Catch-Up Week: Dallas and Houston Pensions - Still A-Roar
by meep
It looks like my last Dallas-related post was also a catch up week.
Hey, I’m a busy woman.
But I’m going to look at Houston first.
HOUSTON MAY HAVE SOME RESOLUTION
Texas Senate passes bill overhauling Houston’s troubled pension systems
Texas Senators overwhelmingly passed a bill Monday that aims to overhaul Houston’s troubled pension funds, but not before including a last-minute amendment that could switch future first responders and City Hall employees to a new kind of retirement system.
The Senate passed Senate Bill 2190 in a 25-5 vote. Lt. Gov. Dan Patrick praised the work of the bill’s author, State Sen. Joan Huffman. The Houston Republican spent months working with Houston city officials, police officers, firefighters and city employees in an effort to rewrite the statute that governs the city’s severely underfunded pension systems. Her bill was at least loosely based on a plan that Houston Mayor Sylvester Turner worked on with the three employee groups.
“I cannot think of a more challenging bill in my 11 years in the Senate,” Patrick said.
But the city’s firefighters opposed the legislation because, they said, it required too many cuts to features of their benefits even though their fund is not in nearly as bad a shape as the police and municipal funds. Huffman said from the Senate floor Monday that she made tweaks in the bill that aims to at least partially appease firefighters.
“Although progress was made, it is my understanding the firefighters do not support this bill,” Huffman said.
Houston fire pension chairman David Keller said in a prepared statement Monday afternoon that the benefit features cut from that fund to help the city afford its contributions to all three pension systems could prompt firefighters to leave the department. He also said that could exacerbate existing problems in the firefighters’ fund in the same way that Dallas’ pension fund has been bombarded by asset losses.
“There, the anticipation of future benefit cuts caused waves of early retirements, forced liquidations of immature assets, and a spiraling decline of pension fund balances,” Keller said.
Huffman amended her bill so that if the police or fire systems have less than 65 percent of the money they will need to cover future retirement costs after 2021, new employees will have to go on a different kind of retirement plan called a cash balance plan. If the municipal fund isn’t funded at 60 percent after 2027, those city employees will also have to shift future employees to the new retirement plan.
Currently, the city’s police system is funded at 62 percent, the firefighter fund at 81 percent and the municipal fund at 48 percent, according to credit rating agency Standard & Poor’s.
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Missed payments and growing debtHouston faces more than $8 billion in shortfalls in its police, firefighter and municipal employee pension funds. But credit ratings agency Moody’s estimates the unfunded liabilities exceed $10 billion. That firm ranked Houston as having the nation’s fourth worst pension shortfall when unfunded liabilities were compared to the annual operating revenues.
Those shortfalls are far worse in the police and municipal employee funds than in the firefighter retirement fund. The unfunded liabilities in the police and municipal systems stem from years in which those respective board agreed to let the city underfund its pension contributions. City officials estimate they now owe the police fund $750 million and the municipal employee fund $250 million.
To repay those underfunded amounts, the city plans to issue $1 billion in pension obligation bonds. But the Senate in March passed a bill that could complicate that plan because it would require voters to approve a city’s attempt to take on bond debt to fill pension funds. Huffman’s bill also includes a provision saying that if voters reject pension obligation bonds, the benefit cuts that employees agreed to will not go into effect.
Budget woes ahead
Houston is already facing a $90 to $100 million shortfall in its budget that has to be approved by the end of next month. In July, when Houston’s 2018 fiscal year begins, the city will have to pay $130 million into the police retirement fund. If pension reform legislation goes through, the city plans to quickly issue its $1 billion in planned bonds to avoid draining $130 million from its general fund. If the city has to use its the general fund for that payment, it will create a $220 to $240 million budget shortfall that will lead to layoffs for city employees, including police officers and firefighters, according to Turner.
“No group of employees is going to go unscathed in this process,” Turner said at a press conference last week.
Houston officials have warned that a shortage in first responders will lead to higher crime rates and lower response times throughout the city. Houston fire chief Samuel Pena said at a press conference last week that his department wouldn’t be able to respond as quickly to car wrecks, house fires or medical emergency.
