The problem that no big city mayor wants to confront

gpensionThe turmoil in the municipal bond markets over the past week got me thinking.

Bill King has done a great job (and see generally here) of explaining how Houston’s unfunded public pension obligation represents an untenable burden on the city government’s financial condition. The problem is not just Houston’s, either.

So, it was refreshing to come across this Maria D. Fitzpatrick/Stanford Institute of Economic Policy Research paper (H/T Craig Newmark) that indicates that now may be the best time for Houston and other over-stretched local governments to attempt to do something about this mess:

ÔªøÔªøÔªøÔªøThe results show that the majority of Illinois public school teachers are willing to pay just 17 cents for a dollar increase in the present value of expected retirement benefits. The findings therefore suggest substantial inefficiency in compensation as the public cost of deferred compensation exceeds its value to employees.  .   .   . [. . .]

In this context, the main finding of this paper, that the majority of IPS employees value their pension benefits at about 17 cents on the dollar, has two important implications. First, it suggests a possible Pareto-improving and politically feasible solution to the current inability of states to pay their promised pension benefits to public employees. Governments could offer to buy back pension benefits from teachers and other public sector employees. If the results here generalize, governments may be able to buy back promised employee pension benefits, or at least some of these promised benefits, for as little as twenty cents on the dollar. Doing so would draw down the pension obligations of governments both significantly and immediately, rather than waiting for a reduction in benefits to take effect years in the future.

Meanwhile, in this WSJ op-ed, Roger W. Ferguson, Jr. passes along an innovative approach that Orange County, California – the site of one of the largest municipal bankruptcies in U.S. history back in the mid-1990′s – is taking to deal with its unfunded pension obligations:

The plan is a hybrid model: It combines contributions by the county and its employees with both a traditional defined-benefit pension and individual accounts, which the worker can take with him from job to job.

Here’s how it works: New hires can choose either the old defined-benefit plan or the new hybrid plan when they sign up for benefits. The plan maintains a strong traditional pension, but it reduces the requisite contribution for both the county and its employees. It also redirects a portion of that money into the defined-contribution part of the plan where the money can grow over time.

Unlike a typical 401(k), the defined contribution part of the hybrid plan emphasizes retirement income as the primary goal. It incorporates affordable deferred annuity options during employees’ working years that can deliver income in retirement that compares favorably with what workers can expect from the traditional pension plan alone. The hybrid plan also increases workers’ take-home pay because workers’ contributions are lower than they are in the old defined-benefit plan.

This new program helps workers to think about how much monthly income they will need in retirement–as opposed to how big a nest egg they’re building. [. . .]

Sometimes real change begins with compromise. A new approach on pensions won’t close the gap between current pension promises and the public’s ability to afford them. But it points the way forward and acknowledges the reality that we have to start somewhere to address our nation’s public pension woes.

Are you listening, Mayor Parker?

2 thoughts on “The problem that no big city mayor wants to confront

  1. Why do these so-called Think Tanks and conservative
    pundits seem to never target highly paid public
    servants (sic)? Doing so would make it seem more
    like a neutral response. I guess that sort of thing just never crosses the minds of the folks
    whose worldview doesn’t encompass ideas that might involve shared sacrifice…and all that jazz.

  2. Pensions are just one part of a total compensation package, a great many public safety workers not covered by Social Security. As such, you can pay them more during their working years to balance out smaller pensions and/or adjust other benefits such as medical or you can simply continue the status quo. The city of Houston, the location of this blog, pays no such benefits as the examples typically espoused from IL, CA, NY. or elsewhere so if you’re truly wanting to think clearly, by all means use local examples.

    Locally, police and fire personnel typically receive about a 50% pension when they retire. This is unlike other states or even other big cities in Texas that pay anywhere from 75% and up. Those places also subsidize medical benefits to the tune of providing free or nearly free benefits while Houston lets employees pick up 80% or more, depending on which program they enter. In terms of pay scale, Houston workers also make less by a large amount, all factors that a “clear thinker” might want to incorporate when challenging things like pensions that comprise about 6% of the total city budget.

    Why are city pensions not fully funded if workers are paid so much less, receive lower benefits, and even much lower pensions you ask? Well, the city does not fund them adequately in order to fund pet projects and keep taxes lower than other cities and states. The bulk of underfunding comes from this reason alone, the stock market troubles several years back certainly contributing to the short term problem.

    The solution is to force the city to pay what it promised and what workers earned under lawfully binding agreements. The city can then adjust how many employees it has which will impact delivery of services for better or worse. Most workers have given back several times in terms of lowered pensions in 2004 for police, 2004, 2007, and at least one other time for municipal non-classified employees. As far as Firemen are concerned, they were not given raises under Mayor Lanier or Brown during the city’s extended boom economy so cutting them is unfair and not reasonable either.

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