While Houston may succeed, it may also crumble under a mountain of public pension debt that then-Mayor Bill White and then-Controller Annise Parker, now our new mayor, have failed to control in what basically amounts to a massive shell game.
The introduction to the “City of Houston 2009 Annual Financial Report,” which was published on December 2009, states that:
“According to the City’s Fiscal Year 2009 Monthly Financial and Operations Report for the period ending October 31, 2009, the unfunded liability for these three pensions totals $1.86 billion. Negotiated changes in pension benefits, increased employee contributions and the use of pension obligation bonds have helped to reduce the unfunded liability in recent years. … However, there could be some setbacks due to Wall Street’s difficulties as all three pension systems invest heavily in the stock market.”
Unfortunately, the $1.86 billion unfunded liability reported in the monthly financial report for October 31, 2009, is from July 1, 2008, before the stock market crashed in October 2008. This is over 18 months out of date. To make matters worse, the policy changes implemented under then-Mayor White that Mayor Parker continues to recite as the way out of the pending financial mess– negotiated benefit changes, increased employee contributions, and the use of pension obligation bonds — have either failed to do the job, are not true, or are not a feasible solution.
A Houston Municipal Employees Pensions System report by an outside firm forecasts that the unfunded ratio will barely increase from 70.1 percent in 2008 to 72.3 percent in 2018, even under optimistic assumptions. This report also forecasts that employee contributions are falling, not rising, because newly hired municipal employees are not required to contribute a single penny to their retirement — all part of the agreement negotiated by then-Mayor White. How exactly does this constitute increased employee contributions? Another fact is that pension bonds are not a potential solution to the problem, and have probably only compounded the financial mess. Borrowing money to fund a pension can delay the negative impacts of paying off debt and under the best circumstances yield small gains, but it also increases the risk of serious financial crisis (e.g. this article on Pittsburgh and pension obligation bonds). Unfortunately, city leaders continue to underfund the pension in terms of its annual contributions and this problem is only getting worse.
Figuring out where the city stands is difficult, given the lack of up-to-date information put out in the 2009 City Annual Financial Report. However, data from the Houston Municipal Employees Pensions System fall newsletters in 2008 and 2009 suggests that asset values in the municipal employees’ pension program fell by 23 percent from July 1, 2008, to July 1, 2009. If the other city pension programs experienced similar losses, the implied current unfunded liability in all three city pensions would be $3.92 billion, not $1.86 billion. This is a rough estimate that does not include roughly $400 million in borrowed funds that have been shifted to the general fund.
In her inaugural speech, Mayor Parker said, “I firmly believe that our city’s future will be shaped by our citizens — not our politicians. I welcome your suggestions.” Well, here’s mine: Take a long, hard look at our pension systems and have the courage and political will to come clean about this looming disaster.
The city’s future squarely rests on Mayor Parker making some very tough decisions regarding public pensions — I hope she will step up to the task.
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. He wrote about this issue in an Oct. 11, 2009, Houston Chronicle op-ed titled, “Next Mayor Must Fix Pension Problems.”