Houston pension reform bill passes Senate by wide margin
Houston’s pension reform package breezed through the state Senate Monday afternoon, setting up a Saturday vote in the Texas House that could put the city inches away from solving a fiscal crisis that officials long have warned could threaten the city’s solvency and force the layoffs of hundreds of employees.
Mayor Sylvester Turner cheered the 25-5 vote, made possible because a threatened political blockade dissolved, giving the landmark proposal a speedy passage.
“Today, the Senate approved a locally developed and agreed-to solution that will place the city of Houston on a sustainable financial path,” said Turner, who was a state representative for 26 years. “The Senate has listened to the will of stakeholders in Houston. We now move forward to the House of Representatives, where I have full confidence my former colleagues will follow suit.”
Sen. Paul Bettencourt, R-Houston, had planned to offer a controversial amendment to allow voters to impose 401(k)-style “defined contribution” plans on future city employees, which worker groups view as insufficient.
He stood down, however, and praised the final version of Sen. Joan Huffman’s bill, thanks to a compromise negotiated among business groups, city leaders and pension officials over the weekend that added a pathway to “cash balance” plans, a less generous type of pension plan.
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‘Substantial improvement’
Arnold Foundation pension expert Josh McGee, who also chairs the state Pension Review Board, has praised the reform package for thoroughly reforming the city’s existing pension system, and cheered the cash balance “trigger” for addressing future benefits.
In a cash balance plan, the city and the worker both contribute to an individual account which is credited with a guaranteed minimum interest rate annually. Huffman’s bill caps that rate at each pension fund’s average returns for the prior five years. In a bull market, the plan can be designed to let employees recognize all or a portion of the gains above that minimum guarantee, while the pension fund saves a portion to prepare for a future downturn.
“There’s a pathway to get to a simpler, easier to manage system,” McGee said. “That’s a substantial improvement on what was already a pretty good bill.”
The trigger works like this: If the police and fire pension funds have less than 65 percent of the assets needed to pay benefits in September 2021, new hires will be placed into a cash balance plan. Similar wording is in place for the municipal plan, which has until September 2027 to improve its funding level to 60 percent or activate the trigger.
Both public safety plans, if the reforms pass, will be well above that 65 percent mark and would need to miss their investment targets repeatedly to trip the trigger. Projections show the poorly funded municipal pension, however, will improve its position to the required point within a decade only if all its assumptions, including its target investment return of 7 percent, hold true.
“The cash balance is a tried and true method of administering pension benefits. It works,” Huffman said. “And we set enough parameters in the language that the basic structure is there.”
I don’t want to comment (much) on the cash balance plan, but I have found cash balance plans to be the worst compared to a pure DB or pure 401(k).
My true preference is a TIAA-style DC/annuity hybrid, but that’s for a different time.
HOUSTON FIREFIGHTERS DISAPPROVE
The firefighters union in Houston is not happy with what was passed.
It’s official: Firefighters will not back Houston pension reforms
Hopes that Houston’s firefighter pension board might agree to a compromise set of benefit reforms and end their opposition to Mayor Sylvester Turner’s landmark reform package proved too optimistic, after the two sides passed a Thursday [April 6] deadline without a deal.
The Houston Firefighters Relief and Retirement Fund had joined police and municipal worker groups in backing preliminary terms last fall, but did not join their counterparts in agreeing to final legislative language.
Fire pension chairman David Keller had been upbeat in his testimony before a state House committee on Monday, saying recent talks with Sen. Joan Huffman — the Houston Republican whose committee approved the reform proposal last week — had been productive and that he was “hopeful” his board could come on board.
Keller acknowledged he verbally agreed to a compromise Turner offered that included more than the estimated $800 million in benefit reductions the board had approved last October but less than the nearly $1 billion in cuts currently in the reform legislation.
But, after the final numbers were crunched, Keller said, the proposal cut too deep for his board to approve.
