Houston’s Pension Plan Changes Make Real Reform Less Likely

The City of Houston’s pension rescue plan is winding its way through the Senate, and state legislators are attempting to respond to a dizzying array of concerns, including fears that the bill is too complex, too experimental, and doesn’t quite go far enough to create a sustainable system.

According to its own estimate, Houston has overpromised on pensions to the tune of $7.7 billion, and that figure is growing fast. This huge amount of pension debt threatens the city’s economy, credit rating, and ability to deliver core services.

A crucial element of reform is that Houston’s pension systems identified unnamed benefit cuts to reduce the pension liability by $2.5 billion. In return, Houston would issue $1 billion in pension obligation bonds to immediately pay down the existing pension debt.

To its credit, the Senate bill requires voter approval for pension obligation bonds issued after September 1, 2017. New debt should not be issued without an opportunity for Houston’s voters to weigh in. However, recent changes tie the agreed upon benefit cuts to Houston delivering the proceeds of the agreed upon pension obligation bonds by March 31, 2018, and this jeopardizes the delicate balance undergirding the reform effort.

On the surface, this may look like a fair trade. If Houston voters choose not to approve the pension obligation bonds, then it’s seemingly fair that the concessions made by public workers should also be withdrawn from the table.

However, as we saw in the Senate’s hearings, not all employees are on board with the plan to cut their benefits as part of the larger reform effort. This leads to the possibility that police, fire, and municipal workers and retirees would vote against the pension obligation bonds so as to protect their benefits from being cut. Without the $3.5 billion reduction in Houston’s pension debt from the bond and the benefit cuts, the path to fiscal sanity under the new “Risk Corridor” concept will be even more uncertain.

Houston’s pension reform travails are just another reason why the Texas Legislature should get out of the business of governing locally-focused pension plans. With restored local pension control, communities will be empowered to enact needed adjustments to their pension plans sooner rather than later—and hold their city officials directly accountable for plans that leave taxpayers at risk.