With the chaotic end to the regular session and the tension in the special session lots of ink, time, energy, and focus has been in Austin. That’s well and good, but it poses a significant challenge for Houston. With the attention focused on Austin, the needed scrutiny for the November election on pension reform and spending cap increase has been pushed to the back burner. The vote will have a far larger impact on Houstonians than anything that happens in Austin this special session.
Before turning reasoning on the vote, I will give credit where credit is due. Mayor Turner could have pushed the pension plan through without a vote. He took the high road and agreed to let it go to the voters. For that, he deserves credit.
It’s important to recognize that the spending cap will need to be increased/lifted if pension reform is approved. Approving the plan without increasing the spending cap will be disastrous. The city has released a “sustainable pensions” web page which promotes the plan. The information there is presented in the light most favorable to the city. The Urban Edge has published an analysis which gives a more neutral assessment.
Although the current situation in untenable, the plan has some problems that need to be addressed. The first, big, problem is that the plan only has a framework to stop unfunded liabilities from increasing. Don has written on the plan extensively, and he correctly points out that the corridor is not a lockdown solution.
Without a lockdown solution, the “risk sharing” is theoretical rather than ongoing. The city and pensioners had the option of shifting future employees to a 401k structure. This would have reduced the obligation going forward and made the problem manageable. Rather, they elected to go the corridor route. The corridor route would achieve the same goal IF it were a hard agreement without wiggle room. Rather than being a hard agreement it calls for negotiations should the investment return fall outside the boundaries of the corridor.
The second problem is that the plan assumes it will succeed and gives little wiggle room for error. The plan calls for reducing the rate of return to 7%. That’s great if the rate of return hits 7%. However, Houston Municipal Employee Pension System publication shows they have not hit that rate of return in the past 3, 5, and 10 year periods. It’s close, but not there. Individual year values have been much lower.
The pension bond requires a 5% rate of return in order to make debt service payments. Although the HMEPS hit that mark in the 3, 5, and 10 year periods it did not hit the mark every year. In those years the city will have to bridge the gap with general revenue.
Third problem is while the books allegedly will be open the transparency doesn’t regulate where the investments are. Municipal bond rates over time have been at 3.5% or slightly higher for the past decade.
With an assumed 7% rate of return along with a 5% rate needed to service the pension plan at least moderately aggressive investing is going to occur. Aggressive investments played a part in the current crisis. The plan lets everyone see the investments, but doesn’t place safeguards to ensure prudent investments.
These problems are significant and give pause as to whether the proposed plan is workable. Prudence calls for a no vote and tweaking the plan to ensure Houstonians aren’t left with a billion dollar obligation that isn’t backed by reform that have teeth to ensure the pension crisis is resolved.
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