Texas Senate passes bill overhauling Houston's troubled pension systems

^{Editor's note: This story has been updated throughout.}

Texas Senators overwhelmingly passed a bill Monday that aims to overhaul Houston’s troubled pension funds, but not before including a last-minute amendment that could switch future first responders and City Hall employees to a new kind of retirement system.

The Senate passed Senate Bill 2190 in a 25-5 vote. Lt. Gov. Dan Patrick praised the work of the bill's author, State Sen. Joan Huffman. The Houston Republican spent months working with Houston city officials, police officers, firefighters and city employees in an effort to rewrite the statute that governs the city’s severely underfunded pension systems. Her bill was at least loosely based on a plan that Houston Mayor Sylvester Turner worked on with the three employee groups.

"I cannot think of a more challenging bill in my 11 years in the Senate," Patrick said.

But the city’s firefighters opposed the legislation because, they said, it required too many cuts to features of their benefits even though their fund is not in nearly as bad a shape as the police and municipal funds. Huffman said from the Senate floor Monday that she made tweaks in the bill that aims to at least partially appease firefighters.

“Although progress was made, it is my understanding the firefighters do not support this bill,” Huffman said.

Houston fire pension chairman David Keller said in a prepared statement Monday afternoon that the benefit features cut from that fund to help the city afford its contributions to all three pension systems could prompt firefighters to leave the department. He also said that could exacerbate existing problems in the firefighters' fund in the same way that Dallas’ pension fund has been bombarded by asset losses.

“There, the anticipation of future benefit cuts caused waves of early retirements, forced liquidations of immature assets, and a spiraling decline of pension fund balances,” Keller said.

Huffman amended her bill so that if the police or fire systems have less than 65 percent of the money they will need to cover future retirement costs after 2021, new employees will have to go on a different kind of retirement plan called a cash balance plan. If the municipal fund isn’t funded at 60 percent after 2027, those city employees will also have to shift future employees to the new retirement plan.

Currently, the city's police system is funded at 62 percent, the firefighter fund at 81 percent and the municipal fund at 48 percent, according to credit rating agency Standard & Poor’s.

A cash balance plan can be similar to a pension, but instead of money being pooled into one large fund, each employee has their own separate account. But it was unclear Monday if such plans would be pooled or not if Houston is eventually required to use them.

"We did leave some flexibility for the city and the pensions to develop the fine details," Huffman said after Monday's vote.

Houston leaders last week said no such plan was offered to police, firefighters or municipal employees while they were negotiating a pension reform plan with city officials. They said they didn’t know enough about the idea to support it so late in the legislative session. But Turner on Monday praised passage of the bill in a prepared statement. 

“Studies are still out on whether they will work in the long run,” Huffman said Monday of cash balance plans. “The beauty is there's certainty in the cost to the city and the taxpayers.”

The idea for the cash balance plan came from some Houston business leaders worried that Turner’s plan would not adequately shore up the shortfalls and would lead to cuts in city services or employee layoffs.

“It only kicks in if his plan doesn't work,” said Houston investment manager Chris Zook.

State Sen. Paul Bettencourt, R-Houston, had wanted to amend the bill to let Houston voters decide whether the city should send all future employees to defined contribution plans, like 401(k)s. That’s a highly controversial idea among first responders who say that the promise of dependable pensions is something cities have long used to keep from paying them higher salaries.

Bettencourt said Monday that he liked the cash balance plan idea because it would end the use of costly pension funds if the current financial crisis doesn’t ebb.

“It’s a recognition of the obvious,” he said.

Missed payments and growing debt 

Houston faces more than $8 billion in shortfalls in its police, firefighter and municipal employee pension funds. But credit ratings agency Moody’s estimates the unfunded liabilities exceed $10 billion. That firm ranked Houston as having the nation’s fourth worst pension shortfall when unfunded liabilities were compared to the annual operating revenues.

Those shortfalls are far worse in the police and municipal employee funds than in the firefighter retirement fund. The unfunded liabilities in the police and municipal systems stem from years in which those respective board agreed to let the city underfund its pension contributions. City officials estimate they now owe the police fund $750 million and the municipal employee fund $250 million.

To repay those underfunded amounts, the city plans to issue $1 billion in pension obligation bonds. But the Senate in March passed a bill that could complicate that plan because it would require voters to approve a city’s attempt to take on bond debt to fill pension funds. Huffman's bill also includes a provision saying that if voters reject pension obligation bonds, the benefit cuts that employees agreed to will not go into effect. 

Budget woes ahead 

Houston is already facing a $90 to $100 million shortfall in its budget that has to be approved by the end of next month. In July, when Houston's 2018 fiscal year begins, the city will have to pay $130 million into the police retirement fund. If pension reform legislation goes through, the city plans to quickly issue its $1 billion in planned bonds to avoid draining $130 million from its general fund. If the city has to use its the general fund for that payment, it will create a $220 to $240 million budget shortfall that will lead to layoffs for city employees, including police officers and firefighters, according to Turner.

“No group of employees is going to go unscathed in this process,” Turner said at a press conference last week.

Houston officials have warned that a shortage in first responders will lead to higher crime rates and lower response times throughout the city. Houston fire chief Samuel Peña said at a press conference last week that his department wouldn’t be able to respond as quickly to car wrecks, house fires or medical emergency.

“We are already strained to the max as far as being able to provide the service that this community has come to expect,” he said.

Read related coverage:

• Hundreds of Dallas police officers stood at City Hall last week to oppose Mayor Mike Rawlings' calls for residents to oppose a legislative fix to the rapidly failing first responder pension fund.
• As the Texas Legislature considers bills aimed at fixing the Houston and Dallas pension problems, several of its members have personal or business ties to those cities' pension systems.