City of Houston Pension Solution

Dear Houstonians,

They said it couldn't be done; but in Houston, we always get it done. Houstonians came together and achieved historic pension reform, lifting a significant barrier to progress in our city. Our victory on pension reform is substantial. We immediately reduced a debt of $8.2 billion and put in place a responsible plan to pay off the balance over 30 years - just like the mortgage on a house. The plan also requires the city to make the payments in full and on time - just like every Houstonian with a mortgage is required to do - and protects the city from cost increases due to economic downturns.

The new law requires annual Risk Sharing Valuation Studies (RSVS) to determine the city’s contribution rate.

View the RSVS Reports

We began 2017 by bringing a deal, negotiated in Houston between the City and employee groups, to the Texas Legislature. The Legislature passed pension reform for the first time in decades, but required voter approval of pension obligation bonds, a critical component of the reforms. In November, Houston voters approved the bonds by a 3-to-1 ratio. We ended 2017 by completing the issuance of those bonds.

We thank our city employees, our state legislators, the Houston business community and, most importantly, the voters of Houston for making this happen. The pension crisis in Houston is no more. We can now move on to what will lift up our families, our neighborhoods and our city!

McGee said that provision, if strictly enforced, would help make the proposal 'one of the better reforms in the country...' '...(T)he good thing about the plan is that cost is now capped, whereas before it wasn't. We're in a fundamentally different situation than we were before.

-Josh McGee, Arnold Foundation [Source ]

It's a new idea with great potential to solve a 15-year old problem in Houston. And, if the "corridor" mechanism is airtight and works as intended, it could become a case study for cities across the country.

-Marc Watts, chair of Greater Houston Partnership's Municipal Finance Task Force [Source ]

Indeed, the Mayor's proposal appears to strike the right amount of give-and-take that's required for all parties to get on board. First, the city is stepping up in terms of accountability, meaning it would be required to make its pension payment annually.

-Liz Farmer, Governing Magazine [Source ]

[The pension proposal] offers a clear path toward a sustainable retirement for city workers at a very uncertain time for city finances. I commend the Mayor and all stakeholders for their commitment to addressing an urgent problem in a timely manner. The longer we wait to implement a solution to our pension challenge, the more difficult it becomes for the city to succeed in solving it.

-Chris Brown, Houston City Controller [Source ]

The numbers for the Mayor's pension reform plan generally add up, and the reforms generally move Houston in the right direction. In fact, this pension reform plan should be viewed by other cities as a national model, especially its risk-sharing aspect.

-Dr. Bill Fulton, Kinder Institute for Urban Research [Source ]

I am very pleased with the Mayor's proposal because it actually includes a structure. It used to be that if the pensions board misestimated the amount they needed, then it just fell on the City and the City was required to pay that amount and that's what's happening in Houston and Dallas. Under the Mayor's plan, there are actually consequences to making bad estimates, and that's going to give the pension review boards as well as the City the proper incentives to make the right assumptions. That's what we need. We need a system that incentivizes the parties to make consistent decisions, not decisions they know are probably off.

-Dr. John Diamond, Baker Institute for Public Policy [Source ]

Real Numbers for a Real Solution

For the first time, the pension boards are opening their books. All gains and losses will be recognized.
The solution implements a more realistic rate of return of 7 percent, which is in line with national standards.
After recognizing all our gains and losses and using a more realistic rate of return, we know that our real unfunded liability is $8.2 billion. Only by using real numbers do we understand the true extent of the problem, and only then are we able to fully address it.
The City had borrowed more than $1 billion from pension systems. To pay back the debt, the City has issued pension obligation bonds, which voters passed in November 2017 with more than 75 percent of the vote.

Why It's Called a "National Model"

Under the old plan, if investments did not meet expectations, the City had to make up the difference. The solution implements a "cost corridor" so that the City's contributions are capped. If investments perform too far below established levels, the pension boards will cut benefits or increase employee contributions to bring costs in line.
Houston's pension systems were in open amortization - we would never pay off the debt. The solution places the systems in closed amortization - we treat the debt like a mortgage, paying it off in 30 years.
There are no new taxes needed for the City to meet its obligations. The solution is budget neutral.