Houston, There Is A Pension Problem

A generous city with state's highest debt compounds benefit quandary.

Texas in general and Houston in particular have reputations as economic dynamos. Texas created the vast majority of new jobs during the Great Recession. According to Gallup's job creation index, Houston is the nation's No. 1 metro area - a fact sure to be mentioned at the Texas Municipal League's conference this week.

However, the city's reputation for fiscal prudence is under pressure from rising public employee pension and health costs. Furthermore, state Comptroller Susan Combs has pointed out that overlapping local government boundaries in the metro area make it difficult for citizens to know how much debt they are taking on.

Houston's Municipal Employees Pension System is only 61 percent funded. That is well below what analysts take to be the minimum threshold of 80 percent for a defined benefit pension plan.

While the police and firefighter pension plans are widely considered well-funded, they are very generous. One study found that firefighters who retired after 30 years received, on average, 94 percent of their working salaries.

Houston's firefighter plan is even more complicated because it is governed by state statute, which forces the city to fully fund it annually.

This arrangement deprives the city of control over a portion of its budget, crowds out other priorities and caused Mayor Annise Parker to seek to repeal the law in state court.

All told, pension payments are projected to gobble up 17 percent of the city's budget by 2017 - up from 11 percent five years ago.

That is on top of the fact that Houston has the highest total debt of any city in the Lone Star State, owing some $13 billion, or $6,200 per person. Paying pensions and other debt means less money left over for other pressing public purposes. This year, Houston is paying $353 million to its three pension systems, nearly twice what it spends on parks, libraries and trash collection.

Part of the problem is that the city's defined benefit pension plan, like all such plans, places the liability for any shortfall in promised payments to retirees squarely on the city. In Houston, as elsewhere, this means that the city is offering, and citizens are consuming, more public services while promising to pay for them later. No wonder politicians, city residents and public employee unions all like the program. In the long term, pension commitments will test the robustness of the city's tax base (as they are, in fact, already doing).

Over the long term, the pension formulas have trouble adapting to changing economic circumstances - even in circumstances as favorable as Houston's. It would be a tragic irony if Houston's public employee unions, who have pushed for more generous pensions, are forced to face the grim reality of seeing the size of their younger colleagues' pension allotment reduced. Such a debate is now on the table in Houston, as the city weighs whether to create a new pension plan for new firefighters.

Texans often think that powerful public employee unions and unfunded pension and health systems are problems that plague slow-growing blue states like New York and California. While these problems don't loom as large in Texas because fewer public employees are unionized (and such unions enjoy fewer legal advantages), they still present significant fiscal challenges, especially at the local level of government.

When one looks under the hood at what is happening in Houston, residents should realize that they, too, have a problem.