Tuesday, February 14, 2012

Houston Pension Debate Continues; Other Texas Cities Look On

Debate is good and we’re glad to see that Houston’s leaders continue their constructive engagements on the subject of public employee pensions, their funding, and their role in a well-governed city. But we need to remind our readers that what happens in Houston should stay in Houston.

Here’s what’s going on and why we’re concerned that some in Houston are trying to spread their misery:

The latest volleys started with an op-ed by Bill King, appearing in the Houston Chronicle on Feb. 4, explaining his formation of the group Texans for Public Pension Reform, as well as his reason for resigning, recently, from that group’s Board of Directors. King, a Houston attorney and former mayor of Kemah, has written voluminously on the subject of Houston’s budget problems and its penchant for issuing debt to cover both city operational expenses and pension promises.

We should note that King’s concerns about the city of Houston’s outstanding debt obligations is a real, and serious, issue with which the city is coming to terms. But King’s ongoing campaign about public employee pensions in Houston and other places in the state has been interpreted by many as evidence that he wants to run for another political office, possibly a statewide position. He said his resignation from the Board of the group he helped form reflected his acknowledgement of critics’ intuition.

A few days after King’s op-ed appeared, the editors at the Houston Chronicle weighed in with their own views, in “Fixing the pension mess.” The editors did a great job of confining their comments to the situation in Houston, which was the right thing to do. Houston’s problem is Houston’s problem. It’s not the state’s problem. It’s not a Houston-sized problem in the other Texas cities. It’s not Abilene’s problem, or Corpus Christi’s problem, or El Paso’s problem.  Across Texas, in situations where benefits have had to be resized according to revised projections of city finances, that has indeed occurred, in Austin, Dallas, Fort Worth, San Antonio and other cities in recent years.

But unfortunately King has been casting his attacks on pensions with broad brushes, projecting his concern about the Texas Teacher’s Retirement System (TRS) and Houston’s situation onto other Texas statewide pensions and other Texas cities, without really knowing what’s going on outside of Harris County. Note that the group he helped form with the Greater Houston Partnership was not named “Houstonians for Public Pension Reform.”

Let’s go back to King’s op-ed, where he uses the claim that the Texas Teacher Retirement system is underfunded to then say that that is what is happening in “local governments,” with Houston being his prime, and only, example:
Some of the plans are also becoming an intolerable burden on local governments. In Houston, the contributions required to fund its three pensions plans grew from $100 million in 2000 to $220 million in 2010. The actuary reports on Houston's plans project that the contribution will need to be $500 million in 2020. At that time, that will represent about half of the city's property tax collections.

There are many ways to address this problem. Private industry did so 20 to 30 years ago, mostly by freezing their existing defined-benefit plans and converting future pension benefits to defined-contribution plans. There are other ways to address the problem, but continuing on the current path is not an option. It will result in a financial disaster for everyone.

Many people are starting to pick up on King’s broad stroke attacks and his one-size-fits-all assertion that defined contribution plans are the answer (because they are not).

Former Texas firefighter Laura Matau provided King and Chronicle readers with her own op-ed, on February 9, offering the view that defined benefit plans have worked, and will continue to work, for public employees across Texas.

Public defined-benefit plans have been a Texas institution for 70 years. More than 2 million working, active and retired Texans participate in these plans, with combined net assets of about $170 billion. Defined-benefit plans provide retirement security for public employees who devote their lives to educating our children, protecting our homes, keeping our neighborhoods and streets safe and providing other critical services that enrich the quality of all our lives.

Matau concludes by reminding Houstonians that strong retirement plans attract high caliber people to public service and the states and cities should keep the promises they’ve made to the people they hired.

Then, yesterday, in a newsletter note to AFL-CIO members in Texas, Houston Independent School District Superintendent Gayle Fallon came to the defense of the Teacher Retirement System and other systems by providing statistics on TRS’ historically high rates of return and its similarities to the Social Security contribution rates. Teachers do not pay into Social Security so they don’t receive any SS benefits in retirement. And Fallon offered her own theory on why there is this effort by King and others to convert defined benefit plans to defined contribution plans, like 401(k)s:

“There is over $170 billion sitting in public pension funds in Texas. Unfortunately those funds have the attention of greedy investors and hedge fund operators who salivate at the thought of converting public pensions into 401(k)s and collecting huge administrative fees.”

