Employee Pensions GOVT 2306, Module 11

Quiz The answer is D Which costs the city of Houston the most? A) Parks B) Libraries C) Trash collection D) Firefighters’ pension payments In 2015, the city contributed $90 million to the firefighters’ pension fund. The city has three pension funds—police, fire, and municipal employees. Total pension contributions from the city of Houston are twice as much as the city spends on parks, libraries, and trash collection combined.

Types of Pensions Defined Benefit Defined Contribution Both employees and their employer contribute to a pension fund. Employees are guaranteed a specified amount of benefits depending on their earnings and years of service. The benefits continue over a lifetime. The employee and perhaps the employer as well contribute a specified amount into a retirement account, often called a 401 (k). The money is invested in mutual funds or other investment vehicles. When the employee retires, the employee receives the retirement account to pay for his or her retirement. The city of Houston has defined benefit retirement plans for its employees.

Houston Pensions Generous A city employee who retires after 25 years earns a pension larger than his or her salary at retirement: Retired municipal employees earn 19 percent more by retiring; Retired police officers earn 12 percent more by retiring; and Retired firefighters earn 58 percent more by retiring. Keep in mind that the city of Houston does not pay into Social Security, so most retired city workers will have neither Social Security nor Medicare.

City Officials Prefer Pensions to Salaries Over the years, the mayor and council have preferred to offer city employees higher pensions rather than salary increases. Why do you think this is so? Salaries come out of the current budget. Pension payments come out of future budgets when other people will be in office.

Public Employees Justify Pensions City employee groups argue that police, fire, and other city employees deserve generous pension benefits: City pay is relatively low; City employees have dangerous jobs; and City employees have physically demanding jobs. Firefighters, especially, and to a lesser extent police officers are politically attractive.

City Pensions Are Underfunded A fully funded pension matches pension fund assets with expected payouts to current retirees and city employees who qualify for future benefits. Houston pension funds are $3.1 billion in the red. Healthcare benefits for current and future retirees are $2.2 billion in the red. The total underfunded employee benefits exceeds $5 billion. To get an idea of the magnitude of the shortfall, the city’s general fund budget is only $2.2 billion.

Pension Funding Shortfall Even though pension contributions are roughly 10 percent of the general fund budget, they fall well short of the amount of money needed to fully fund municipal pensions.

Property Tax Revenue Cap Voters approved a property tax revenue cap in 2004 that limits the increase in the city's annual property tax collections to the combined rates of inflation and population growth, or 4.5 percent, whichever is lower. If property tax collections grow faster, the city is required to cut the tax rate.

Pension Reform Mayor Bill White got the police and the municipal employee unions to agree to pension reforms that apply to new hires while protecting the pension benefits of retirees and all current employees. New hires will contribute more into pension funds and receive lower benefits than their more experienced counterparts. The firefighters, however, have refused to agree to changes, which is their right because the state backs them up.

State Law Ties City Hands Under state law, the amount of money the city contributes to the firefighters’ pension fund is determined by the Houston Firefighters’ Relief and Retirement Fund board which includes six firefighters, two citizens chosen by the firefighters, and two city appointees. State law says that the city and the employee unions must “meet and confer” before any changes in pension payments and contributions can be proposed. Under a state law that only applies to Houston, any changes in firefighter contributions and benefits must be approved by the Texas legislature. State law also prohibits the city from reneging on promised benefits.

Quiz Why do city officials prefer increasing pension benefits to raising employee salaries? A) The bill comes due down the road. B) Pensions are cheaper than salaries. C) Pensions are more easily reduced than salaries. d) State government covers the cost of pensions. The answer is A.

What You Have Learned What is the difference between a defined benefit and a defined contribution pension system? Which do Houston employees have? Are Houston employee benefits generous or stingy? What factors contribute to the state of the city’s pension funds? What are unfunded liabilities? Why is reforming city pensions difficult?