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The term "pension bond" sounds innocuous enough. Surely issuing bonds to shore up pension plans is a good thing, isn't it? Actually, no. In fact, these bonds represent the purest form of generational theft. Here's how they work.
The City of Houston maintains pension plans for its employees. These plans guarantee qualifying employees a certain amount of monthly retirement income. Each year the City and the employees contribute money into a trust to fund these future payments. Periodically, the City hires actuaries to estimate how much should be set aside each year and to assess whether the amounts in the trust funds are sufficient to make the future payments. I am sure you will not be shocked to learn that the City has not set aside enough money to fund the future payments. The amount of the shortfall is subject to a fair amount of guesswork, but is currently probably in the $2-3 billion range.
In 2003, the Texas Legislature authorized Texas cities which are behind in their pension payments to issue 30-year, general obligation bonds to fund their pension shortfalls. "General obligation" means that the City is legally obligated to assess property taxes sufficient to make future payments on the bonds. And just so that we taxpayers would not have to worry our pretty little heads over these complicated financial matters, the Legislature allowed cities to issue these bonds without voter approval. As nearly I can tell, this is the only situation where any Texas local government can obligate future property taxes without a vote of its residents.
So after 2003 city officials had the options to cover the shortfalls: (1) raise taxes, (2) cut pension benefits for powerful employee union members, (3) cut other budget items or (4) borrow the money on 30-year bonds and kick the can down the road. You have only one guess as to what they did. It was like giving crack cocaine to an addict. I have not been able to find anyone that has totaled all the pension bonds issued in Texas since the 2003 legislation, but it is in the billions. Houston alone has issued about $600 million.
However, Houston has added its own twist to the pension bond dynamic. In addition to simply borrowing money to make up existing shortages in the pension plans, since 2004 the City has been borrowing funds every year to make part of its current contribution to the pension plans. In doing so, the City has accounted for these borrowed funds as "resources" to "balance" its budget. In any other form this would be deficit budgeting which specifically prohibited by State law and the City charter and obviously is a practice that cannot go on forever.
During 2004-2009, the City used about $225 million in pension bond proceeds in this manner. Without these bond proceeds, the City would currently have a deficit in its general fund. In other words, the City would be broke and could not pay its bills had it not used pension bonds to make part of its pension contributions over the last five years.
To be entirely fair, there is an argument that pension bonds can reduce unfunded pension liabilities. The idea is that the city will be able to borrow at relatively low rates since these bonds are backed by the city's property tax receipts. The bond proceeds will then be invested by the trust funds at higher rates generating a "profit" that will help reduce the deficit in the plans. This is, of course, blatant speculation and will only work if the trusts can actually invest the funds at a higher rate over the thirty-year life of the bonds. Former chairman of investment bank Goldman, Sachs & Co. and former New Jersey Democratic Governor, Jon Corzine, once said of pension bonds, "It's the dumbest idea I ever heard. It's speculating the way I would have speculated in my bond position at Goldman Sachs."
Unlike public improvement bonds which are used to build infrastructure like roads, parks and water treatment plants, the proceeds from pension bonds go to pay a current expense. I have no issue with borrowing money for improvements which will last for many years and which future generations will enjoy. But charging the credit card for an on-going expense is something else entirely. And because any city's general obligation bonding capacity is limited, the more pension bonds a city issues, the fewer public improvements bonds it can issue. As a result fewer public infrastructure projects can be built.
Last year when I first realized that the City was issuing pension bonds and using them to balance the budget, I got so upset I decided I would organize a petition drive for a city charter amendment that would prohibit any more pension bonds or, at least, require voter approval of any new bonds. However, after carefully reading the 2003 statute, I discovered that the bill's backers had anticipated that some pesky taxpayers might take issue with their scheme. The statute provides that city councils can issue pension bonds without voter approval, even if their city charter prohibits them from doing so! So we taxpayers have no say in the matter and must rely on our elected officials to do the right thing.
My daughter gave me my first grandchild this year. He will be in his late 20's when the bill comes due for the pension bonds that have been issued over the last five years. It is a sorry inheritance. So I would ask each of our City officials to look into faces of their own children and grandchildren and realize this is who they asking to pay our bills if they continue to issue pension bonds. Is this the legacy we want to leave them?
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