Chicago, Chicago that toddling town1
Mayor Turner started to publically discuss some of his plans to fix Houston’s pension system at the Texas House Pension Committee meeting a few days ago. He made it very clear that moving to a DC plan (defined contribution) is off the table, and that any resolution will require “shared sacrifices”. It’s difficult to see how the city gets out from this financial mess without some benefit reductions and higher property taxes. Until we know what benefit reductions the employee representatives will agree to it will be impossible to predict how big a tax increase the City will need.
In the meantime, it’s instructive to take a look at what Chicago has been doing. Chicago’s pension problems, among other things, have resulted in a junk rating for its general obligation bonds from one rating agency, Moody’s. Chicago, like Houston, has to look to its state legislature to impose changes in benefits or contribution requirements.
A summary of Chicago’s pension story goes like this:
● In 2010, the Illinois legislature approved large reductions in contributions for a four year period to “ramp-up” higher contributions to achieve a 90% funding level by 2040.
● The required “post ramp-up” contributions would increase by almost 300%.
● In 2015, the Illinois legislature approved negotiated benefit reductions.
● But the Illinois Supreme Court rejected the benefit reductions as being unconstitutional.
● To pay for a portion of the post ramp-up contributions, Chicago increased city property taxes by 59% in 2015.
● In 2015, the legislature extended the contribution “ramp-up” periods by another four years and extended the time available to reach the 90% funding level by 15 years to 2055.
● The Governor vetoed this legislation, but in 2016, the Illinois legislature overrode the Governor’s veto.
The end result is a much bigger problem and a 59% increase in city property taxes.
Chicago, like Houston, has consistently contributed amounts far less than required by its actuarial computations. These “short payments” are the biggest contributing factor to excessive pension liabilities and lead to higher contribution requirements in the future. Chicago’s short payments set the platinum standard of “kicking the can down the road.”
The top of each bar in the chart above represents pension contributions due. The blue portion is the actual contribution made. The orange portion is the amount of the short payment.
In the middle of a missed approach for contractor selections, Mayor Turner decides for a “go-around”.
By now you’ve probably heard about the problems that surfaced during the contractor bidding process for the terminal redevelopment work at IAH. If not, you can read about it here…Morris, M. (2016, February 9) Turner tears up airport contracts, will start bidding over. The Houston Chronicle. (registration/subscription may be required)
The trouble started in November when then City Controller Ron Green “tagged” 5 construction contracts scheduled for City Council approval. Later, on December 22nd, when Green was on his way out the door, he sent a detailed three page memo to Controller-elect Chris Brown outlining evidence of “potential fraud” in the bidding process. A copy of the memo, without the exhibits, can be found here…(December 22nd memo from Green to Brown).
The first sentence of the second paragraph of Green’s memo says: “On, or about, November 21, 2015, this office received notification of potential fraud regarding the ITRP procurement process.”
City of Houston Monthly Financial Reports