DALLAS — A last-minute lawsuit challenging the legality of Houston’s $1 billion pension bond sale forced the city to file a disclosure notice to investors as the bonds were pricing Tuesday.

"The city did not mislead anyone," Houston Mayor Sylvester Turner said about a $1 billion pension bond election.
"The city did not mislead anyone," Houston Mayor Sylvester Turner said about a $1 billion pension bond election.

"The suit alleges that because of language in the election proposition, the City misled the voters as to the effect of the election on the revenue limitations of the City Charter and is therefore void," the notice said.

"Because the City is required to comply with the City Charter revenue limitations as a condition for the Attorney General to issue its approving opinion, no case or controversy is presented which would adversely affect issuance of the Bonds. Upon issuance of the Attorney General's opinion in connection with the approval of the Bonds, the Bonds are valid and incontestable under Texas law."

"We’re still moving forward as planned," said Max Moll, spokesman for Houston Controller Chris Brown. "There are people in New York still pricing the bonds. We’ve had over $3 billion of orders for these bonds."

James Noteware, a former Houston housing department director, filed the Friday in state district court, alleging that ballot language in the Nov. 7 election to approve the debt was "materially misleading."

The ballot proposal did not state that the taxes levied to repay the bonds would not be "limited by any provision of the city home rule charter limiting or otherwise restricting the city's combined ad valorem tax rates or combined revenues from all city operations." However the full language for the provision did include that statement, Noteware contends.

The statement means the taxes levied to pay for the bonds will be exempted from the city’s13-year-old revenue cap, which limits the annual growth of property tax revenue to either the combined rates of inflation and population growth, or 4.5%, whichever is lower.

"Omitting the fact that the proposition created a billion-dollar exception to default limits on the city's taxing authority renders the proposition materially misleading and void," the suit claims.

Mayor Sylvester Turner's office rejected the lawsuit’s claim that the Proposition A ballot language said the city would sidestep the revenue cap as a result of the vote.

"There was never any intent to avoid the revenue cap nor are there any facts indicating that we would," Turner said in a prepared statement. "We have able outside counsel who guide the city in demonstrating to the Texas Attorney General that we will not violate the cap, and have done so. So, again, obviously, the city did not mislead anyone."

Jerad Najvar, the attorney who filed the lawsuit on behalf of Noteware, asked the court to assign a judge to the case who can hold a hearing this week on enjoining Houston from proceeding with the bond sale.

"I think it would be supremely arrogant and irresponsible for the city to proceed with the bond sale before the court can decide if the ballot language was misleading or not," Najvar told Reuters in an email.

The bonds, rated Aa3 by Moody's Investors Service, are secured by a direct tax levied on all taxable property in the city.

The proceeds will be used to fund a portion of the unfunded liabilities of two of the city's single employer pension systems with $750 million going to the Houston Police Officers' Pension Systems, and $250 million going to the Houston Municipal Employees Pension System.

The issuance of pension bonds was a key concession made by the city to reach an agreement on pension reform. The city negotiated a variety of changes to benefits and employee contribution requirements with its employees, retirees and local pension boards before seeking state legislative approval for the reforms. Reform legislation authorized the boards of Houston’s police and municipal pension funds to rescind benefit changes if the city did not issue pension bonds.

"Even after its reforms, Houston’s unfunded pension liabilities and costs will remain elevated," according to Moody's. "However, the city has insulated itself from further unexpected cost hikes by implementing a 'cost corridor' framework that calls for a series of cost reductions, including further potential benefit reductions, in the event of future adverse events."

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