Court dismisses constitutional challenge to Houston pension reform law

A Texas appeals court on Tuesday dismissed claims in a lawsuit challenging the constitutionality of a 2017 state law aimed at rescuing Houston's underfunded pension funds.

A three-judge panel reversed a 2020 district court ruling in favor of the city's Firefighters' Relief and Retirement Fund, which claimed the law, known as Senate Bill 2190, was unconstitutional.

Bloomberg News

"Because we hold that the fund's as-applied constitutional claim is facially invalid, the city defendants' immunity from suit was not waived, and the trial court lacked subject-matter jurisdiction over the city defendants," the appeals court opinion stated.

The firefighters' fund, which unsuccessfully sued over the law in 2017, filed a subsequent lawsuit against the city in 2019, two years after the law took effect. Both lawsuits claimed the law was unconstitutional because it infringed on the pension fund board's "exclusive authority" to select an actuary and adopt actuarial assumptions for the retirement system. However, the first case, which was ultimately dismissed, asserted a facial challenge to the law's constitutionality, while the second lawsuit based that claim on how the law was applied to the fund since taking effect. 

In its opinion, the appeals court said the pension fund has a "nonexclusive duty" to adopt sound actuarial assumptions and the legislature must ensure the funding of public retirement systems is based on sound actuarial principles.

 "SB 2190 harmonizes the fund's duties with the legislature's responsibility to ensure that the fund is financed based on sound actuarial principles," it added.

The ruling marked the second time a state appeals court has upheld the law's constitutionality, a statement from Houston Mayor Sylvester Turner noted. 

"The city of Houston has consistently maintained the constitutionality of the historic pension reform and welcomes the appeals court ruling," Turner said, "The firefighters' pension is now 93% funded — compared to just 80% funded pre-pension reform — and is actuarially sound."

The firefighters' fund board "strongly disagrees" with the appeals court's opinion and will ask the Texas Supreme Court to hear the case, according to a statement from Chairman Brett Besselman.

Houston sold $1 billion of pension bonds in 2017 to fund a portion of the unfunded liabilities of the city's police and municipal retirement systems in conjunction with the pension reform legislation. 

The city's unfunded pension liability for its three retirement systems, which was as high as $8.2 billion, is currently less than $1.5 billion, according to the mayor's statement. 

The law sets a 7% rate of return on investments for calculating actuarial assumptions and requires Houston to meet its annual contribution to eliminate the unfunded liability in 30 years.