HISD Bond Proposal Deserves Our Support

Posted 10/29/2012 by Bill King

HISD Bond Proposal Deserves Our Support

As many of you are aware, HISD has proposed a $1.89 billion bond issue. Those of you that are regular readers of this blog or my columns in the Houston Chronicle know that I am extremely skeptical of grandiose public projects. Many of you know that I have opposed projects like Metro’s light rail because I did not think its cost could be justified. I have also opposed other school bond proposals that included lavish stadium construction. But I do not believe in knee-jerk opposition to any proposal to invest our tax dollars. I have studied the HISD proposal in detail and I am convinced that it is a sound one and deserves our support.

The bonds will primarily be used to rebuild or substantial renovate 28 of the District’s high schools. The work is badly needed. The average age of the school slated for reconstruction or renovation is 52 years. They are dilapidated, leaking and were built without the infrastructure of labs and electrical systems to support today’s needs.

The average age of high schools in Harris County outside of HISD is 13 years. HISD simply cannot be competitive in retaining families in the City’s core if we continue to provide inadequate and antiquated facilities. Anyone who spends even a few minutes at any of these schools will see that the needs are real and the work long overdue.

The proposal includes rebuilding the DeBakey High School for the Health Professions inside the Texas Medical Center on a tract of land TMC has made available to the District. It also includes rebuilding the High School for the Visual and Performing Arts downtown in the theatre district. There will not be another city in the country that will have anything that even approaches these two schools.

Even those who are opposing the bonds do not question the need. Instead they have constructed several arguments which are based on inaccurate or incomplete information, to-wit:

Student Achievement: Some critics have suggested that HISD’s students are not performing academically and that money should be spent on improving instruction instead of buildings. But HISD academic performance has been steadily improving in recent years and is among the best for large urban school districts. The District’s drop-out rate is the lowest and its graduation rate is the highest in decades. HISD seniors last year earned $180 million in college scholarships, up from just a third that amount only three years ago. This year HISD was one of four finalists the prestigious Broad award for most improved urban school district in America.

In addition, studies show that there is a demonstrable correlation between student achievement and the quality of the physical facilities. Much of this has to do with the availability of lab space and technical infrastructure. However, there is also a psychological effect from working in clean, modern surroundings instead of dilapidated ones. No business owners I know would ask their office workers to work in kind of space we are asking our kids to work in.

HISD Enrollment: Another criticism that has been frequently leveled at the bond campaign is that HISD’s enrollment is declining, implying that the District is building facilities it does not need. First, HISD’s enrollment is absolutely not declining. For the last 20 years, it has ranged between 198,000 and 210,000 students. This year, HISD had the largest kindergarten class in its history.

This argument is further rebutted by the fact that the bond proposal is not building additional capacity but is instead replacing a worn out stock of schools and right sizing schools where enrollment has declined or increased. The size of each high school to be reconstructed or renovated is based on the enrollment in the District’s elementary and middle schools.

Taxes to Pay for the Bonds: There has been a great deal of discussion about whether a tax increase will be required to pay for the news, and if so, how much it will be. First, any projection about future tax rates is, at best, an educated guess. The rate necessary to repay the bonds is primarily dependent on the growth of HISD’s tax base. HISD is required make an estimate of the tax rate that might be required to pay for the bonds. To do, it must make an assumption about future growth of the tax roll. HISD has made a projection based on some very conservative assumptions about how much the tax roll will increase. It assumed that the tax roll would grow by 3% for 2014-15, 2% for 2016-19 and 1% thereafter, for an average over the forecast period of about 1.5%. The average increase over the last 20 years has been about 5%.

Based on the 1.5% tax roll increase, the new bonds would eventually require a tax increase of 4.8¢ per $100 valuation. On a house worth $200,000 this would mean about a $70 per year increase. And because not all the bonds would be issued at once, even that increase would be phased in over about four years. Even after being fully phased in, HISD’s tax rate will still be, by far, the lowest of any school district in Harris County.

If the tax roll grows by its historical average of 5%, no tax increase will be necessary.

Pay-As-You-Go: Another argument advanced by the critics is that HISD should adopt a “pay-as-you-go” plan, arguing that such a plan would be cheaper for the taxpayers because it would save the interest that will be paid on the bonds.

First, if HISD were to adopt a “pay-as-you-go” strategy it would take 20-30 years to replace these high schools. That means that most of the schools would be 80-90 years old before they were replaced. This is simply not feasible. Many of these schools would be condemned long before they could be replaced on a “pay-as-you-go” plan.

But even if it were feasible it is almost certain that a “pay-as-you-go” plan would actually be more expensive. Interest rates are currently at historic lows. HISD will probably be able to issue its bonds at about a 4% interest rate. Also, because of the building slump, construction prices are also favorable. Those prices will almost inevitably rise in the future. And if they rise faster than the effective interest to HISD, the building program would actually cost more on an absolute basis.

