Houston and Dallas Pension Bills Signed: Now What?
by meep
It has been a time of deadlines (including my own at work), so a bunch of things hit at once.
So let’s hit it!
TEXAS GOVERNOR SIGNS BILLS
Both Dallas and Houston have police&fire pension troubles. The reasons for these troubles differ a little (and have different magnitudes), but they both hit at once… partly due to the special nature of the Texas legislature. Texas is one of the 4 states that have regular sessions of their legislature only ever-other-year. Yeah, they could call special sessions, but it doesn’t happen all that often (thus, “special”).
More info on the Texas legislature.
In any case, Dallas Police and Fire was definitely in a crisis position, and Houston was strained. They both needed approval to put into effect changes to the pensions and finances to make the changes work. Mind you, they asked for different things, which we’ll get to.
Texas Governor signs Dallas, Houston pension bills
Texas Governor Greg Abbott signed into law on Wednesday a bill aimed at addressing public pension problems in the state’s two biggest cities, Dallas and Houston.
The new law will increase retirement ages, hike worker and city contributions, limit cost-of-living (COLA) increases for retirees, and restructure governance.
In a tweet on Wednesday, Abbott wrote that he was “proud of the Texas legislature leading on pension reform that ensures fiscal soundness.”
The Dallas police and fire pension system was projected to become insolvent within 10 years if the city or the state did not act.
….
The city of Houston estimated that without any type of reform, the city would contribute $3.7 billion to the pension systems over five years. With reforms, the city will contribute $2.0 billion. The city estimates a savings of $1.4 billion, and an estimated debt service cost of $0.2 billion.
So that’s today’s news.
Let’s look at what led up to it.
DALLAS CHANGES
So here is what the Dallas changes are and what they supposedly do:
Among the bill’s provisions are an increase in the retirement age to 58 from 55 (or 50 for those hired before March 1, 2011), a reduction in DROP benefits and the elimination of cost-of-living adjustments unless certain financial benchmarks are reached.
The pension fund was roughly 36% funded at the end of 2016. The bill is expected to bring the pension fund to full funding in 46 years.
=cough= =cough=
Excuse me.
Let me quote myself via twitter:
“bill is expected to bring pension fund to full funding in 46 years.” Assuming what asset return? And if 1%/yr less? https://t.co/5RYPyqTyLa
— E. Bartholomew (@e_bartholomew) May 31, 2017
man, the things that politicians expect. I'm thinking they expect to be dead before those 46 are up
— Mary Pat Campbell (@meepbobeep) June 1, 2017
Yeah, I’m not feeling too good about a “glide path” to full-fundedness in 46 years. Yes, I bet trying to do it more rapidly would be very painful. But also not getting your pensions as fully promised, or getting taxed to pay for decades-ago services while getting less services now, or having higher borrowing costs due to the high debt load — all of these things are also painful.
But back to the bill:
Under the deferred retirement option plan changes, active workers eligible for retirement can participate in DROP for up to 10 years, and retirees cannot continue to defer payments. Previously, the participation period was unlimited. DROP payments will also be paid out as annuities upon retirement rather than lump sums, and the interest paid will be based on a Treasury-based rate determined by the pension fund board, opposed a guaranteed interest rate, currently 6%, and once as high as 10%.
The bill also raises employees’ payroll contributions to 13.5% from 8.5% (or 4% for active workers eligible for retirement and enrolled in the deferred retirement option plan) and raises the city’s contribution to 34.5% of pay annually, from 27.5% of total pay, plus $13 million per year until 2024 when an actuarial analysis will be conducted to ensure funding is sufficient to meet the guidelines set by the Texas Pension Review Board.
Additionally, the number of pension fund board trustees would be reduced to 11 from 12 and would include six trustees appointed by the mayor in consultation with the City Council. Previously, eight of the 12 trustees were pension fund participants and four were City Council members.
The pension fund board could also decide under the bill to take back interest earned by DROP participants. Two-thirds of the pension fund board would have to approve the clawback.
Ooooh, clawback is gonna be a tough one.
