Fiscal Notes
No fiscal implication to the State is anticipated.
The City of Houston estimates the required contribution to the pension systems in fiscal year 2018 would be $704,556,462 without legislative changes and $381,441,348 with legislative changes and Pension Obligation Bonds (POBs) issued. The debt service in fiscal year 2018 for POBs would be $25,527,988.
Over a five year period the City of Houston estimates without reform the city would contribute $3.6 billion to the pension systems. With reform and issuances of POBs the city would contribute $2.0 billion. The estimated debt service would be $0.2 billion. The city projects a savings of $1.4 billion dollars over a five year period.
Bill Analysis
This is a local bill affecting only the Houston pension funds.
General Provisions would:
- Amend multiple sections of Revised Statutes relating to the Houston Police, Firefighter, and Municipal Employee pension systems.
- Set requirements on the qualifications for the Municipal Fund actuary for all three funds.
- Require each pension to perform several reports and analyses, such as:
- an initial RSVS, and project the corridor midpoint (the median of the minimum and maximum contribution rate for the municipality) for 31 fiscal years beginning July 1, 2017;
- and an Actuarial Experience Study (AES).
- The municipality as of the 2017 effective date would contribute at least biweekly to the funds an amount equal to the municipal contribution rate multiplied by the pensionable payroll for the fiscal year. The bill requires that the municipal contribution rate not exceed the maximum contribution rate or be less than the minimum contribution rate.
- Allow a municipality to issue pension obligation bonds (POBs) to fund all or part of the unfunded liability only if the majority of voters approves the issuance at an election called for that purpose.
Provisions Relating to Firefighter Pension System would:
- Allow the board of the fund and the municipality to alter benefit types or amounts, the means of determining contribution rates, but may not increase the assumed rate of return to be more than 7 percent per year, extend the amortization period of the liability greater than 30 years, or allow the municipality's contributions to be less than the minimum or greater than the maximum municipal contribution rate.
- Limit the number of years a Deferred Retirement Option Plan (DROP) participant who has 20 years of service can participate to 13 years.
- Change the active member's contribution rate from 8.35 percent of the member's salary to 10.5 percent after the year 2017 effective date.
Provisions Relating to the Police Pension System would:
- Changes the active member's monthly contribution rate from 8.75 percent to 10.5 percent of the participant's pay.
- Limit the maximum number of years an active member may participate in DROP to 20 years after the member receives the hypothetical earning rate.
- Changes the members in military service from being entitled to being eligible for counting uniformed service towards years of service.
- Prohibit the board and municipality from entering into an agreement to increase the assumed rate of return to be more than 7 percent per year, extend the amortization period of the liability greater than 30 years, or allow the municipality's contributions to be less than the minimum or greater than the maximum municipal contribution rate.
Provisions Relating to the Municipal Pension System would:
- Modify an employee's retirement grouping based on date of hire. The groupings are A, B, and D.
- Establish member contributions rate on or after the 2017 effective date, and the municipal contribution rate on or after July 1, 2018.
- Require group D members to contribute one percent of the member's biweekly salary to a notional account with an annual return rate no less than 2.5 percent and no higher than 7.5 percent.
- Modify the requirements for DROP participation.
- Require the board to establish an interest rate for DROP accounts that is not less than 2.5 percent and not greater than 7.5 percent.
- A DROP participant would be required to pay contributions to the pension system for all the participant's time in DROP that would constitute service in order receive credit to the DROP account.
Vote Recommendation Notes
The public pension system in Houston is broken and rapidly growing worse. The city's current $8 billion dollar unfunded public pension liability is alarming and unsustainable. Urgent reform is needed to stop the bleeding, shore up the system, and provide pension security for those who are counting on it. This bill in its current form fails to enact the reforms necessary to achieve these goals.
True pension reform that is sustainable for the long term will restore local control, significantly increase transparency, get the system up to a minimum of 80% fully funded, require elections before issuing new pension obligation bonds, and move to a defined contribution system for new hires. Legislation that fails to enact these reforms would simply kick the can down the road for a future legislature to address at a time when the system will almost certainly have grown more indebted, become further destabilized, and consequently make the problem even more difficult to fix than it currently is.
We appreciate that this bill includes a provision for pension obligation bond elections but without the other reforms this alone is insufficient.
We oppose the continuation of local pensions relying on state legislators to reform their broken systems. The biennial nature of passing state-level laws is time-consuming and inflexible for addressing local problems that require immediate resolutions and can't wait for the next legislative session to begin.
We also oppose continuing on with a defined benefit system for new hires rather than a defined contribution system. The committee substitute has removed from the original bill any pathway to changing to a defined contribution system.
Ultimately this bill can not truly be considered a reform bill. It tinkers around the edges without addressing the problem and kicks the can down the road to the next legislature. It can hardly be said that passing this bill in its current form would be a worthy improvement over the status quo.
We recommend this bill be amended to include a provision to reestablish local control and discontinue the cycle of perpetuating the encroachment of state government in issues it should have little to no engagement in.
We recommend this bill be amended to require that new hires be placed in a defined contribution plan which is inherently more stable and viable than a defined benefit plan. If such an amendment is adopted we would support this bill as a clear improvement over the status quo even if not the full measure of needed reform.