In the meantime we will have astronomic maintenance costs. HISD already spends tens of millions of dollars each just trying to keep these dinosaurs in service. Those will go up exponentially as the condition of these buildings continue to decline. And as you can imagine they are not exactly energy efficient. There is no rational business person that would adopt such a plan for their own business under these circumstances.

Use of 2007 Bond Proceeds: There is also a criticism making the circuit that HISD either has not spent all of the 2007 (implying that it does not need any more bonds) and that the 2007 bond money was somehow misspent. Neither could be farther from the truth.

First, HISD has spent over 90% of the 2007 bond proceeds. There was some delay because of litigation that was filed over the 2007 bond election and some projects that were to be funded from the sale of excess real estate were deferred to market conditions. By the end of 2013 all of the projects in the 2007 bond campaign will be complete. Also, every project came in under budget. This was due in large measure to the 2008 recession and catching a favorable construction cost cycle.

Amount of HISD Bond Debt: The critics have also complained that HISD bond will have tripled since 2002 if the bonds are approved. What the critics leave out is that this increase in HISD’s bond debt will actually occur over a 15 year period. Adjusted for inflation during that time, HISD’s bond debt will actually have only about doubled. They also fail to mention that HISD has historically carried one of the lowest debt loads of any major district in the State. In 2011, HISD’s debt per student was slightly over $10,000 compared to a statewide average of nearly $14,000. So we are starting from a very low base, due in large part to the fact that we have let our physical plant deteriorate so badly.

Conclusion: In the final analysis, however, this is not about a bunch of esoteric facts and figures. It is about the condition of the facilities where we are sending this City’s children to school. In that regard, I challenge any of you to go and visit one of these schools and see the deplorable conditions for yourself. Then ask yourself if you would send your child or your grandchild to that school. And if you would not send your child to that school, why would you send someone else’s child there?

We have left these schools go too long unattended. If we are not going to fix them now, then when?

Filed under: Community, General, Public Finances | no comments »

The State of the Teacher Retirement System in Texas

Posted 03/14/2012 by Bill King

The State of the Teacher Retirement System of Texas

Filed under: Uncategorized | no comments »

An Open Letter to Texas Public Employees & Retirees

Posted 02/09/2012 by Bill King

An Open Letter to Texas Public Employees & Retirees

Many of you may have heard that I and some other concerned Texans formed an organization seeking to reform Texas public pensions. This effort has been characterized by some as a Wisconsin-style, union-bashing, anti-public worker initiative. Nothing could be farther from the truth.

The truth is that we have significant problems and a looming crisis with most of Texas’ public pension plans. Each pension plan is unique. The benefits paid by each plan and their funding status vary widely, so it is dangerous to generalize. However, a large majority of public pension plans in Texas are significantly underfunded at this time.

The Texas Public Pension Review Board has estimated that Texas’ pensions, based on the fair market value of their assets, are underfunded by approximately $68 billion. This is a bad deal for future generations of both Texas taxpayers and public employees.

But it is also a bad deal for current retirees. For example, the Texas Teacher Retirement System is now $32 billion underfunded based on the fair market value of the assets. As a result, retirees have received no cost of living adjustments for over a decade.

Some of the plans are also becoming an intolerable burden on local governments. In Houston, the contributions required to fund its three pensions plans grew from $100 million in 2000 to $220 million in 2010. The actuary reports on Houston’s plans project that the contribution will need to be $500 million in 2020. At that time, that will represent about half of the City’s property tax collections.

There are many ways to address this problem. Private industry did so 20-30 years ago mostly by freezing their existing defined-benefit plans and converting future pension benefits to defined-contribution plans. There are other ways to address the problem but continuing on the current path is not an option. It will result in a financial disaster for everyone.

That does not mean that we should do away with pension plans all together. You may have seen an article that appeared in the Austin American Statesman where I was quoted and seemed to take that position. The Statesman quoted me as saying “Texas needs to get the hell out of this (pension) business completely.” However, the quote was taken out of context. At the time the reporter and I were talking about the state laws that mandate pension plans for many cities in Texas. I was making the point that I thought the state should stop dictating pension plans for local governments.

It is, however, my opinion that government at all levels should begin to transition out of defined-benefit plans to defined-contribution plans. This is because defined-benefit plans allow politicians to promise public employees a retirement benefit without going through the painful process of asking taxpayers to pay for those benefits. Instead, the liability for the promised benefits is kicked down the road to our children and our grandchildren. In defined-contribution plans the full contribution must be funded each year.

However, a transition to full blown defined-contribution plans is not the only solution to this problem. There are hybrid plans that can be used accomplish most of what needs to be done.

There is one point, however, on which I have been adamant. I do not support changing any benefits that any public employee has already earned. In Texas, a deal is a deal and we must live up to promises we have made.

But if we do nothing we are setting up a financial crisis at some point that will pit future generations of taxpayers and public employees against each other as the bills come due for the promised benefits and there is no money to pay them. A number of other states are going through this painful process now. In California, the state’s liability for underfunded pensions has been estimated at $700 billion.

