere I go, astonished voters ask how this happened and what the city is going to do about it.

May 15 election

One immediate solution is the May 15 election. Houston voters will be asked to opt out of Proposition 15, the recently approved state constitutional amendment that prohibits cities from reducing or impairing any pension benefit already earned by someone vested in a municipal pension. If Proposition 15 is allowed to stand, the city will be limited in its ability to negotiate changes that could help reduce the unfunded pension liability.

I hope community organizations study the issue and recommend that people vote to allow the city to opt out.

Public and private entities all across the country face staggering pension problems, mostly due to the drop in the stock market and the recession. The city of El Paso’s pension fund faces a $440 million gap while Dallas is $2 billion short. Many private pension plans have already asked for a federal bailout or have sought bankruptcy.

Of the city’s three pension plans, the municipal pension system has by far the largest projected shortfall, ranging from $1.5 billion to $2.8 billion over the next 18 years. This covers about 12,000 civilian employees. The police pension system may fall about $500 million short, while the Firefighters Relief Fund is essentially fully funded and may be less than $50 million in the hole.

Yes, we’ve got a serious problem. But it’s the result of the age and demographics of the municipal workforce converging with changes on Wall Street and in Austin. The dilemma is complicated by the fact that we’re trying to predict what may or may not happen two or three decades down the road. No one knows for sure at what age an employee will retire or what kind of returns we can expect from our investments in 2020. It’s all imaginary numbers.

How it happened

Since city employees make about one-third less than their private sector counterparts and are lucky to get a raise every three or four years, the city has tried to compensate by offering better pensions. The state legislature controls pension benefits for Texas cities. In 2001, the legislature dramatically increased Plan A benefits by raising the 25-year pension from 80 percent to 90 percent of salaries. The state also pays its employees less but puts more money into pensions.

Like previous pension changes, these occurred in Austin. City Council did not vote to increase pension benefits. We did, of course, know about the legislation.

In 2001, the Municipal Pension Fund’s actuarial firm, Towers Perrin, estimated that 14 percent of the city’s annual payroll would be needed to cover pension obligations. We thought we could afford the more generous pension benefits being discussed in Austin.

In 2003, a new Towers Perrin report predicted pension obligations would eat up more than 40 percent of the city’s annual payroll. What happened between 2001 and 2003? Many of you with mutual funds and 401k’s know the answer. The stock market tanked.

The way out

Change the actuary period. This would have a huge impact. The current estimates are based on a fixed actuary period that will expire in 18 years. A rolling 30-year actuary period would allow us to spread out the unfunded liability.

Issue pension obligation bonds. This would be like using your credit card to pay your mortgage. It’s not a good idea, but we may have to consider it.

Change pension benefits. Employee payroll contributions likely will be increased. New hires and employees who are not yet vested may well be offered an entirely different plan. I envision a defined contribution plan instead of the current defined benefit plan. A defined contribution plan is similar to a 401k. Each year the city would contribute a specific amount of money on an employee’s behalf. The employee would also contribute. Upon retirement, the employee would receive only the money in the account as opposed to a specified percentage of his or her salary.

Establish a city controller seat on the pension board. This would fit perfectly with the controller’s responsibility as the city’s financial watchdog and would bring some independent oversight to the pension fund’s investing policies. There would be no conflict of interest because I have no vote at the council table. Either the controller or a designee could serve.

The city has a chance to begin bailing out the ship May 15. Please don’t forget to vote.

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My Municipal Channel TV show, Money Matters, can be seen every Monday on the Municipal Channel (Warner Cable 16) at 2 and 8 a.m. and 2 and 8 p.m.

Annise Parker is city controller and the highest-ranking openly GLBT elected official in any of the 10 largest U.S. cities. She has contributed a monthly column to OutSmart since June 2002. The controller’s website is www.ci.houston.tx.us/citygovt/controller. To receive her newsletter, send an email to controllers@cityofhouston.net.

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