The proposed “Solution” to repair Houston’s failing pension system includes a plan to issue $1 Billion of Pension Obligation Bonds (POBs). Voters will have a chance to approve or to reject the issuance of these bonds on the November 7th ballot.
I plan to vote NO on Proposition A, primarily because issuing the bonds eternalizes a failed pension system. Advocates of the proposed “Solution” seemed to recognize as much when they negotiated the so-called Corridor to hold future contributions to the pension systems within certain limits. The problem is, the Corridor contribution limits (as high as 35%) are unsustainably high. These high contribution levels will be allowed to continue for 5-10 years even if they don’t result in higher actual funding levels relative to pension liabilities. Our pension system needs to be reformed now, not 5 or 10 years from now.
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.
City of Houston Monthly Financial Reports