Mayor's Office Press Release
Mayor Turner Announces Historic Pension Reform Plan
Defined Benefits Maintained, Unfunded Liability Reduced Immediately
September 14, 2016 -- Negotiators for the City, the Houston Police Officers’ Pension System, the Houston Firefighters’ Relief and Retirement Fund and the Houston Municipal Employees Pension System have developed Preliminary Points of Understanding on a structural approach to long term, sustainable, defined benefit pension reform. Detailed formal plans continue to be developed and will need to be presented to the governing bodies of the three pension systems, City Council and the state legislature for approval.
“This reform accomplishes the objectives I set at the beginning of this process,” said Mayor Sylvester Turner. “The plan I am outlining today immediately reduces and later eliminates the unfunded pension liability, controls costs going forward, allows us to retain employees and allows us to present to the state legislature a much more united front. It is a budget neutral, 30-year fixed payoff plan that includes significant cost avoidance from what the City would need to pay in the absence of reform. No other plan does this and takes the issue off the table permanently. We will have fully funded, secure, sustainable and affordable defined benefit pension plans that our employees can rely on and our taxpayers will find fiscally responsible.”
With implementation of the changes, the City’s unfunded pension liability immediately drops by $2.5 billion and continues dropping for the next 30 years, at which time it will be paid off. This approach replaces the present practice of restructuring the liability every year with a 30-year closed amortization model that is a pension best practice and a requirement of the City’s financial policies. Just like a fixed rate consumer mortgage, the liability will be paid off at the end of 30 years.
To substantially reduce risk related to market performance and in keeping with the national trend for pension systems, the assumed rate of return on pension investments will be reduced to 7%.
To further stabilize the pension funds, the City will be required to make the full annual contribution to all three pension systems. Payroll contribution rates will be fixed over the 30-year period, providing more predictable budgeting. The proposal cuts the City’s annual obligation to a manageable level and, most important, is budget-neutral while significantly reducing what the City would need to pay to cover the full annual contribution without reforms.
The plan also employs $1 billion in pension obligation bonds for funds that have not received the full annual required contribution from the City in recent years. This will increase the City’s debt, but earnings from pension investments are anticipated to more than offset the borrowing costs.
To ensure the City does not find itself in the same place again, there is a cost-management component. If future market changes cause costs to exceed specified limits, the City and the pension systems will return to the negotiating table to work out adjustments to bring costs back in line. Mayor Turner characterizes this as a cost management corridor that contains a thermostat that must be kept at a set temperature. The thermostat concept is the only point on which all of the parties lack unity. The police and municipal pension systems have gotten comfortable with it, but the firefighter pension system has not, so far. Talks are continuing.
“These points of preliminary understanding are historic in nature because of how impactful they are,” said Mayor Turner. “I have discussed them with numerous stakeholders and key members of the state legislature. The response has been very positive. To my knowledge, no other city in the nation has crafted a plan that addresses the problem in quite the same way. We have a way to solve our pension issues for good, and our approach can serve as a model for other cities.”
There will be changes in employee benefits. They are different for each pension system but, basically, will affect one or more of the following: cost of living adjustments, future benefit accrual rates and the DROP program. More details will be forthcoming once the finer points of negotiation are finalized and the governing bodies of the pension systems consider these agreements.
“These changes are being made in a manner that minimizes the impact on the thousands of police, fire and municipal workers eligible to retire today,” said Turner. “We must retain these employees to continue to serve the residents of this city. I appreciate the pension system representatives who have recognized the status quo must change and have been willing to move away from previously held fixed and non-negotiable positions. The pension systems have also shared more data than ever before and are committed to continue working on the right way to share the data we need to manage our costs going forward. There is still much work to be done, and I know there will be disagreements along the way, but we have come so far since we first began talking seven months ago.”
Mayor Turner has never wavered from his promise to accomplish pension reform while still maintaining defined benefit plans. However, he did have his financial analysts study implementation of defined contribution plans. They found that option would increase immediate costs and provide no financial relief for at least 30 years.
This contribution from City employees is step one of the shared sacrifice model Mayor Turner is asking everyone to help with. He does not expect City employees to shoulder the entire burden. Once pensions are fixed, he intends to ask voters to repeal the revenue cap that handicaps the City’s ability to keep up with the needs of a growing population. No other governmental body in the state has such a restraint.
“I took this job knowing that our City faced difficult public policy challenges,” said Turner. “I promised pothole repairs in record time, and we delivered. We followed that achievement by closing Houston’s biggest budget gap since the Great Recession. We delivered a budget built on sustainable, recurring improvements, and it was adopted by City Council unanimously and in record time. Now, we bring you a solution to Houston’s pension challenge that meets the needs of our City, its employees and its taxpayers. To all concerned, I say you can trust this solution to deliver on our promise of pensions that protect our employees’ retirement security while remaining affordable and sustainable for the City and its taxpayers”
The proposed pension reforms announced today have been discussed with numerous stakeholders and key members of the state legislature with very positive results.