“There was an all-in number that the city gave us for benefit reductions that just proved to be a very difficult challenge,” he said. “This thing has been punitive, it’s been unfair and, even while we’re trying to be conciliatory, we still couldn’t get there. This whole thing from start to finish has been moving goalposts.”
City officials have a similarly uncharitable view of Keller and his colleagues, saying the board has been dragging its feet through months of negotiations.
So there may still be some polical fighting re: Houston.
To be sure, that story is from a month ago, but I can’t imagine they’re much happier now.
For one, I doubt they were much happy with the tactics of the Houston mayor:
Turner Warns Of Layoffs If Pension Plan Is Not Approved
The Mayor says “hundreds” of police officers and firefighters would be impacted.Houston Mayor Sylvester Turner is warning the City might have to lay off between 1,700 and 2,200 employees if the Texas Legislature doesn’t approve the reform of the City’s pension system this year and those layoffs could have a negative effect on public safety.
During the customary press conference held after the Wednesday [April 26] City Council meeting, Turner noted that if the pension reform bill fails in Austin the Houston Police and Fire Departments will feel the pain because the City would face a deficit of approximately 240 million dollars for the Fiscal Year 2018 budget.
“We are probably talking about laying-off a few hundred more of the police officers, certainly talking about laying off, yeah, several hundred firefighters and you are talking about laying off a lot of municipal workers,” the Mayor said.
Ray Hunt, president of the Police Officers Union, criticized State Senator Paul Bettencourt, who is trying to add other requirements to the pension deal.“We cannot handle massive layoffs and when this city is jeopardized, when our officers’ safety is jeopardized and when the citizens are jeopardized,” Blunt stated at the press conference “I’m gonna lay it right at the feet of Paul Bettencourt if he continues to gum up this process.”
I don’t want to get into the weeds of the Bettencourt thing, because the bill has been passed and Bettencourt has been temporarily sidelined.
And, in any case, Houston isn’t where the big trouble is.
DALLAS DEEPLY SCREWED
Deficit in Dallas: How One of the Fastest-Growing U.S. Cities Ended Up With Billions in Debt
The city has created a huge problem for itself — one so big that bankruptcy isn’t off the table.
Dallas has enjoyed enormous success in recent years. Texas’ third-largest city has seen the fastest job growth of any major metropolitan area in the country, as well as the second-fastest population growth. But despite its good fortune, Dallas has created a huge problem for itself — one so big that even bankruptcy isn’t off the table.
The problem is the city’s pension funding, particularly the cost of its commitments to public safety workers. The public safety pension fund has a shortfall somewhere in the neighborhood of $8 billion. The pension board would like the city to pitch in more than $1 billion — an amount almost equal to the city’s entire general fund. Meanwhile, Dallas is facing a lawsuit over back pay for police and firefighters that could cost the city up to $4 billion.
The pension mess came about through a familiar set of circumstances. Back in the early 1990s, workers were offered generous benefits that included a guaranteed return rate of 8.5 percent on individual savings accounts. In order to pay for such benefits, the board engaged in some risky investments. “They had some investments in real estate that unfortunately turned out to be disastrous,” says James Spiotto, managing director of Chapman Strategic Advisors. “They promised a high return. They earned far less than that.”
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Given pension rules in the state, the legislature is going to have to sign off on any plan to address the problem. Lawmakers are confronting a similar-sized hole in Houston, but a crisis seems to have been averted there because the city and its employees have agreed to a deal. Dallas, by contrast, has been unable to bring state legislators an overhaul that has the blessing of both the city and its pension board. One proposal legislators are talking about would convert individual accounts of Dallas workers into annuities. That might save some money, but Texas lawmakers need to consider how they can reshape pension oversight to avoid similar problems in the future.The quasi-independent nature of pension boards in Texas may be one reason why its plans keep running into trouble. Seven Texas municipalities have filed for bankruptcy protection over the last 35 years, notes Frank Shafroth, a government finance expert at George Mason University and a Governing columist. “The state of Texas needs to really think through what kind of structure they have that enables municipalities to avoid accountability,” Shafroth says.
