DALLAS — Houston Mayor Sylvester Turner wants to issue $1 billion of bonds as part of a comprehensive plan to rein in the city's ballooning pension liabilities.
After years of negotiations and legal battles over Houston's pension obligations, Turner outlined a 30-year plan to fund the system in part by issuing $1 billion of bonds.
"We will have fully funded, secure, sustainable and affordable defined benefit pension plans that our employees can rely on and our taxpayers will find fiscally responsible," Turner said Wednesday in a letter announcing the plan. "No other plan does this and takes the issue off the table permanently."
Turner said the plan to attack a $7.7 billion unfunded liability has resulted in "preliminary points of agreement" with the Houston Police Officers' Pension System, the Houston Firefighters' Relief and Retirement Fund and the Houston Municipal Employees Pension System.
The plan, Turner said, would reduce the city's unfunded pension liability by $2.5 billion immediately and eliminate it completely after 30 years.
"Issuance of $1 billion in pension obligation bonds will have the impact of further reducing the unfunded liability beyond the initial $2.5 billion," Turner said. "This will increase the City's debt portfolio, but profits from investments are anticipated to more than offset the 3-4.5% interest we expect to pay for borrowing."
The city anticipates a 7% return on pension investments, with all liabilities recognized as of June 30, 2016.
The decision to issue pension obligation bonds is "tantamount to deficit financing" S&P Global Ratings analyst Bianca Gaytan-Burrell said Thursday in a comment piece on Turner's plan.
"The POB bond proceeds would need to provide a return equivalent to the assumed rate of return (7%) plus the cost of borrowing the funds for the pension funding to keep track with assumptions," she said. "This is particularly important as a trend of lackluster investment returns, together with forecasts of lower expected market returns over the next 10 years, has brought on renewed calls from some financial economists for lower rate-of-return and discount rate assumptions."
Analysts would also have to evaluate how the issuance would play into Houston's ability to meet future capital needs and if it will be structured in a way that provides reduced pension funding early on in exchange for higher, less sustainable contributions in the future, Gaytan-Burrell said.
The announcement came days after a Texas appeals court ruled that Houston is not allowed to overhaul the state-governed firefighter pension system the mayor claims is pushing the city towards insolvency.
The issue has been in the courts since 2014 and was debated in the 2015 Texas Legislature where Turner was serving as a state senator.
Firefighters Fund chairman David L. Keller Jr. did not participate in Turner's Sept. 14 announcement, but Keller issued a statement in support of the process.
"We are not comfortable portraying to the membership or the public that we have reached a deal," Keller said. "However, we have not walked away from the table. We are open to continuing the discussion with Mayor Turner in an attempt to reach a mutual agreement."
Specific language for more formal agreements will be worked out over the next month and then presented to the governing bodies of the three pension systems, the City Council and the state legislature for votes of approval, Turner said. The Texas Legislature, which meets only in odd-numbered years, begins in January.
Pension fund officials were encouraged that Turner stood fully in support of a "defined benefit" plan as opposed to a "defined contribution" plan that shifts risk from the city to employees.
To ensure the city does not find itself in the same place again, a new cost-management component requires costs to stay within a specified "corridor," Turner said.
"It's like a thermostat — 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," he said. "If this type of system had been put in place 15 years ago, we would not be where we are today."
Turner also likened the 30-year payoff plan to a 30-year consumer mortgage with a defined end.
"No longer will we kick the can down the road," he said.
All three pension systems have identified benefit changes that will reduce their individual portions of the unfunded liability, Turner said. The Police fund has identified a $1.1 billion reduction, the Firefighters fund an $802 million reduction and the Municipal Employees fund $700 million.
"These figures represent an overall 33% reduction in the City's $7.7 billion total unfunded liability and that is significant," Turner said.
Houston's growing pension obligations resulted in downgrades from S&P and Moody's Investors Service earlier this year. S&P retained a negative outlook on its AA rating, as did Moody's on its Aa3.
The Firefighters fund has proven particularly troublesome for the city because its provisions were established by the Texas Legislature, leaving the city no ability to adjust terms in a changing economy.
Houston sued the Houston Firefighters' Relief and Retirement Fund in January 2014, seeking a declaration that a state law setting how the fund is operated is unconstitutional.
A state judge sided with the fund in May 2014 and granted it summary judgment.
Houston claimed on appeal the state law violates the separation-of-powers principle in the Texas Constitution by delegating authority to a non-legislative entity, the fund board.
But the 14th Texas Court of Appeals decided Sept. 8 that the lower court's ruling would stand.
The appeals court also rejected Houston's argument that the state law is unconstitutional because it only applies to incorporated municipalities with a population of at least 1.6 million and a fully paid fire department. Houston is the only Texas city that qualifies.
