Mayor Sylvester Turner says the plan will immediately reduce the city's unfunded liability by $2.5 billion. But not all the stakeholders are on board quite yet.

 

Houston Mayor Sylvester Turner announced his plan for a pension reform package that he says would immediately reduce the city's unfunded liability by $2.5 billion -- but he cautioned that only two of the city's three pension plans have signed onto it.

In a press conference Wednesday afternoon Turner, who took office earlier this year, said he had received agreement on the plan from the Houston Municipal Employees Pension System and the Houston Police Officers' Pension System.

The Houston Firefighters' Relief and Retirement Fund, Turner said, has not yet signed onto his plan. Turner said he was confident that the firefighters would eventually come around, but he also said he will move forward with the reform package with or without their endorsement.

"At some point in time, the train has to leave the station," Turner said. "The train is leaving the station. But I'll always pause to pick up additional passengers."

Turner said his plan would immediately cut the city's $7.7 billion unfunded pension liability, as of June 2016, by $2.5 billion.

The reduction is largely based on negotiated cuts to retirees' cost-of-living adjustments, as well as reductions in Deferred Retirement Option Plans (DROP) benefits, which essentially allow retirement-age workers to accumulate retirement benefits as they continue to work.

Reforms to COLA and DROP were both among the options outlined for pension reform in the Kinder Institute's study, "The Houston Pension Question," released last month.

Turner said the police had identified $1.1 billion in cost reductions, firefighters had identified $802 million and the municipal workers had identified $700 million. He said he gave each of the plans wide latitude to determine exactly what kind of benefit cuts to enact in order to achieve savings.

The centerpiece of Turner's reform package is his so-called "corridor" or "thermostat" proposal that would offer maximum and minimum guidelines on the level of annual contributions the city will make to the three pension plans annually.

"This is a mechanism to make sure we don’t have rising, unsustainable, unmanageable pension costs," Turner said.

"It's like a thermostat," he continued. "If market situations cause your situation to get hot, the city and the pension systems will go back to the negotiating table to lower the temperature."

Although different versions of the corridor concept have been used elsewhere, Kinder Institute Director Bill Fulton said he has not seen it used exactly this way before. "If it is executed properly -- and consistently over time -- it could provide a way for both sides to share in the upside and sacrifice when times are tough," Fulton said.

In his remarks, Turner did not clarify the specific thresholds on either side of the "corridor." Notably, Turner said, the firefighters' plan had reservations about the mechanism.

The reform package, the mayor said, is by no means perfect -- but he said it's good, "and it's not going to get any better."

"This proposal is in everyone's best interest," Turner said. "This is the package, and I'm moving forward."

Turner characterized his reforms as steps that would simultaneously improve the city's finances while also providing municipal workers with much-needed certainty about their retirement benefits. Given that elements of the reforms would need approval from the state legislature, Turner said it's crucial that the city come to Austin with a "united front."

Turner described his plan, which has not yet been publicly released in full, as the only way of addressing the pension problem. He said he hopes each of three pension plan systems, as well as the city council, approves the reform package.

The reforms also include the planned adoption of a 30-year, closed amortization schedule for the city's pension plans. It's a stark contrast from the city's previous method of funding, which essentially recalculated pension payments annually and created a schedule that ensured the unfunded liability would never be fully paid. "No longer will we kick the can down the road in this city," Turner said.

The reforms, Turner added, would ensure the city's unfunded liability is fully paid within 30 years. The Kinder Institute report also described the financial benefits of adopting a closed amortization schedule.

Notably, the mayor's reform plan doesn't include the adoption of a defined contribution plan, which the Kinder Institute highlighted as a reform option used by several other municipalities. Turner said the benefits of that move wouldn't be enjoyed for years, and the city needed a way to achieving more immediate savings.

The package requires each of the three pension plans to adopt a 7 percent projected rate of return on investments when making their funding calculations. Currently, each of the three plans assumes an 8 percent to 8.5 percent rate of return, even though none of them have enjoyed that level of return in recent years. The Kinder Institute pension reform report warned of the negative consequences of unrealistic investment projections.

The city also intends to issue $1 billion in pension obligation bonds to help reduce the liability. Those bonds would increase the city's debt; essentially, the city is betting that the proceeds it could earn by investing that money would exceed the cost of borrowing it.

Turner described the reform package as a way of reducing the pension liability "without increasing your taxes." However, he also said he didn't expect employees to "shoulder the burden on their own," and said he intends to ask Houston voters in 2017 to lift the city's revenue cap, which limits property tax growth.

The Kinder Institute estimates that lifting the cap could generate $40 million to $60 million in extra revenue for the city annually. Turner did not describe a specific use for that potential funding.

Fulton said the outline the mayor issued Wednesday seemed to show "shared sacrifice" on the part of both the city and its workers.

"Both the employees and the mayor are giving up things they’d rather not give up," Fulton said.

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