Parker taking city pension cuts battle to Legislature
Instability in its three pension systems is the greatest threat to Houston's financial solvency, city officials and financial analysts say.
Within three years, according to an actuarial study commissioned by the city, the pension for firefighters will require the city to contribute 45 percent of its payroll costs for that retirement plan, a burden Mayor Annise Parker says is unsustainable.
The other two plans are in even worse shape. The police and municipal employee pensions are underfunded by $2.1 billion, roughly the equivalent of what the city spends annually for public safety and general operations.
"The bottom line is the whole system is completely unsustainable with current benefit levels and the city's financial position," said John Diamond, a Rice University public finance fellow and governmental tax consultant.
The opening salvo in what may be a long fight over city pensions is expected to take place in the upcoming state legislative session. The city is taking direct aim at the firefighters' pension, seeking help from state lawmakers to force pension officials to negotiate in hopes they can reduce benefits and lower annual contributions.
"Voters elected me to make tough choices, and voters elected me to get the city's budget in order," Parker said. "We are hemorrhaging right now … in some of our pension costs. … There's a difference between a fair pension and a gold-plated pension, and the citizens of Houston have to know that we can find a fair balance in there."
Officials with the pension system, called the Houston Fire Fighters Relief and Retirement Fund, say the mayor is playing politics. The city's contribution in three years is likely to reach only 33 percent of payroll, not 45 percent, they say. That figure also is going down by tens of millions of dollars in the next three years, and the eventual increase is necessary due to losses the pension suffered with market downturns.
Christopher Gonzales, executive director of the firefighter pension, said the fund does not want to join the city in a "meet and confer" agreement, a sort of watered-down collective bargaining. Those negotiations with the two other employee pensions in recent years have only resulted in reduced benefits for the workers and annual contributions to the system that were not enough to ensure its financial security, he said.
"The urgency the city has is all politically driven," Gonzales said. "We should wait, be patient about this and look at things in the next couple years."
The pensions form a large and growing piece of the city's current financial crisis. The city is projected to have a deficit of more than $600 million in the next five years, much of which will come from ballooning annual pension costs. Although the annual contribution required by the firefighter pension is expected to go down in the next three years, it is projected to jump by $18 million to $42 million in 2015.
Financial analysts say Houston, or any other city, no longer can afford the pensions they have used for years to make up for generally lower salaries than the private sector. Researchers have blamed the decline of the auto industry and the virtually bankrupt status of some U.S. cities, such as San Diego, on underfunded pensions.
"Plans that allow people to retire after 20 or 25 years at the age of 50 or 55 and get 80 percent of your salary for life are just unsustainable in this day and age," said Ramon Fernandez, a professor and specialist in government accounting at the University of St. Thomas.
A Houston Chronicle analysis found that Houston firefighters generally retire with an annual pension that is 42 percent to 65 percent higher than that of a military service member with similar service experience.
The firefighters are allowed to pick the months in their career when they were most highly paid. The months do not have to be consecutive, and they can base their retirement on gross pay, which includes overtime. A surviving spouse receives 100 percent of the benefit.
These aspects of the plan far exceed that available in other Texas cities and municipal programs, City Attorney David Feldman said.
"We are headed for a train wreck here," he said.
Todd Clark, a firefighter who chairs the pension board, said firefighters often face severe medical problems when they retire, making generous pensions necessary.
He also pointed out that the firefighter pension is in the best financial shape of the city's three funds, an assertion two financial analysts confirmed. When the other pensions began negotiating under the city's terms, all they got was less money than they needed to keep their programs solvent, he said. "We're the only pension fund that has not been skinned back to the bone," Clark said. "They just want to pay less into this fund. It's completely politically driven."
The upcoming battle in the Legislature could be an uphill climb for the city for a number of reasons.
First, the state is facing a budget shortfall estimated by some at more than $20 billion, one that may consume all the attention of state lawmakers.
Second, Texas' pension laws have been designed to ensure that municipalities will be able to keep the promises they have made to employees. They provide the systems with a modicum of independence and regulate how much cities and counties must give, putting them in a stronger financial position than many other government funds around the country, analysts say.
Third, the pensions will spend far more on lobbyists in Austin than the city. Texas Ethics Commission data shows the three pensions have plans to spend an estimated $400,000 to $800,000 on lobbying this legislative session.
The city, on the other hand, is expected to spend $200,000 to $350,000 on the entire range of issues it is seeking to address in the 2011 session.
"The mayor would hope, given the severe financial state that the state of Texas and the city of Houston are experiencing, that the Legislature would take up the issue of overly generous taxpayer-funded retirements, like they've done for other pension systems," said Darrin Hall, director of the mayor's office of Intergovernmental Relations.
If the city loses the legislative battle, Houstonians should expect the matter to go to the courts, officials said.
"If we are unsuccessful in the Legislature, we will have to explore whatever other legal options there may be to try and secure relief," Feldman said. "But, at some point in time, somehow, some way, we have to stop the bleeding."
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