Tuesday, January 24, 2012

Cities Need to Combine Money-Saving with Money-Making

The city of Houston has been working with its three pension systems for some time now to look for ways to keep the city’s budget in good shape. We don’t want to get too bogged down in the details or history of that city’s situation, but we do want to take a brief moment to point out a couple of recent interesting articles in that city’s major newspaper. There’s a lesson here for other Texas cities.

First, there was the January 9th news article in the Houston Chronicle which offered the results of a 16-member task force’s work on brainstorming ideas for saving or raising hundreds of millions of dollars for the city of Houston’s government. Among their proposals is ending public employee pensions or changing them dramatically to ineffective and costly defined contribution plans. Here’s how the Chronicle story covered the task force’s “thinking”:

For example, dozens of items offer ways to reduce future pension benefits, including ending pensions altogether and borrowing money to cover the current $5 billion in future pension bills for which the city has not set aside money. The list also includes changing from traditional guaranteed pensions to 401(k)-type savings plans, reducing survivor benefits, requiring employees to contribute more and raising the retirement age.

In our view this is not much in the way of a fruitful brainstorm idea unless the city wants to completely diminish the attractiveness of its already low-paying public sector jobs and greatly increase the city’s budget for ongoing training and recruitment activities. Defined benefit pensions keep people on the job. In human resource circles, it’s widely accepted that it costs a business more than $20,000 each time an employee leaves. Take a look at this site for just one calculation of the total costs involved. Ending defined benefit pensions is a good way to reap the unintended consequences of a greatly increased human resources budget.

But it’s also apparent that the task force focused exclusively on saving money by cutting or raising money in the form of increased taxes. We have not read the report, but the summary provided by the newspaper indicated that was the case. There is another way.

A second article, appearing in the Chronicle last Thursday by two Board trustees at the Houston Firefighter’s Relief and Retirement Fund (HFRRF) provided the alternative prescription: setting the conditions for economic growth. Here’s a snippet:

Houston needs increased private sector economic growth to generate enough revenue to pay for needed city services while also paying off outstanding city pension obligations. The vast majority of the city's general fund revenue comes from the ability of renters, homeowners, businesses and entrepreneurs to pay property taxes, sales taxes and other existing city fees.

To generate more funds for the city, Houston needs more private sector paychecks and profits. We need more private sector jobs for more Houstonians. To put more people back to work, we have to take greater advantage of our community colleges to help more Houstonians secure the new skills they need for the jobs available now and in the future.

The lesson here is that Houston, and every Texas city, needs to take a balanced approach to examining their budget and operations, while also doing what they can to encourage private sector growth. President John F. Kennedy noted how a rising tides raises all ships, and a burgeoning economy can increase revenues to municipal, state and federal entities. It seems to us that the City of Houston should pay some attention to the HFRRF op-ed on economic growth. Pension board trustees, by the nature of their focus on gaining investment returns, are good advisors.

In these two stories, we can see a lesson of value to all planners in all of Texas’ great cities – remember that your job is to develop policies that encourage economic growth as well as managing your city’s budget. Ending defined benefit pension plans may jeopardize your good intentions. – Max Patterson

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