When you find yourself in a hole, the first order of business is to stop digging. That’s what we did – and pardon the pun here – with the pothole crisis. That’s what we did with the biggest budget gap since the Great Recession. And that’s what we are now doing with pensions. That’s historic, but the even bigger news is the renewal of the can do attitude and cooperative spirit that has served our city well since its founding. Instead of continuing to fight as they have in the past, a broad spectrum of Houstonians are now putting aside their differences and working together to dig us out of this financial hole.
Through their pension governing boards, our City employees have put $2.5 billion of concessions on the table. These hard-working public servants are giving up benefits to which they are entitled in order to create a more stable future for our city. City leaders are promising to no longer fudge on what we owe to City employees every year. The business community and legislative delegation are helping to get the plan enacted into law. And, as I have said many times before, I will later ask taxpayers to step up and share in these sacrifices by agreeing to repeal the revenue cap that is crippling the City’s ability to meet its growing needs.
Now, let’s take a closer look at the path forward. Just imagine reducing by more than $200 million what the City will have to pay next year while also controlling what we have to pay every year after. Then imagine having $8.1 billion of currently unfunded pension obligations immediately reduced and then eliminated entirely over time. This plan achieves fully funded, secure, sustainable and affordable retirement plans that our employees can rely on and taxpayers will find affordable, and we do it without increasing the City budget or needing to raise taxes.
Although we are dealing in the billions of dollars, this really isn’t that much different than a consumer mortgage. We will have a 30-year fixed payment plan and just like a mortgage, the debt will be gone at the end of 30 years. The City will pay what it owes every year, and there will be no more refinancing every year to put us deeper in the hole.
The benefits changes from the pension systems will immediately reduce our unfunded liability to $5.6 billion for a 33% reduction right off the bat. Their offer is like the down payment. It is their upfront commitment to helping, and it has a significant impact on the total amount we will have to pay now and in the future. We will couple this with $1 billion in pension obligation bonds (POB) to further reduce the unfunded liability. Yes, we are trading one form of debt for another, but at a lower interest rate. As Fitch Ratings recently noted, “POB use in conjunction with reforms to benefits and contribution practices increases the odds of strengthening funding positions and improving long-term sustainability.”
In keeping with the national trend, we are also lowering the assumed rate of return on pension investments to a more realistic 7%.
And, to ensure the City never again finds itself facing a multi-billion dollar debt with no way to pay for it, we are limiting the amount to be spent each year for pension benefits. If anticipated costs rise above this limit, the City and the pension systems will have to return to the table to make adjustments to bring costs back in line. If this type of system had been put in place 15 years ago, we would not be where we are today.
For some time, we have known we had choices to make regarding our employee pensions. The current situation is straining our finances and putting at risk our ability to meet our pension obligations in the future. We have chosen a path that will minimize adverse impact on our hard working employees, especially the thousands of police, fire and municipal workers eligible to retire today.
No other plan provides both immediate and long-term benefits and takes the pension issue off the table for good. We are closer than ever before to solving this. There will be a few who will criticize but not one of them has presented anything that reduces the unfunded liability by even $1 immediately and then pays it off entirely in 30 years while also moving us forward in a unified manner. Is it perfect? No. But is it a very good plan for City employees, taxpayers and the future of this great city? Absolutely!