Posted on 02/29/2004 6:26:42 AM PST by MeneMeneTekelUpharsin
The city of Houston's main pension program has a billion-dollar funding shortfall because benefits have been boosted so high that many employees will earn more in retirement than they received while working, according to a report obtained by the Chronicle. A few will retire as millionaires. To properly reduce the shortfall, taxpayers would have to put nearly $100 million extra into the fund next year, according to an analysis prepared for the pension's board.
Further, the city cannot reduce the benefits for any employee who already has worked five years, thanks to a Texas constitutional amendment passed by voters last fall. As a result, the city is considering closing the plan to new members and moving new employees into a less generous plan. The only alternatives might be a tax increase or widespread layoffs, city finance officials said. "I feel so bad for taxpayers," said state Rep. Martha Wong, R-Houston, a former member of both City Council and the pension board who tried to sound an alarm about pension issues while in the Legislature. "Poor (Mayor) Bill White is stuck with it." White knows he's stuck with the problem and has vowed to fix it. At last week's State of the City address, White was asked how his new job is going so far. He ticked off a list of tasks ahead, including "a billion-dollar mistake" in the city employees' pension fund.
The Houston pension is far more generous in every measurable way than similar-sized cities, including Dallas, Phoenix, Denver and Philadelphia, according to a consultant's report commissioned by the city late last year after the shortfall became apparent. For example, employees who work 25 years and four months will receive 90 percent of their final salary in retirement, plus Social Security payments that will put them well over 100 percent of their salary. After they die, their spouses will continue to receive the full pension until their deaths. And a special deferred-retirement program could allow some longtime employees to get million-dollar payouts in addition to their monthly benefits.
Unheeded warnings
Mayor Lee Brown's administration approved the bulk of the extra benefits in 2001, despite a state board's warning that the changes would be costly. The city did not conduct its own analysis of the proposed benefits. Instead, it relied on a cost report prepared by the firm that does work for the city's independent pension boards, all of which are controlled by employees and retirees. That firm, Towers Perrin, seriously underestimated the true cost of the benefit changes, said Joe Esuchanko of Actuarial Service Co. of Troy, Mich., who wrote the new analysis for the city. Asked if Towers Perrin should have foreseen the potential for drastically increased costs, Esuchanko replied: "Let me put it this way. If I had been doing the work, I would have noticed." Government pension funds usually are more generous than private plans because government workers are paid far less. The funds typically get money from three sources: employer contributions, earnings on investments, and in some plans, employee contributions.
In the Houston Municipal Employees Pension System, which covers about 12,000 city workers, one program has no employee contribution, while the other requires workers to chip in 4 percent of their paychecks in return for better benefits when they retire. Each year, an actuary forecasts the value of the assets -- stocks, bonds, real estate and cash -- that the pension fund should have to cover in the eventual payout to retirees. Because the Houston employee contributions are frozen at 4 percent and the performance of investments varies, city taxpayers must make up any shortages, or "unfunded liabilities."
A billion dollars short
The Houston fund is considered to have a $995 million shortfall because projected payouts to employees are $995 million higher than projected assets. The number is a moving target, thanks to changes in the stock market, employee pay and other factors. City officials are now negotiating with the pension board to drastically reduce next year's city contribution to the fund, which is calculated to be $152 million instead of this year's $55 million. The higher amount would meet the fund's technical goal of reducing the shortfall over a set period of years. The city cannot pay that much, but it may still have to increase its contribution by tens of millions of dollars. Today's problems can be traced to 2001, when the pension, governed by a board whose majority is made up of current and retired city workers, asked the city to increase benefits. The city agreed, based on a Towers Perrin report that the city would not have to contribute more than 14 percent of its payroll.
The improvements to the employee-contribution program were substantial.
· In 1993, the program promised 52.5 percent of income for a retiree with 25 years of service. The new program promised 88.75 percent.
· To reach 65 percent of income in retirement, an employee now needs just 20 years of service, compared with the 25-35 years required by most cities.
· Only one other city surveyed gives a surviving spouse 100 percent of the pension. Others require their retirees to accept smaller pension payments in order for their survivors to keep receiving benefits.
· Houston gives a 4 percent cost-of-living increase, regardless of the actual Consumer Price Index computed by the federal government. Others give less or even none at all.
But the most expensive changes were revisions to a deferred retirement plan, available to any employee whose age and number of years of employment equal 70 -- for instance, an employee who is 50 years old with 20 years of service. With a so-called "drop" account, the employee essentially "retires" for pension purposes but continues working at his normal salary. Meanwhile, his monthly pension benefit -- 65 percent of salary in the above example -- is paid into an account that he can't touch until he really retires. In addition, the account receives whatever interest the overall fund is making on its investments, but always at least 8.5 percent, compounded daily, no matter how poorly those investments perform.
