The City and your pension plans’ management are leading you down a path that will seriously impact your pensions for years to come.
Defined benefit pension plans are a broken financial model. They were originally put in place in a time that most people only lived a few years after retirement and financial markets were much more stable. Neither of those conditions exist today. As a result, the costs of defined benefit plans have inexorably risen over the last several decades causing the private sector to almost completely abandon them.
Every new employee added to this broken model makes your pension plan weaker and your pension less secure.
This is not an opinion. It is just math.
The latest data from the City (which is still unrealistically optimistic) shows that the City would have to contribute over $8 billion just to pay the benefits that you have earned so far.
The proposed plan represents an average 12% cut in the benefits you thought you were going to get. Of course, this comes after City leaders repeatedly promised you they would honor all pension commitments. And trust me, these cuts will not be the last you see. In fact, this is just the beginning.
Automatic Future Benefit Cuts or Increased Contributions
The term sheets agreed to by your pension boards include automatic additional cuts if the City’s costs exceed the “corridor”. The term sheets specifically say that once the corridor is exceeded that the pensions will further cut the cost-of-living adjustments (COLA), extend retirement ages, and/or increase contributions.
Of course, no one can predict the future, but it is highly likely that the corridor limits will be exceeded sooner rather than later, as was suggested by Tuesday’s Houston Chronicle story. Many investment professionals question whether the new 7% return assumption is reasonable. Warren Buffet has said that pension plans should not be using anything above 6%. His company’s plan is based on 4.5%. Over the last two years your plans have averaged returns of less than 3%. Both the police and fire plans lost money last year.
You have been told that this plan provides certainty about your future benefits, when the exact opposite is true. And the plan is so complex it will undoubtedly result in years of litigation over how it is to be interpreted, if it ever passes.
Forget about Future Raises or Increasing Staff
The proposed plan sets the target contribution for the City at 32% of payroll. The upper limit is about 37%. How can the City possibly afford to hire new employees and pay them a decent salary when it must put up an additional 37% in a pension plan? And what do you think are the chances of existing employees getting any kind of respectable pay raises with a 37% add-on for pensions?
Practically speaking, you can also forget about there ever being two officers in a patrol car, the City ever building any new fire stations, or hiring enough building inspectors, or addressing any of the other hundreds of critical needs Houston is facing.
The Causes and The Cure
There are two reasons that the City is in this mess. The first is that the increases to pension benefits during the Lee Brown administration turned out to cost vastly more than was understood at the time. This is what is frequently referred to as the “legacy costs” and we must come up with a plan to deal with those costs.
But an equally important driver of the out-of-control costs is the City’s blind commitment to indefinitely continue defined benefit pension plans. The notion that we can hire people today and promise them a benefit based on their salary thirty years from now and have any idea what that is going to cost is absurd. If the City continues to cling to defined benefit pension plans, the City’s – and your pension plans’ – finances will continue to deteriorate.
The Right to Opt Out
In addition to other needed reforms, you should have the right to opt out of the existing pension plans and to put your money in your own retirement savings account. That may not be for everyone, but if you want out of the interminable controversy that has been and will be the history of these plans, you should have the right to do so and to take control of your future.
Property Tax Cap Will Not be Repealed
Many of your leaders are assuring you that some of the financial pressure on the City will be relieved if voters repeal the property tax cap that was passed in 2004. It is a fantasy. It is not going to happen. This issue has been polled extensively and over 70% of Houston voters oppose repealing the cap on property taxes. And with tax bills already skyrocketing, can you blame them?
I am not predicting an imminent crisis or financial collapse of either the City or your pension plans. But if we do not reform the City’s finances and begin providing reliable services at reasonable tax rates, the City will suffer a long, slow decline, or hollowing out, like other great American cities that failed to tame this problem. And there will be a tipping point at which this becomes a crisis, just as it has in Dallas. That should concern you because your benefits are paid over the long term as well. If the City suffers financially, so will your pension plans.
We don’t know what all will be required to put the pension system on a sound footing and probably will not know for some years. But the most obvious change that should be made immediately is to convert new employees to defined contribution plans. This will not, by itself, solve the pension problems. But as the old saying goes, when you are in a hole stop digging.
Every city employee and retiree should not only be supporting defined contribution plans for new employees; they should be demanding it.
Many of you have been upset with me for the last several years because I kept raising the alarm about the condition of your plans. But I think if you look back at what I said and predicted about the City’s pensions, everything I told you or predicted was true or has come true. In contrast, all the assurances you repeatedly got from your pensions’ management and the City, that there were not any problems, has proved completely wrong.
And please do not ever lose track of the fact that there is a whole cottage industry of pension executives, Wall Street bankers, lobbyists, accountants, actuaries and others that make a very nice living off your pension. For example, why don’t you inquire about what the executive director of your pension plan is paid and compare that to your salary?
Last year, your plans paid $50 million in expenses. That is $50 million that could have gone to shore up your pension funds, but instead went into the pockets of bankers, pension bureaucrats and lobbyists, to name a few. They are petrified that their gravy train might end someday, which switching new employees to defined contribution plans would eventually do that. So, they will continue to spread misinformation about your plans, just like they have been doing for the last 20 years.
I, on the other hand, have zero financial interest in this issue one way or the other. My only interest is seeing that the City I love so dearly does not go the way of Detroit.
So, before you blindly follow your leadership and the City into yet another plan that is going to kick this can down the road until the current elected officials are out of office and your current leadership is retired, perhaps you should consider what is best for you. And believe me, that is not the continuation of defined benefit plans for new employees.