HOUSTON (CN) — Houston's mayor unveiled a pension-reform plan this week that he says will swiftly slash the city's liability by $2.5 billion, enabling it to corral the debt that threatens to cripple public services.
There's one major caveat to Mayor Sylvester Turner's preliminary plan that he says will pay off the pension debt in 30 years: any changes to the city's municipal worker, police and firefighter pension funds must be approved by the Texas Legislature, as state law governs how much the city pays into the funds each year, based on the number of employees covered.
With the city facing $7.7 billion in unfunded pension liability, Houston officials have compared its funding crisis to the pension woes that bankrupted Detroit in 2013.
Turner said in his first State of the City speech in May that hundreds of employees will be laid off if his plan doesn't go through, but he vowed not to lay off any police officers. Houston has half as many officers as Los Angeles, around 5,300, to patrol the city's 627 square miles, which has become a problem as the population grows.
Demographers predict Houston will surpass Chicago by 2025 to become the nation's third-largest city.
"To ensure the city does not find itself in the same place again, there is a new cost-management component that requires costs to stay within a specified 'corridor,'" Turner wrote in letter to Houstonians posted on his website Wednesday with the heading "Houston Pension Solution."
The mayor added, "It's like a thermostat — if market conditions cause our situation to get too hot, the city and pension systems will go back to the negotiating table to lower the temperature."
The first-term mayor — a black Democrat, Houston native and former state legislator — repeatedly said the cost-management element is essential to his plan and "non-negotiable" at a Wednesday press conference announcing the deal.
"The police and municipal pension systems are willing to work with us on this concept, but the firefighter pension system is not comfortable with it yet," Turner's letter states.
Turner said at the press conference the plan will not decrease pension payments for retirees, but active employees could see a reduction in cost-of-living raises or a slowdown of the rate their retirement benefits accrue.
Turner's plan also calls for the city to issue $1 billion in pension obligation bonds. Turner said the 3 to 4.5 percent interest the city expects to pay on the bond debt will be covered by anticipated earnings on the city's investment portfolio.
The city blames the funding crisis in part on its former actuary, Towers Watson & Co., which it sued in August 2014 in Federal Court, claiming the firm issued a special report in April 2000 that said firefighter retirement benefits could be raised "without increasing the city's contribution rate for the next 10 years."
Texas law makes an actuary responsible for calculating whether the three funds can alter their members' retirement benefits.
But the city said in the lawsuit that 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."
U.S. District Judge Melinda Harmon refused to dismiss the lawsuit in September 2015.
Houston also sued the Houston Firefighters' Relief and Retirement Fund in January 2014 in Harris County Court, seeking a declaration a state law setting how the fund is operated, and giving the city no control over the amount of its contributions, is unconstitutional.
A state judge dismissed the lawsuit and a Texas appeals court upheld the dismissal Sept. 8.
The appeals court found the state law is reasonable because any increase of the city's payments to the fund must be approved by an actuary, a majority of the funds 10-board members that include the city's treasurer and a representative of the mayor, and the State Pension Review Board.
To help balance the city's future budgets, Mayor Turner is also banking on voters repealing a 2004 law that caps the city's property tax revenue at $1.1 billion annually. He said he will put the issue before voters in November 2017.
Police and city workers' retirement fund representatives were at the press conference in support of Turner's plan, but firefighter board trustees declined the mayor's invitation.
"We will not be in attendance today at the mayor's announcement because we are not comfortable portraying to the membership or the public that we have reached a deal. However, we have not walked away from the table," David Keller, chair of the firefighters' retirement fund, said in a statement.
Keller specified the firefighters' issues with Turner's plan on Friday.
"Our concern is that it's an untested and unproven model and we're going to subject the retirement of firefighters to an experimental process, and the unintended consequences of that are unknown. It hasn't been vetted out...Our fear is it would rob the certainty of a dignified retirement from firefighters," he said in a phone interview.
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