The city of Houston issued bonds over the years to cover the pensions of retired city workers during previous mayoral administrations, and the practice has played a major role in the city’s financial woes, Mayor Annise Parker said in an interview with Texas Watchdog.
“One of the reasons I am struggling with the budget is that I started off with $30 million to cover, because I wouldn’t use pension obligation bonds, which is just borrowing money to pay the pension,” Parker said. “I’m trying to wean the city off the credit card and on to pay-as-you-go.”
Yet she said she will not consider adjusting the presumed return rate on investments that fund the pensions, a move that some claim would lower a growing unfunded portion of the debt while forcing the city to keep its debt under control.
Cities nationwide are struggling to cover ballooning pension debt, and the way they calculate the debt has been attacked by a number of economists, who say the true costs are much larger than cities acknowledge on their balance books. The pension problem has been compounded over the years as unions extracted large concessions from politicians eager for their support and financial backing, who passed along debt that will take years to catch up to.
In Houston, a city controller projection shows that the unfunded pension debt will increase 82 percent in the decade ending 2019, when it will top $2.1 billion.
Houston has three separate pension systems – police, fire and municipal employees – and three separate unions, making negotiations a prolonged and complex effort.
“I have to meet and confer authority with all of my unions and with two of my pensions,” Parker said. Firefighters can only be dealt with at the state level, and Parker said - again – that she will look for help in Austin.
“Fire, there is no mechanism for them to come in and negotiate with me," she said. "Everything takes place at the state level.”
Negotiations regarding fire fighter pensions in the six largest cities in the state have their own separate conditions and rules. Any changes in annuities or other factors in pension calculations – which could alter the city’s contributions or projected rate of return, for example – have to be done through the legislature.
The city assumes a return of 8.5 percent on its investments for the purpose of funding the pensions, a rate that some believe is too high and allows the city to underfund the pension funds. Parker said the city would not change that assumption.
“If the market were to roar back and start getting 14, 17, 20 percent returns – that sometimes happens – the outcome could reverse," she said.
Some economists claim the city’s pension problem is larger than officials are letting on, and say the 8.5 rate is allowing the city to underfund the obligation.
“We can’t afford to pay these pensions, and they know it,” said John Diamond, an economics professor at Rice University. “And everything is working against the taxpayer.”
Diamond has studied and written about the pension debt and claims the 8.5 percent return the city is using is unrealistic at a time of lesser returns that don’t appear ready for a significant increase.
The larger the supposed rate of return, the less the city pays into the pension fund, further expanding the deficit.
“If [Parker] went to the pension funds and said that 8.5 is too high, the unions would have every incentive to agree,” Diamond said. “Because it would mean the city could have to contribute more, making those pensions safer.”
Another pundit says the situation requires cutting services and staff. But negotiating the benefits owed to soon-to-be retirees is worth a shot.
“You can’t change the deal we made -- a deal is a deal,” said Bill King, a local attorney who is currently writing a series of columns in the Houston Chronicle on the pension situation in the city. “But we have to work creatively, figure out a way, and maybe offer anyone in a plan a 20 percent discount for taking cash,” a plan similar to what was done in the auto industry.
Contact Steve Miller at 832-303-9420 or firstname.lastname@example.org.
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