THE DIFFICULTY OF DROPPING DROP
Fight over Dallas Police and Fire Pension System is done, but big challenges still ahead
The Deferred Retirement Option Plan, known as DROP, is the source of two ongoing lawsuits against the pension system. DROP allowed veteran officers and firefighters to accrue large lump-sum accounts by retiring on paper — they remained on active duty — while the system diverted the pension checks they would’ve received into a personal account. Retirees could leave their money in DROP for years while the pension system paid a high guaranteed interest rate.
The board’s decision to restrict DROP withdrawals — after $500 million left the fund in a panic late last year — resulted in one of the lawsuits in federal court. If the pension system loses the case, the fund could be crippled.
Otherwise, almost all the DROP money still in the fund is likely to become annuitized and paid out over the recipients’ projected life spans.
In recent months, the pension board had to consider every month whether it had enough cash to pay out DROP withdrawals. The bill now directs the board members to stop considering it. That means the pension system has about $400 million in cash to reinvest.
It could be one of the last major decisions the current board makes. On Sept. 1, the bill takes effect and a new board takes power. Instead of having a majority made up of police and firefighters, the board will be mostly professionals appointed by the police and fire associations and the mayor.
Given that the DROP freeze is a matter of litigation…what do you think would happen if they tried to grab that money back?
So they may just hold off on that particular move.
Back to the reaction piece:
Police and fire associations fear more of their colleagues could leave if they’re fed up or if it’s now more financially prudent to do so. Pension officials expect at least the bulk of a group of 76 police and firefighters to retire because of new time-limit rules on DROP.
Hundreds more officers and firefighters could conceivably retire tomorrow. History suggests they won’t, but history may not apply now.
“Since this is so unprecedented, it’s hard to make an exact determination how people are going to react to the changes in the pension as well as society,” said Deputy Chief Scott Walton, who oversees personnel.
City officials also have their own financial problems: finding the money they are now required to pay to the pension. The city will pay a minimum of more than $150 million into the pension fund in the first year of the law. That is more than $32 million more than the city spent on the system last year. The increase alone is far more than the city’s entire budget for neighborhood Code Compliance.
….
Council member Scott Griggs, a pension trustee, has been a supporter of using a small portion of the sales tax that currently goes to DART. Such a move would require a change to state law, which lawmakers balked at this session.
Note: this wasn’t in the final bill.
Here are some comments on this witches’ brew:
State Senator Royce West, D-Dallas, who helped oversee the negotiations, compared it to a popular dish. “Have you ever had gumbo? We’re putting a little bit of this in there a little bit of that in there. We’re trying to come up with the best Gumbo we possibly could.”
He and other lawmakers, Dallas Mayor Mike Rawlings, and most of the police and fire associations called the compromise a victory.
Michael Mata, the President of the Dallas Police Association said, “Today is a good day, today is the day that we solve the future of the Dallas police and Dallas Fire.”
Mayor Rawlings said, “Today, I’m 100 percent happy. I really am, I’m really proud of these guys. Its been long and its been hard but we win together.”
West said, “This has been a long time coming.”
State Senator Don Huffines, R-Dallas said, “It’s not an easy feat to strike a balance like this. The men and women of Dallas police and fire must be secure in their future. We must also fight for the hard-working taxpayers in our city who are already asked to pay far too much.”
Jeez, guys, don’t hurt yourselves patting your own backs.
And now the other side:
The Dallas Police Retired Officers Association opposes the pension bill.
The President of the group, Pete Bailey said, “We represent the group most negatively affected I think in this deal. We’re going to go back and explain to them there was a ton of hard work done. There was a lot of good will put forward to try and create a situation where their futures would be secured.”
Bailey says his group opposed the deal because some retirees may be forced to give back thousands of dollars they already received.
It’s a provision called “clawback.”
But two-thirds of the new pension board members would have to approve that provision.
James Freeman, who spent 36 years with the Dallas Police Department, went to the Capitol Thursday.
He opposes “clawback.”
Freeman said, “A lot of money has been spent. I don’t have it. A lot of people have died. Retirees have died and this money has been willed to spouses, to grandchildren.The money has been spent and redistributed.”
Sen. West said he doesn’t think that will be likely.
“I don’t believe that that particular tool will be utilized unless it’s absolutely necessary to, number one, save the fund, but for actuarial soundness.”
