The Houston Municipal Employees Pension System (HMEPS) was pleased to see the extensive discussion of pension issues at the May 29, 2012 City of Houston Budget & Fiscal Affairs Committee meeting. Little by little, these discussions are beginning to clear up misunderstanding about public employee pensions in Houston. Despite frequent assertions that Houston's employee pensions are on the brink of fiscal disaster, careful examination of the facts says otherwise.
For example, the whole concept of a pension fund's “unfunded liability” is often used to create panic. However, in response to questioning from Committee members at the May 29th meeting, the City’s Chief Pension Executive acknowledged that the best analogy for the unfunded liability is a mortgage. Yes, it is a kind of debt, but the important thing is to have a plan in place to pay it over time and to stick with the plan.
It has also become a rallying cry for some to blame current City financial challenges on the employee pension systems. However, perceptive questions from Committee members made clear that the existing benefit levels were agreed to by prior City administrations and Councils – and were not imposed upon the City by pension systems. This is a critical point and directly disputes the assertion that City officials need “more control” over the pension systems to reduce costs.
While we were happy to see these points come out of the meeting, discussion on some others issues requires some clarification.
The 8.5% assumption for investment returns: Some claim that “everyone” agrees 8.5% is too high as an annual investment return assumption for a pension system. While some push for changes to the return rate assumption based on the current economic climate, for years HMEPS has periodically reviewed its return rate assumption and is in the process of performing the next review, which will take into account economic models and forecasts on both short-term developments and long-term expectations. In the recent past, for the fiscal year ending June 2011, HMEPS achieved investment returns of over 20%, and consistently outperformed its peers over the last decade. Few predicted the sharp stock market decline in 2008 before it happened, and predicting the future is difficult to do. Here’s what we do know. The proper time horizon to use for actuarial calculations is the very long term – decades, not years. And over the last two decades, the pension system has met its 8.5% annual investment return target.
Benefits: The administration's pension presentation stated that a small group of recent retirees with over 25 years service was able to retire from HMEPS with pension benefits of 119% of their pre-retirement income. This is incorrect. The calculation used to derive the percentage assumed that each retiree would be able to withdraw over 7% of the DROP account each year for the rest of his or her life, even while increasing these withdrawals annually to cover inflation. No responsible financial planner would suggest such a distribution plan. A proper calculation, based on the actual cost of buying an inflation adjusted annuity from an insurance company, indicates that the 119% figure is an overestimate by almost 30%.
Even if the correct numbers were used, the report would still be misleading. Focusing on a tiny group of recent retirees ignores the fact that Houston municipal employees have already endured significant changes to their pension over the last few years. These changes have had a considerable impact on the thousands of municipal employees who were not part of the small retiree group analysis, and have saved the City of Houston hundreds of millions of dollars. These agreed to changes and savings were achieved solely through the meet and confer process between HMEPS and the City of Houston. Due to these successful reforms, HMEPS was identified by the Center for State & Local Government Excellence as one of five pension systems in the U.S. that has made reforms that make them “more fiscally sustainable while continuing to provide retirement security to their members.”
Though we disagree with certain points of discussion at the May 29th Committee meeting, overall we welcome City Council efforts to avoid a sound-bite approach to analyzing these important issues and instead engaging in substantive conversation and deliberation. We encourage them to continue on this path.
Should you have any questions or need further information, please call our office at (713) 595-0100.