All of this back and forth aside, our point here is simple. Texans should not be confused by what is occurring in Houston. Yes, Houston has a problem. Texas, and all its local pension systems, do not.

King’s understanding of how local pensions operate and perform is still growing, as evidenced by the following statement in his op-ed:

That does not mean that we should do away with pension plans altogether. You may have seen an article that appeared in the Austin American-Statesman where I seemed to take that position. The Statesman quoted me as saying, "Texas needs to get the hell out of this (pension) business completely." However, the quote was taken out of context. At the time the reporter and I were talking about the state laws that mandate pension plans for many cities in Texas. I was making the point that I thought the state should stop dictating pension plans for local governments.

In fact, Texas does not “dictate” how pension plans operate for local governments. Someone should tell that to Mr. King.

All cities have choices about how they run their systems. Most let the Texas Municipal Retirement System invest their money and run their benefit programs for their employees, but the benefit levels and contributions are decided by the cities themselves. Those Texas cities that run their own investments and benefits administration – TEXPERS members -- have sought to codify their plans in Texas law to protect the continuity of their plans from potentially abrupt changes in city administration’s after elections.  But codification in statute is entirely an effort to preserve their individual plans through a 3rd party. That is not the state’s ‘dictating’ plans onto cities, as Mr. King seems to think.  

It’s our hope Mr. King’s comprehension of these issues continues and that Texans, as strong independent thinkers, will take in these and other facts about a public employee pension system that has a proven track record of working well for public employees and taxpayers. --- Max Patterson

Monday, February 6, 2012

Republican Joint Economic Committee Uses Worst-Ever Market Period to Cry the "Sky is Falling!"

We read with great interest a December 8 report, "States of  Bankruptcy: The Coming State Pensions Crisis" that was issued by the Republican Joint Economic Committee. We noticed several things about the author and the data used, and we hope that people will keep some things in perspective when they read the alarmist, “Sky is Falling” styled report.

Our primary reason for viewing this report as “Chicken Little” like, is the primary date of the data that was provided by the committee by Andrew Biggs, of the American Enterprise Institute. Namely, he used data for the year 2009 to calculate unfunded pension liabilities as a percent of state gross domestic product (see the page 5 chart).

As you recall, 2009 was a particularly  bleak year for the American and worldwide economies, and the GDP figures used by Biggs reflect the lows of the recession and stock markets’ collapse that started in 2008. The markets, state economies and pension fund performance records have recovered significantly since this snapshot was taken. It would have benefited the credibility of the report  if it had reflected a more representative year in terms of 'normal' economic and market activity. Choosing the bottom of a market cycle to cry the “Sky is Falling” is a bit disingenuous. What’s the data look like in 2010 or 2011, after market recoveries and opportunities for pensions’ to rely on their strong-hand style of investment portfolio management.

Even with the report's use of the worst possible GDP figures, all Texans should note that Texas pensions performed very well on a comparative basis to other states. On the chart, Texas was among the  states with  the lowest levels of unfunded liability  debts compared to GDP. This is testament to the effectiveness of  Texas' combined  state  and  local systems for  providing  defined benefits to their public sector employees and our solid economy. This is resilience, and also a signal that our systems are performing well, even during trying economic times.

It should be noted that, at the local levels in Texas, those few systems which have experienced trouble have done so as a result of their government sponsors' decisions not to adequately fund their pensions. As a result, they quickly get behind their actuarial curves and must take drastic efforts  to get caught up with  their liabilities. Obviously, this is a poor management practice. Fortunately, at the  local levels, very transparent  processes exist to  correct  such shortfalls. In the past two  years, pension systems in Austin, Dallas, and Houston have used these processes to realign their benefit promises and taxpayer commitments. These processes work wherever they’re tried. Contrary to the Joint Economic Committees’ assertion, there is no pension system or political movement in Texas that has as its intention  asking for "bailouts" from any source, either now or in the distant future.

We will continue to watch the reports that emanate from the Republican Joint Economic Committee. – Max Patterson