Tuesday, September 8, 2015

TEXPERS Comments on Swamped Whitepaper of the Laura and John Arnold Foundation

TEXPERS responded the most recent whitepaper produced by the Laura and John Arnold Foundation via a press release distributed Friday to all Texas journalists. Here is the text of the release:

HOUSTON, Sept. 4, 2015 /PRNewswire/ -- Max Patterson, executive director of the Texas Association of Public Employee Retirement Systems, commented on "Swamped: How Pension Debt is Sinking the Bayou City," a whitepaper released by the Laura and John Arnold Foundation:

"The best I can say about this propaganda is that it is accurate in one regard: the city of Houston has shortchanged, over decades, the actuarially required contribution (ARC) its pension funds needed to function fully to their design. Employee benefits calculations could have been made to rely less on employer and employee contributions if the pension funds had received adequate assets to generate investment returns. By this action, successive Houston city councils have torpedoed the funds' abilities to create those returns and the unfunded liability measure has increased.

"Contrary to the Arnold Foundation's conclusion, why would any lawmaker want to give more control to a city management style that created this situation?

"By contrast, look at San Antonio, where decades ago the city and its employees agreed to increase contributions to fully fund the ARC each year, no matter what, and to place that agreement in state statute. The San Antonio Fire and Police Pension Fund now has the best funded ratio and lowest unfunded liability of Texas pension funds with assets greater than $1 billion. Houston should follow suit.

"The remainder of the Arnold Foundation whitepaper is misinformation endeavoring to confuse the general public and policy makers by creating dire, what-if scenarios for its unfunded liabilities, equating them to debts as if they are due today or next year," Patterson said.

"The truth is that unfunded liabilities are not debts that require the payment of interest, but they are like calculations for a homeowner's mortgage. Does a homeowner have the assets on hand today to pay the purchase price of their home? Of course not. That is why they obligate themselves to pay monthly over 30 years. Through diligent, disciplined effort and aided by career stability and benign inflation, the homeowner can expect their monthly mortgage payment to decrease each year as a percentage of their take-home income.

"The same is analogous to unfunded liabilities. They are snapshots of a city's ability to pay future liabilities today, but they don't have to be paid in full today. They are simply an accounting guidepost that should encourage a city to fully fund its ARC. It's inconceivable how a foundation with a billionaire hedge fund benefactor can misconstrue this fundamental pension accounting concept unless it is trying to effect some backroom agenda," Patterson said.

With specific reference to the Arnold Foundation's call to rescind statutes which govern Houston and other big cities' pension funds, Patterson said:

"A pension fund situated in a steady, healthy city economy whose elected leaders responsibly compensate employees for services they deliver will not have a problem generating investment returns over time. While Houston's leadership should prioritize its budget accordingly, there's little evidence it will do so. Why should pension funds and city employees become completely and absolutely subject to the whimsical, undisciplined behavior of a city council by ending the balancing force of their protection 
in state statute?" Patterson said.

"By placing some factors of their governance in statute, the pension funds can stick to the long-term investing horizons they need to generate the returns for retiree benefits, reducing the contributions required of cities and employees. But whipsaw council budget-making – of which Houston's history is example A – would undermine the pension funds' ability to produce. Why should other big cities' pension funds suffer a similar fate? The Arnold Foundation is advocating for seriously flawed and dangerous public policy with its call for absolute local control," Patterson concluded.