DALLAS The Houston City Council last week approved a plan to use the citys convention center hotel as collateral to plug part of a $2 billion shortfall in the citys pension fund.
Under the proposal, the citys hotel corporation would assign ownership of a promissory note including the deed of title for the 1,000-room Hilton Americas-Houston Hotel over to the city. The city, in turn, would assign the title over to the pension fund.
Essentially, rather than paying cash to fill the shortfall, the city was searching for assets of value, said Judy Gray Johnson, the citys director of finance and administration. We basically asked the question, Do we have something that is worth money now, or will be in the future. Thats when we came up with the idea of the convention center hotel.
The hotel was financed in 2001 by the issuance of $310 million of insured sales tax and hotel tax revenue bonds issued by the city. The bonds will not be repaid until 2033.
Obviously, we cant transfer ownership of the hotel until the bonds are paid off, said Johnson. The note could not be sold until after all debt service is repaid on the bonds.
The note will be held as a $300 million asset of the Municipal Employees Pension System.
The proposal calls for the city to pay annual interest at 8.5% about $25.5 million to the pension fund.
The interest on the notes can be deferred, Johnson said. The city can pay the interest, or elect to issue deferred interest certificates, which would be held as assets of the pension fund.
According to Johnson, the first interest certificates issued by the city would not have to be collateralized to the hotel. However, after the first $150 million of interest, the city could later issue collateralized interest certificates.
If the city defaults on its interest payments to the pension fund, the pension fund would take ownership of the hotel and its assets after bondholders are repaid.
The rates on the collateralized interest certificates were structured to be attractive to the market, so that the pension fund could, if its managers chose, sell them to receive up-front cash.
Under Texas law, the note issued by the city to the pension fund constitutes a pension fund bond.
The only difference is that the pension fund cant sell the collateralized note only the interest certificates, Johnson said.
According to Houston Mayor Bill White, the hotel transfer will be better for the citys credit because it keeps Houstons bonded indebtedness.
Ed McGlade, an analyst with Standard & Poors, said that while the hotel transfer wont hurt Houstons credit rating, it wont necessarily help it.
It really depends on how much debt theyre talking about issuing before it becomes a problem for the city, he said. They have other things that we believe are more pressing than the pension fund. For instance, they have a tax cap election coming up Tuesday. Thats the biggest risk we see for the city, probably followed by their pension fund issues.
Houston has two side-by-side ballot items that could place pressure on city revenues, McGlade said. Proposition 1, posed by White and the City Council, would place a revenue cap of 4.5% or the cost of inflation and population on all property tax and water and sewer rate increases.
Proposition 2, proposed by a group called Citizens for Public Accountability, would limit city spending to the previous years revenue plus the cost of inflation and population growth. Unlike the city plan, Proposition 2 places caps on the growth of all city spending, including that for enterprises such as the convention center and the citys airport system.
Houston Controller Annise Parker wrote in an Aug. 30 memo that while the hotel transfer fixes an immediate need for assets for the pension fund, she does not view the solution as a long-term option.
Although on paper it will result in a $300 million decrease in the unfunded pension liability, this is not a cash transaction, she said. The reduction is achieved through some creative financial engineering, none of which involves $300 million in currently available assets or cash flow to HMEPS this should not be the final solution.
In addition, the proposal calls for traditional pension bonds. This year, Houston will issue $33 million of taxable pension fund bonds, which will be backed by its general obligation pledge. The city will increase the amount of pension bonds issued in 2005 to $36 million, topping out at $39 million of pension bonds issued for the fund in 2006.
The city also has a plan to issue pension fund bonds for the Houston Police Officers Pension System. In addition to annual cash payments, the city will issue $36.645 million of bonds for that system this year, and $55.9 million next year.
Officials are reviewing the results of a request for proposals for a bond team to handle the pension fund issues.
