 Those are the numbers in the city’s 2015 financial report, published New Year’s
Eve. Bill King, who just lost a close runoff mayoral election to Sylvester
Turner on Dec. 12, said the city released the report on the latest date
allowable by law.
One observer noted the report was actually ready 10 days before the election, in
which the city’s disastrous finances were the primary issue.
King pointed out the city’s net worth was virtually wiped out overnight, going
from $3.1 billion to a mere $147 million from 2014 to 2015. What little money
the city has is tied up; in fact, Houston is $5.9 billion short of commitments
already made.
The drop was caused almost entirely by new nationwide accounting rules meant to
force state and local governments to acknowledge the size of their pension
debts.
“According to the new report, taxpayers actually owe their employees over $5
billion for the pensions promised them over and above the amount that has been
set aside in the pension trust funds,” King emailed supporters Jan. 4. “In other
words, to fully fund the pension promises that the City had made through June
30, 2015, the City would have to come up with an additional $5 billion plus.”
King is referring to a figure known as net pension liability. Houston’s went
from $1.2 billion to $5.6 billion from 2014 to 2015, reflecting those accounting
changes.
Even that figure understates the problem. The new financial statements list $7.7
billion Houston owes for its retirees: on top of the $5.6 billion owed to
pension funds, there are $587 million worth of pension bonds outstanding, plus
$1.5 billion owed for retiree health care (which used to be buried in a
footnote, but now goes right on the balance sheet).
By comparison, the city’s equity in all of its infrastructure is just $4.8
billion. If you throw in all the city’s cash and other liquid assets — another
$4.4 billion — you’d have just enough to offset the pension debt.
That just leaves all the rest of the money the city owes. Houston has $11.6
billion in bonds outstanding and total liabilities of $22.2 billion. That’s $3
billion more than Detroit owed when it declared bankruptcy.
City Controller Ronald Green acknowledges the comparison in the report, writing,
“I have been asked several times over the last year or so, ‘Is Houston going to
end up like Detroit?’ To me, that’s inconceivable.’”
Houston is three times bigger than Detroit, of course. However, the real pension
debt is also far larger than even the new-and-improved figures in the official
statements. The real market value of Houston’s unfunded pension liability is
$13.7 billion, according to a study published last year by Joshua Rauh, a
finance professor and Hoover fellow at Stanford University.
The biggest reason the official figures still understate the size of the debt is
that despite the accounting reforms, the local pension funds are still using
some of the highest discount rates in the country. That is, the pension funds
for Houston firefighters and municipal employees both assume their investments
will grow at 8.5 percent annually forever. (The police fund is using a discount
rate of 7.08 percent, more in line with other funds around the country.)
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Hilariously, the city simply refused to accept the 8.5 percent
discount rate the municipal workers fund used, asserting “the
assumption is no longer valid.” So the city recalculated the debt at
8 percent, which added $234 million to the total owed.
The actual investment returns are much lower than projections. The
police and fire funds, for example, made just $87 million on $8.7
billion in investments last year — a return of just 1 percent. The
city workers did slightly better, at 3 percent.
Under the new rules, investments are factored into the calculation
for annual pension expense.
The traditional way of calculating the pension expense for a year
was just to total up the amount going out the door to pensions each
year. However, this was a problem, given Houston’s pronounced bad
habit of skipping payments and otherwise kicking the can down the
road.
Last year, for example, Houston paid $430 million to the pension
funds, thanks to can-kicking deals reached with the unions.
King notes the properly accounted pension expense “was a staggering
$689 million, much higher than any of us had estimated…. This was
about equal to the budgets of Public Works, Solid Waste, Housing and
Community Affairs, Parks and Library departments, combined.”
Neither figure would even cover the annual interest on the debt,
which was $1.19 billion last year. Officials had planned for
investment returns of $843.5 million to help cover that interest,
but the pension funds only made $161 million combined.
So the debt grows ever larger.
That sort of shortfall is one reason the city workers union now has
just 54 percent of the assets it needs to pay the benefits it owes,
while the police pension fund is just 61 percent funded.
RELATED: Houston cutting road repairs in ’16, pensions to blame
The classic argument in favor of public pensions is that governments
are big enough to ride out downturns in the market, so they can
provide retirees a stable income. That was true when the typical
pension was the size suggested by the word “pensioner.” But it’s
dubious now, as the union-controlled pension funds are now bigger
and arguably more powerful than the local government itself, at
least when it comes to union interests.
Houston unions have gotten state lawmakers to block local officials
from imposing any reforms.
And the three pension funds are sitting on some $10.6 billion in
assets, not even counting the billions they’re owed. The city, by
comparison, has $300 million in cash, and it’s spoken for.
As the pension funds get bigger, the city’s exposure to volatility
increases. One bad year in the market can be instant disaster for
the city.
In 2014, the city owed the police pension fund $1.6 billion. Yet
thanks to weak returns — and an adjustment in assumptions to
accommodate lowered expectations — just one year later, the city now
owes the police fund $2.6 billion.
It may be too soon to say Houston is facing insolvency, but it’s no
exaggeration to say that everything the city owns is actually in
hock to the unions.
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