Fortunately, the situation in Texas is not that dire, yet. But if we continue to ignore this problem it will only get worse. In some cases, like the City of Houston, the crisis will come sooner than many think.

If you are a public employee or a retired public employee, I would encourage you to get a copy of the latest actuarial report for your pension plan and learn about the funding status of your plan. Many are now available on-line. These are extremely complicated to read, especially for those who do not have a financial background. However, the most important number is the Unfunded Accrued Actuarial Liability (UAAL). This is an estimate by the actuaries of the amount that your employer would have to put into the plan to pay for the benefits that have been earned so far.

However, there is one quirk in that calculation. It does not use the actual market value of the assets in your plan. Instead, profits and losses on the investments in our plans are “spread” over five years. As a result, almost every plan has investment losses that have been deferred. Somewhere in the actuarial report the unfunded liability based on the actual value of the assets will be noted. This is the real number.

Another thing you want to look at is the funding history. Most of the reports have a schedule that show how well funded the plan was in past years. What you will find in most plans is that they were fully funded only a decade or so ago. There is a common misconception that these plans are underfunded now because the employers have not put in enough money to fund them over many years. Actually this problem has largely been created in the last ten years.

There are very powerful interests that do not want you know how serious this situation is. There are hosts of pension bureaucrats, fund managers, lawyers and accountants who make a very good living off of your defined benefits plans. For example, TRS’s administrative and investment expenses in 2011 were $275 million. That is up from only $55 million in 2008. These interests have a very strong incentive to make you believe that there is no problem with our current pension systems.

As a result, these interests attempt to discredit anyone who warns about the problem. Personally, I have certainly found that to be the case, as various pension-related bureaucrats have accused me of raising this issue and participating in the formation of Texans for Public Pension Reform for political purposes. If anyone can tell me how telling people the bad news about our pension system is politically beneficial, I really wish they would share it with me.

I have an aunt, mother-in-law and former wife, who are all currently receiving benefits from TRS. The last thing in the world I want to do is jeopardize their benefits. So those who are getting fat off your pension plan can cast all the aspersions they want that this is some effort to beat up on public employees, but it does not square with the facts and the numbers do not lie.

To underscore that I am motivated to solve this problem and not to leverage it for some political advantage, I have decided to resign from the board of Texans for Public Pension Reform. However, I intend to continue to raise this issue with taxpayers and public employees. I will be writing periodically on this subject and I am prepared to meet, speak with or debate anyone, anytime, in any forum on the seriousness of the issue.

It would be profoundly irresponsible for our generation to leave this problem for our children and grandchildren. But facing up to and dealing with it, honestly and fairly, would be a great legacy to leave them, whether they will be future public employees or future taxpayers.

If you have any questions or need any help trying to analyze the financial condition of your pension plan, please do not hesitate to contact me at weking@weking.net.

You can also follow what I will have to say on this issue on Twitter @weking, on my blog (www.BillKingBlog.com) or on Facebook at http://www.facebook.com/home.php#!/pages/Bill-King/315939961750357.

Bill King
Houston, Texas
February 5, 2012

Filed under: Uncategorized | no comments »

Next Page »

Public Policy in Houston

» Welcome

» About Bill King

» Online Resources

» Newsletter Sign-Up

» Contact Us

Discussion Areas

» Community

» Conservation

» Crime

» Energy

» General

» Hurricane

» Immigration

» Public Finances

» Traffic

Public Policy Archives

» May 2015

» April 2015

» March 2015

» February 2015

» January 2015

» December 2014

» November 2014

» October 2014

» September 2014

» August 2014

» July 2014

» June 2014

» May 2014

» April 2014

» March 2014

» February 2014

» January 2014

» December 2013

» November 2013

» October 2013

» September 2013

» August 2013

» July 2013

» June 2013

» May 2013

» April 2013

» March 2013

» February 2013

» January 2013

» December 2012

» November 2012

» October 2012

» September 2012

» August 2012

» July 2012

» June 2012

» May 2012

» April 2012

» March 2012

» February 2012

» January 2012

» December 2011

» November 2011

» October 2011

» September 2011

» August 2011

» July 2011

» June 2011

» May 2011

» April 2011

» March 2011

» February 2011

» January 2011

» December 2010

» November 2010

» October 2010

» September 2010

» August 2010

» July 2010

» June 2010

» May 2010

» April 2010

» March 2010

» February 2010

» January 2010

» December 2009

» November 2009

» October 2009

» September 2009

» August 2009

» July 2009

» June 2009

» May 2009

» April 2009

» March 2009

» February 2009

» January 2009

» December 2008

» November 2008

» October 2008

» September 2008

» August 2008

» July 2008

» June 2008

» May 2008

» April 2008

» March 2008

» February 2008

» January 2008

» December 2007

» November 2007

» October 2007

» September 2007

» August 2007

» July 2007

» June 2007

» May 2007

» April 2007

Contact Information

p | (713) 221-1557

e | info@billkinghouston.com
paid for by William E. King, P.C.
site by Advarion Incorporated