I recently wrote an op-ed for the Houston Chronicle discussing the underfunding of the police, fire and municipal employee pensions. This is a critical issue and every mayoral candidate should address how they would solve this problem. In fact, they should have to address specifically whether they will (1) cut pension benefits or (2) increase pension funding (either through increased employee contributions or increased city contributions) ― including to what extent they would use each method for bring the pensions back into the black.
It is worth noting that Houston is not alone in its struggle to fund it pension obligations. The Public Fund Survey reports that for the 125 plans in the survey, which make up more than 85 percent of total state and local pension assets in the United States, the funding ratio (assets/pension liabilities) is 85.3 percent for all plans aggregated together. The bottom line is that many state and local government pension funds are seriously underfunded. Houston’s funding ratio of 73 percent is well below the aggregate ratio of 85.3 percent, and is a signal of the significant financial problems facing the city.
Unfortunately, given the market losses since July of 2008 (the last date the Houston pension numbers were updated), the problem is much worse than the numbers above indicate. Current market losses could decrease the funding ratio to 65 percent or below. This will increase the required annual contributions and, thus, put more stress on the city’s budget in the coming years.
This means that Houston will have less money to invest in critical public infrastructure, police protection and fire protection. Houston is going to reduce its spending one way or another ― I suggest that we start by reducing pension benefits to pre-2000 levels for municipal employees.
John W. Diamond is the Edward A. and Hermena Hancock Kelly Fellow in Public Finance at the Baker Institute and an adjunct professor of economics at Rice University.