The employee also continues to contribute 4 percent of salary. And the monthly benefit gets an annual 4 percent cost-of-living increase. In the case of a worker hired at age 22 who entered the deferred program after 24 years at a salary of $40,000 and retired for good at age 65, the lump sum waiting for him would be $2.75 million, Esuchanko calculated. Plus, he would start getting a pension of 84.5 percent of the salary he earned at retirement, not what he earned back when he triggered the deferred program. Esuchanko said Towers Perrin's analysis was flawed in several areas.
Although the employee-contribution plan became a considerably better deal than the non-contribution plan, the company did not anticipate the swarms of employees who would switch over. It also failed to anticipate that virtually all workers would enter the deferred retirement program immediately after becoming eligible. When Towers Perrin refigured its numbers last year, it told the city it should now be contributing 32 percent of payroll, not 14 percent. The city payroll stands at $405 million this year, excluding police and firefighters who are on a different pension system. While many public pensions across the nation are similarly underfunded because of the recent poor performance of their investments, Esuchanko said Houston's problem rested squarely with its generous plan and poor understanding of its effects.
Low pay, rich rewards
For their part, employee union officials said workers are not to blame for the funding crisis and should not be ashamed for having good retirement benefits because they are paid so little. "They accept such low salaries because when they do retire, they will retire well. They are looking for that payoff when they get done," said Kimbal Urrutia, executive director of Local 1550 of the American Federation of State, County and Municipal Employees. Lonnie Vara, the city's human resources director, who also sits on the pension board, acknowledged that city workers would get a "rich benefit," but noted their average salary is just $32,068. Vara said the fault lies with the consultant who advised that the city could afford it. The consulting firm, Towers Perrin, declined to comment for this story.
Al Haines, the city's former chief administrative officer who negotiated the pension changes, is now advising local officials in Iraq. He e-mailed that he didn't have access to files that would help his memory, but that the increased pension had been justified by the "inordinately low" salaries paid to city workers. A spokesman for the pension fund did not return phone calls or e-mails for three days last week and then did not respond to a list of written questions. The fund was one of the principal backers of last September's Proposition 15, which ratified a state constitutional amendment stating that no local government could reduce benefits in a pension plan for those employees already "vested." Houston employees vest, or become full participants, at five years.
Changes afoot
In an interview, White said the city could not afford to keep the current pension system and would be forced to make changes. New employees might get a "defined contribution" like a 401(k) plan rather than a "defined benefit" like a standard pension, he said. White said he "can't rewrite history" and hadn't determined who was at fault. But when asked about the city's reliance on the pension fund's expert rather than hiring one beholden to the city, he said: "In my administration, I'll make sure we do have second opinions. Period. "I personally will familiarize myself with the actuarial assumptions. I, the person who runs the city, will not rely on secondhand information," White said. The Brown administration did receive a warning in 2001. The state's Pension Review Board hired an analyst to review the Towers Perrin assumptions. "I would characterize the proposed actuarial assumptions as very optimistic," wrote the consultant from Milliman USA, a major actuarial firm. That warning was disregarded, Wong said, by most City Council members and by members of the Legislature, which ratified the changes at Brown's behest. The pension fund's lobbyist was attorney Robert Miller, who also was one of Brown's top fund-raisers.
City Controller Annise Parker, who was on City Council at the time, said she didn't believe the pension was too generous to employees, and that it only became clearly unaffordable late last year, when Towers Perrin revised its forecasts. "It's not a matter of assessing blame," she said. "But the Brown administration just kind of said we would leave it to the next mayor to figure out."
The continuing legacy of dishonesty dismantles the United States. Whoever is responsible for this should be tried and imprisoned.
Idiots.
This is why this country is a Republic and not a democracy. People, taken as a whole, are morons.
As always, a FReep mail will get you on or off this Houston topics ping list.
As always, a FReep mail will get you on or off this Houston topics ping list.
In other words, just do what you gotta do to squeak by for 25 years and retire nicely at 50-55 years old.
ROFL!
Texas' constition has hundreded of ammendments, many over civic issues like does a city need to get voters to approve this or that.
I don't think we will have any luck getting this one repealed though.
If anyone has a subscription to the Houston Comical, you can go online to www.chron.com and look at the archives of articles back to 1985 (even some of the Houston Post articles are there).
Let's see if they endorsed it and then promote the wool that The Houston Chronicle is trying to pull over the public's eyes.
More incompetence from our Affirmative Action Mayor! Lee P. Brown is an idiot and you can follow his path of incompetence from job to job, from city to city!
...good riddance!
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