Error Creates Houston ‘Pension Funding Crisis’

HOUSTON (CN) - An actuary's errors led Houston to increase its firefighter retirement fund payments by $11.6 million a year and created a "pension funding crisis," the city claims in Federal Court.

Houston sued Towers Watson & Co. on Friday. The New York City firm is the product of the 2010 merger of Towers, Perrin, Forster & Crosby and Watson Wyatt Worldwide.

Though the oil and gas boom has Houston's economy humming with a 5.4 unemployment rate as of June, compared to the nation's 6.1 percent rate, the city has a pension debt problem akin to what bankrupted Detroit last year.

"Each year the city of Houston pays more than $300 million to the three pension funds it supports for city firefighters, police officers, and municipal workers. The city's contributions to these pension funds impose a substantial annual financial burden on the city and its taxpayers," the complaint states.

Houston says in fiscal year 2015 its required contribution to the Houston Firefighters' Retirement Fund will be $90 million.

"The city's contribution equals approximately 33.2 percent of the fire department's annual payroll, and is approximately four times the amount that the firefighters themselves contribute from their salaries," according to the complaint.

Under the Texas law governing Houston's firefighters' retirement fund, the city is required to make a yearly contribution to the fund that is at least twice the firefighters' contribution.

The law also mandates that the "firefighters' fund is managed by a ten-person board of trustees with eight trustees elected or appointed by the firefighters, and the other two trustee positions held by the City of Houston's Treasurer and by an appointee of the Mayor of Houston," the complaint states.

The statute makes an actuary responsible for deciding if the fund can alter its members' retirement benefits, according to the lawsuit.

Houston says Tower's predecessor was the fund's actuary from the early 1980s until 2002, and prepared annual reports that calculated the fund's financial health and the city's required annual contributions.

In the lawsuit, the city lays the blame for its costly firefighter pension fund payments squarely on a report that Tower's predecessor issued in 2000.

"According to Towers, the firefighters' fund was running a surplus through the late 1990s. To that end, Towers represented that the actuarial value of the firefighter fund's assets exceeded the accrued liability for benefits payable to pension members over the next 30 years," the complaint states.

Keeping with that calculus, Towers issued a February 2000 report stating the city's yearly contribution to the fund would stay at the statutory minimum of 15.4 percent of the fire department's payroll through 2018.

Buoyed by the report, the city says, the firefighters' fund proposed increasing pension benefits for retirees and adding new benefits.

Towers then issued a special report in April 2000 that concluded the "existing benefits could be increased and the new benefits could be added without increasing the city's contribution rate for the next 10 years," according to the complaint.

Houston says it trusted Towers' math and voted for the changes in a May 2000 meeting at which the pension review board approved the increased benefits.

But the city says Towers' calculations were way off: that in March 2002 Towers' annual report found that with the new benefits, the city's responsibility to the pension fund "jumped by an additional $11.6 million in a single year," and the increase would "persist through at least 2020."

Houston seeks punitive damages for negligence and professional malpractice.

It is represented by Geoffrey Harrison with Susman Godfrey of Houston.

The city sued the firefighters' retirement fund in January, seeking to establish the authority to negotiate its debts to the fund.

In that lawsuit in Harris County Court, Houston said it does not want to become Detroit's southern cousin.

"Houston cannot and will not ignore the lessons to be learned from the recent Detroit bankruptcy and the financial difficulties related to pension obligations being experienced by municipalities throughout the country," the city said in the complaint.

Towers Watson's public relations director Josh Wozman said the firm does not comment on pending litigation.

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