In the first eight days of May, both chambers of the Texas legislature passed a historic bill — the Houston Pension Solution — that aims to reform the municipal, police, and firefighters’ pension funds in Texas’s largest city. It was the first time in 16 years that a pension reform bill for Houston had passed in either the House or the Senate, and it left one group feeling ripped off.
The Houston Firefighters’ Relief and Retirement Fund doesn’t like the terms of the proposal — which reduces future benefits to fix the $8.2 billion unfunded liability faced by the city’s three public pensions — because it’s taking the biggest hit even though it’s the least underfunded.
Although the fund represents just 18 percent of the total unfunded liability, the firefighters are expected to take about 35 percent of the total future benefits reduction, according to Joe Gimenez, a spokesman for the firefighters’ pension. Making matters worse, he says, there are fewer firefighters than police and municipal employees, meaning that each firefighter would see a bigger reduction in benefits than either of the other types of city employees.
“It’s robbing Peter to pay Paul,” says Nick Salem, president of the Houston Retired Firefighters Association.
Here’s a look at the numbers. The Houston Municipal Employees Pension System is 47 percent funded, the Houston Police Officers’ Pension System is 77 percent funded, and the firefighters’ pension is 89 percent funded, according to the plans’ latest financial statements. The municipal pension has more than 27,000 members, the police fund has almost 9,000 members, and the firefighters’ pension has about 7,000 members, the statements show.
Houston Mayor Sylvester Turner and the city’s finance director did not respond to phone calls and emails seeking comment. A spokeswoman for the city pointed to the mayor’s previous statements on the matter.
In a letter to the Texas House dated May 3, Turner wrote that police and municipal employees have a system that allows them to retire with 70 to 80 percent of their salaries after 40 years of service, whereas firefighters can draw nearly three times as much. The city’s annual audit shows that Houston does not have the money to pay these benefits, Turner said.
“Houston’s pension challenges are real. Our city’s financial future is at stake,” Turner said in the letter. “It’s time to solve this problem by working together to create a sustainable pension for all employees.”
Houston will address past underfunding by issuing $1 billion in pension obligation bonds, $750 million of which will be allocated to the police fund and $250 million to the municipal fund, according to the city’s January presentation to the State Pension Review Board. It’s another point of contention for the firefighters, Salem says, who note they will be expected to make cuts without seeing any of the proceeds from the bond offering. Turner said in his letter that because police and municipal employees had previously adjusted their benefits and willingly deferred payments from the city, the bonds will be issued as “catch-up” funding for the two pensions.
The new bill will also lower the assumed rate of return for all three pensions to 7 percent — down from 8 percent for the police and municipal funds and 8.5 percent for the firefighters’ fund. And it will introduce a “corridor rule” that will cap Houston’s contribution to 5 percent above expected costs over the next 30 years. Houston will be the first city to use the corridor rule, says Josh McGee, vice president of public accountability at the Laura and John Arnold Foundation, which has funded research on public pensions. The concept addresses one of the critical points of pension reform, he says, which is to reduce downside risks for taxpayers.
Under the rule, if Houston’s contribution rises above the cap, the pension plans will be required to cut benefits to a certain level. But the lack of precedent for the corridor rule is precisely what worries the firefighters, Salem notes: “No one knows exactly how this will work.”
On May 21 a Senate–House conference committee tasked with reviewing the bill removed an amendment, written by Representative Dwayne Bohac of Houston, that would have exempted currently retired firefighters from the benefit cuts. On May 23 the revised bill was passed by the Texas Senate, freeing it to move on to a vote in the House. If approved by Texas Governor Greg Abbott, it will take effect as soon as July 1.
Until then, Salem plans to meet regularly with the retired firefighters, more than 300 of whom he says are living below the poverty line even with their pension checks. At a recent pension retirees barbecue, Salem recalls being approached by a Houston firefighter’s 92-year-old widow who was worried about potential cuts to her pension check: “She said she was going to have to cut her medicine in half.”