Hmmm.
Long 911 Wait Times Add to DPD Enrollment, Pension Problems
The future of the Dallas Police Department continues to hang in the balance as problems surrounding the department pension points to enrollment drop.
According to Dallas Police Association officials, about 250 officers will retire by the end of the summer. Meanwhile, new recruits are rethinking their position on the police force.
City leaders believe if the pension and enrollment problems are not addressed properly, Dallas residents will feel the impact. When enrollment numbers drop, the number of officers patrolling the streets will drop as well.
That low number could impact 911 wait times. When an emergency operator receives a call for help, the emergency is organized by the “priority” level. Each priority has a target “wait time.”
Thomas Glover, president of the Black Police Association of Greater Dallas, is not sold on the deal.
“We need the full council’s attention and we need the citizens to know what our concerns are,” he said.
Glover insists governance of the fund should be split evenly. And he strongly opposes that “clawback” on Deferred Retirement Option Plan (DROP) savings money already promised to plan members in the past is in the bill.
“I don’t think that you’re going to do your best in recruiting if people think you’re going to break your promise,” Glover said. “If we don’t have a decent pension and we don’t have good pay, the best people that would be here in the police and fire department are going elsewhere.”
Fair enough, but if there’s another police system that guarantees 8% on deposits as part of its pension system: 1. it almost definitely is having the same trouble and 2. no, I don’t think there are any other large police systems with this promise.
So, yeah, they can leave. Or not sign up. But what is this supposed better deal they’ll get elsewhere?
HOUSTON CHANGES
The Houston situation also has changes, but because it doesn’t have the extremely nasty problems (DROP and stinky investments/governance issues) of Dallas, it wasn’t quite as contentious.
It was still contentious, tho.
May 24: Houston pension reform plan passes Texas House, awaits Governor’s signature to become law
AUSTIN – The Houston pension bill was adopted by the Texas House on Wednesday [May 24].
The approval sends the bill to the governor’s desk to be signed into law.
The pension system won final Senate approval by a large margin Tuesday, with a vote of 25-5.
It’s a big win for Mayor Sylvester Turner and the bill’s author, Sen. Joan Huffman ®, of Houston.
The mayor praised the Senate vote in a written statement Tuesday, saying, “Houston is very thankful for the Senate, our author Chairwoman Joan Huffman and Lt. Governor Dan Patrick for their support. On to the House for the final legislative step to approve the Houston Pension Solution.”
The Senate bill encompasses Turner’s pension reform plan, which requires cuts in future employee benefits, coupled with the sale of bonds to begin whittling down the city’s $8 billion pension deficit.
Oh Lord, pension obligation bonds, the work of the devil.
And no, I’m not joking about that at all.
Back to the piece:
The bill requires a city-wide referendum to approve sale of the bonds.
The plan has already been approved once by the Senate and by the House.
Three amendments favored by firefighters were tacked on in the House, but all three were later stripped from the bill in conference committees.
The reform plan is opposed by Houston firefighters who contend the future benefit cuts they would be required to take will spark an exodus of experienced firefighters from the Houston Fire Department.
“We’re urging House members to vote against the bill,” David Keller, chairman of the Houston Firefighter’s Relief and Retirement Fund, said after the Senate vote.
“The bill is punitive and unfair. We’re 18 percent of the city’s pension debt and 39 percent of the proposed solution,” Keller said in reference to the city’s unfunded pension obligations and cuts in future benefits to firefighters required under the plan.
Huffman said firefighters were invited to participate in crafting the bill, but chose not to do so.
“We still feel it was a fair outcome to them,” Huffman said. “I was careful to make sure we incorporated concessions to the firefighters even though they didn’t participate the entire way.”
The Houston bill passed Wednesday [May 24] without two amendments the House had previously added in an apparent attempt to appease firefighters. One amendment would have prevented the bill from impacting current firefighter retirees. The other could have allowed the firefighter pension system to bear a smaller burden in paying down unfunded liabilities shoring up billions in shortfalls in three city employee retirement funds.
That drew the anger of firefighter pension members, dozens of whom sat in the House gallery Wednesday. Some shouted down to representatives as they walked out after the vote. One woman could be heard yelling, “Shameful!”