There’s a huge part of the Dallas situation that is not shared with Houston or the other Texas pensions: the hideous DROP program that “guaranteed” 8% returns for employee deposits.
All sorts of dire warnings have been coming out of Dallas.
Dallas law enforcement in crisis, and failing pension, low pay to blame, former chiefs warn
Former Dallas police chiefs warn in a letter that the police department is in crisis because of the failing police and fire pension system.
The letter, released Wednesday [April 5], calls out city leaders for “pointing fingers” instead of focusing on “consequences of ill-conceived proposed solutions.”
The pension is expected to reach insolvency within the next decade.
The letter — signed by retired police chiefs, assistant chiefs and deputy chiefs that are pension members — echoes other complaints retirees have lobbed at the Dallas Police and Fire Pension System. The letter isn’t addressed to a specific person or organization, though it was released days after Mayor Mike Rawlings denounced a bill before state legislators that would take control of the pension fund away from the city.
Signees of the letter include former Dallas Police Chief Ben Click and current Dallas ISD Police Chief Craig Miller, who was a deputy chief in the Dallas Police Department.
Here is the letter.
Letter from former Dallas police chiefs by Anonymous ovJgHA on Scribd
DALLAS IS NOT GETTING BAILED OUT
Look, guys. You can keep trying to blame the state:
Dallas officials say state lawmakers share blame for city’s pension woes
Amid a legislative session that aims to fix massive pension shortfalls in two of Texas’ biggest cities, Dallas officials argue it’s state law that created some of their current problems in the first place.
The Texas Legislature doesn’t send any state funds to the beleaguered Dallas or Houston pension systems. But legislators nonetheless find themselves mediating city-level disputes over a collection of bills aimed at shoring up at least $14 billion in the cities’ collective shortfalls.
Under a practice that dates back to at least the Great Depression, state law dictates a lot of the financing, governance and benefits of dozens of local pension funds. Some say it’s a good use of checks of balances. Others say it’s another example of the state controlling local matters and dictating how a city’s money must be spent.
“If they mandate that we have to contribute a certain amount of our general fund to a particular use, that’s a mandate they’re not funding,” said Lee Kleinman, a Dallas City Council member. “The legislature’s not kicking in a dime.”
Many Dallas officials say the way previous legislatures wrote the rules are what opened the door to the current pension woes, which have spurred criminal investigations, ignited political rifts and spawned a spin-off argument about whether to divert mass transit funds to public safety retirements.
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This session, state Rep. Dan Flynn authored House Bill 3158, which seeks to overhaul how the Dallas pension system is funded and governed. He said it’s common for the state to control such local matters.“We do a lot of these things,” said Flynn, a Canton Republican. “It’s not unusual.”
First responders support the bill. But Dallas Mayor Mike Rawlings and several City Council members oppose it because of provisions detailing how much the city would contribute to the fund and how pension board members would be selected.
Yet both sides agree that if the legislature doesn’t do something this session, Dallas could face a number of dire scenarios including crippling budget cuts, debilitating property tax increases and a crisis-level shortage of police officers and firefighters.
THE STATE DIDN’T “PROMISE” 8% RETURNS.
DALLAS PEOPLE DID THAT.
If it’s my minor children pointing out that I didn’t stop them from doing something catastrophic, then, yes, my minor children would have a point.
But if my kids circle back when they’re 50 years old and had wasted all their money on lottery tickets as middle-aged adults, it’s not my fault. It’s their responsibility.
Dallas people decided to make insane promises.
Then Dallas people hired other people to try to cover those promises with insane investments.
Tell me, exactly – why is any of this insane behavior the state’s fault?
“You should have stopped us from doing dumbass stuff!” is an extremely weak argument from PEOPLE OLDER THAN ME.
And I’m old enough (get off my lawn, whippersnapper Millennials)
I really don’t know if Houston’s proposal is really sufficient to fix their problems, but the stuff I’ve been seeing out of Dallas is awful. The ideas I’ve seen go by are pension obligation bonds, soaking the local public transit, and trying to soak local taxpayers.
None of which look close to sufficient to cover that insane 8% “guaranteed” return promise.
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