Houston Mayor Sylvester Turner announced Wednesday a series of proposals aimed at shoring up the city's three pension funds.
Speaking at a press conference, Mr. Turner proposed adopting a 30-year closed amortization schedule to pay off the $7.7 billion in unfunded liabilities across the pension funds — the $3.8 billion Houston Firefighters' Relief and Retirement Fund, $4.6 billion Houston Police Officers' Pension System and $2.5 billion Houston Municipal Employees Pension System. “We are replacing the present practice of restructuring the liability every year with a 30-year closed amortization model,” Mr. Turner said. “No longer will we kick the can down the road in this city.”
Also, the mayor proposed lowering the pension funds' assumed rates of return to 7% from the current rates, which range between 8% and 8.5%, and recognizing all pension liabilities as of June 30, 2016, effectively raising the combined unfunded liabilities to $7.7 billion from the roughly $5.6 billion reported as of June 30, 2015.
Additionally, Mr. Turner disclosed that all three funds identified benefit changes to reduce the portion of their plans' unfunded liabilities.
Without going into specifics, Mr. Turner said the changes, which are different for each system, affect one or more of the following — cost-of-living adjustments, future benefit accrual rates and the deferred retirement option program. He said the changes could reduce the combined $7.7 billion funding shortfall by 33%, or about $2.5 billion. Further details will be announced once negotiations have been finalized and the pension fund boards consider the changes.
Also as part of the proposal, the city will make the full annual required contributions to all three pension funds, and $1 billion in pension obligation bonds will be issued, which could reduce unfunded liabilities further.
Finally, “to ensure the city does not find itself in the same place again,” the mayor announced a “new cost management component that requires (pension) costs to stay within a specified corridor.”
“It is like a thermostat,” Mr. Turner said. “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.”
Mr. Turner noted that the “thermostat concept” is the only piece of Wednesday's proposal that has not received support from all three systems. The police and municipal plans are on board but the firefighters fund is “not comfortable with this model yet,” Mr. Turner said.
Talks will continue, he added.
“There is no other solution that provides the relief and certainty of the plan that I am announcing today,” Mr. Turner said.
Moody's Investors Service and S&P downgraded Houston's credit rating in March, citing the city's high unfunded pension liabilities and rising pension costs.
Wednesday's proposal is preliminary and will go to the City Council and state Legislature for approval.
Houston Firefighters board Chairman David L. Keller Jr. said in a news release Wednesday that the pension fund and mayor did not agree on the changes, but fund officials are open to working toward an agreement.
Peter Koops, spokesman for the municipal plan, and John Lawson, executive director of the police plan, could not immediately be reached for comment.