After the vote, Houston firefighter pension board chairman David Keller said he was disappointed in the vote. During the session, pension officials had suggested such legislation could be unconstitutional because it determines the financial boundaries the fund should stay within. Keller said the Constitution says that power is left solely to the pension board.
Keller said it was too soon to determine if the pension board will file a lawsuit.
“We will explore every option available to us,” he said.
And an opinion piece from May 9:
Over the weekend, the snag came from state Rep. Dwayne Bohac, R-Houston. The 15-year representative sponsored an amendment to the pension legislation in the Texas House that would exempt more than 3,100 retired firefighters from benefit cuts. Beyond the curious novelty of a supposedly conservative Republican aligning himself with a labor group, Bohac’s amendment would add an estimated $400 million to the unfunded liability burden borne by Houston taxpayers. And it comes from a guy whose website brags that his colleagues gave him a “Taxpayer’s Best Friend” award.
As Bohac rightly points out, firefighters were promised these retirement benefits. That’s part of the deal they signed up for, and it’s a measure of how much respect they’ve long commanded for the dangerous job we’ve always counted on them to do. But the simple truth is that a generation of city leaders irresponsibly left the next generation of Houston taxpayers a pension bill that cannot be paid without substantial tax increases or drastic cuts in services to the citizens of Houston.
Here’s what the Taypayer’s Best Friend is defending: Quit your job and double your pay.
That’s the retirement deal city officials say some Houston firefighters can get under their current pension plan. It’s an arrangement that would continue to be mandated by state law. The Legislature needs to say no.
….
The pension reform legislation is heading to a conference committee, which will try to reconcile it with the version passed by the Senate. So there’s still time to strip this amendment out of the bill. Allowing this provision to survive would be an insult to Houston police and civilian workers, who agreed to give up some of their benefits for the good of the city.
By the way, it was stripped out of the final bill.
COMPLETELY DELUSIONAL
I’m going down a side alley for a moment, to make a point.
Poor land deals pushed Dallas pension fund toward insolvency
Failed land-development deals in Idaho and Colorado have cost the Dallas Police and Fire Pension System approximately $100 million, officials for the system say.
The deals account for a significant portion of the half-billion-dollar losses the fund has endured in recent years because of bad bets on real estate and private equity.
The fund has spent $25 million just in fees to advisers and managers of the land deals. Earlier fund managers intended to build sprawling housing developments, but the plans were ruined when the housing bubble burst.
The ventures are examples of the risky investment strategies that, along with overly generous benefits, led the pension to the brink of insolvency, The Dallas Morning News reports . Speculative investments in past years also included luxury homes in Hawaii, a resort near Napa and high-rise condos in Dallas.
I’m not going to disagree that the real estate deals sucked bad.
I’ve covered them before:
Public Pensions Watch: Dallas Pension Learns About Concentration Risk
Public Pensions and Alternative Assets: Dallas Shows How It Can End
Thing is, one can point to those investments and their awful performance as the proximate cause of the plan insolvency.
But the ultimate cause was some of the insane promises embedded in the Dallas pensions.
The insane promise involved a couple parts:
1. The 8% assumed return on assets
2. A GUARANTEED 8% return on employee deposits, which could be removed AS LUMP SUMS.
Part 1 has been shared by many pensions, and has caused them to pursue inadvisable investment schemes to try to achieve those returns.
Part 2, though — that’s the real poison. There are so many problems with that from a DB pension risk point of view, I’m going to leave that one as an exercise for the reader.
Or you can re-read some prior posts:
- The Pension That Ate Dallas
- Dallas Police and Fire Pensions: Beyond the Event Horizon
- Dallas Police and Fire Pensions: Pulling into the Abyss
These are all from the past year.
THE WORK IS NOT DONE
Hell, it’s barely begun.
Passing the legislation was the first step. There are lawuists to work through, and then we need to see how new governance and other items work out.
The Houston “reform” involves issuing pension obligation bonds… but that requires local voter approval. That can fail.
That 46-year horizon to getting to full-fundedness? Are you kidding me? This is a much shorter-term crisis for Dallas.
So this is just starting to work out.
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