Greater Houston Partnership (GHP)

Municipal Finance Resource Center Houston

Municipal Finance Resource Center

Houston is a vibrant, dynamic city. With an excellent quality of life and a thriving business community, it is a great place to live and work. In order to maintain this standard of living, it is critical to ensure the fiscal health of our region.

Houston's fiscal health impacts our economy and influences long-term economic trends. It is imperative for the Houston community to become familiar with the current situation and the data that is driving conversations on municipal finance in order to protect the economic growth of our region.

The Municipal Finance Resource Center provides context and a foundation for the Houston business community to engage in a smart conversation on this complex topic.

Municipal Finance Task Force Publications

The Greater Houston Partnership's Municipal Finance Task Force was formed in 2014 to identify the City of Houston's fiscal issues and propose methods to address them. The Task Force aims to ensure that the City of Houston can uphold its promise to public employees, achieve long-term financial stability and improve service delivery levels through a balanced General Fund. The Task Force is producing a series of publications discussing various elements of the state of the City’s finances.

Across the States: How Municipalities Are Coping With Inflows and Outflows

In June 2014, the Municipal Finance Forum featured experts from PEW, Brookings, and Rice University, as well as municipalities and states from across the country that have tackled financial issues. You can view the presentations and highlights from the event below.

David Draine, Senior Researcher, the Pew Charitable Trusts
David Draine Municipal Finance Presentation

  • States’ challenges to meeting their pension obligations preceded the Great Recession, but have gotten much worse since the economic downturn
  • 24 states have pension systems that are less than 2/3 funded
  • State pension plans were shortchanged by a total of $21 billion in 2012
  • Comprehensive pension reform requires three things:
    • A credible commitment to paying off the existing pension debt
    • A pension plan that will put workers on a secure path to retirement while being affordable and sustainable
    • Governance policies to ensure full pension contributions, manage risk, and deal with future funding shortfalls
  • Without the fiscal discipline to make contributions to pay for both future benefits and to pay down the existing pension debt, no reform effort will work

Dan Liljenquist, Former Utah State Senator and Chair of the Senate Retirement Committee, Utah Senate
Dan Liljenquist Municipal Finance Presentation

  • Because of the 2008 crash, Utah’s pension funds lost 22.3% of their value and the state’s required contribution rates increased by 75%
  • Utah would have had to commit 10% of its General Fund for 25 years to pay for the 2008 crash if it did not make changes
  • Utah’s pension obligations would have cost the state 8,000 school teachers for 25 years and the increased contribution from the state that would have been necessary would have equaled 19% of the state’s public education funding at that time
  • Utah was determined to meet their obligations, pay the full actuary recommended contribution rate, eliminate pension related bankruptcy risk by paying off the unfunded liability as quickly as possible, and create a new system for new employees with lower costs and predictable employer contributions
  • Senator Liljenquist expects that Utah’s retirement contribution will peak about 2017 and then gradually decline

Mark Dingley, Deputy Treasurer and Special Counsel, Office of the General Treasurer, State of Rhode Island
Mark Dingley Municipal Finance Presentation

  • Rhode Island conducted an actuarial study to examine the real numbers of their pension systems in 2011. Based on these numbers Rhode Island:
    • Reduced its discount rate from 8.25% to 7.5%
    • Adopted realistic mortality tables
    • Increased unfunded liability from $4.7 billion to $6.9 billion
    • Increased annual costs from $320 million to $610 million
  • Rhode Island expressed the critical public services that it would need to cut in order to make their pension payments
  • After Rhode Island enacted comprehensive pension reform in 2011, the state:
    • Reduced its unfunded liability by $3 billion
    • Reduced its actuarially determined annual required contribution (ARC) by $270 million
  • “Most importantly, Rhode Island created a sustainable solution based on realistic numbers”

Pete Constant, City Council Member, San José, California
Pete Constant Municipal Finance Presentation

  • San José faced a decade of budget deficits from FY 2002-2003 to FY 2011-2012
  • The city was forced to close public services because of their tremendous budget issues
  • Retirement costs increased from $72 million in FY 2003-2004 to $272 million in FY 2013-2014
    • This was a $200 million annual increase and $925 million cumulative increase
  • San José was spending more in each department, but had to decrease staffing
    • The San José Fire Department (SJFD) decreased staffing by 5% in FY 2013-2014 compared with FY 2003-2004, but SJFD’s budget increased by 50% in FY 2013-2014 compared with FY 2003-2004
    • The San José Police Department (SJPD) decreased staffing by 16% in FY 2013-2014 compared with FY 2003-2004, but SJPD’s budget increased by 43% in FY 2013-2014 compared with FY 2003-2004
  • The city was paying nearly double for every police officer and fire fighter because of the salary and pension costs
    • On average, the employer was paying $123,891 in cash compensation for an SJPD officer and $95,983 in employer paid benefits
  • San José accomplished major financial reform in 2011 and passed a pension reform ballot measure in 2012
    • The city has saved $22 million so far, not counting savings for new employees
    • The city has achieved a $200 million reduction in other post-employment benefits (OPEB) liability to date
    • The city has been able to significantly restore public services

Understanding the Region’s Inflows and Outflows: 2005-Present

The University of Houston’s Hobby Center for Public Policy in collaboration with Prototype, Fusion & Modeling, LLC (PFM) designed a dynamic, interactive, three-dimensional visualization of key economic variables related to pension liabilities across the 11-county Houston region. This modeling program was presented at GHP’s Leadership Forum on Municipal Finance. The publicly available data displayed in this program is a snapshot over time of various cities’ and counties’ public finances, enabling the user to begin to see the financial patterns and challenges that municipalities face. Using this program, the various scenarios and variable combinations can be seen in real time instead of solely relying on static forms, such as bar graphs or pie charts, to tell the financial story. This program is very beneficial for helping to gain an understanding of the financial situation of the municipalities in our region.

Jim Granato, Ph.D., Director, Hobby Center for Public Policy

  • “Cross-country evidence, as well as evidence at the municipal level, demonstrates that there are various and growing amounts of public expenditures that threaten to crowd out other essential services and at the same time raise future tax liability”

Elena Farah, Ph.D., Director of Sustainable Public Finance, Laura and John Arnold Foundation

  • “Municipalities must remain fiscally sustainable by ensuring that long-term obligations do not exceed governments’ ability to pay”
  • Total long-term debt must be compared to both the tax base and the general operating budget
    • It is important to be aware of the trends of debt and revenue
  • Both the funded ratio and ARC are highly dependent on underlying assumptions, such as investment returns and mortality
  • A plan sponsor may pay the full ARC, yet its pension system may not be properly funded
  • Responsible payment plans must include:
    • Appropriate assumptions about critical variables such as investment returns and mortality
    • Reasonable pension debt repayment schedules not to exceed a closed 30-year period
  • Houston’s general obligation and pension debt are equal to 3.2 times the city’s general fund revenues
  • Houston’s debt is growing faster than revenues
  • Houston’s pension system is 77% funded based on the current assumption of 8.5% annual returns
  • Public pension debt is now 35% larger than general fund revenues
  • Houston’s pension contributions have more than doubled since 2001, consuming nearly 1/5 of general fund revenues
  • “The combination of a large and growing pension debt and governments’ reduced ability to pay will continue to strain state and local budgets”

Terry Mayes, Chief Technology Officer, Prototype, Fusion & Modeling, LLC; Manager, Concept Visualization Lab, University of Houston; Instructor, Certified Public Manager Program, Hobby Center for Public Policy

  • Galveston and Sugar Land are becoming more affluent and thus growing their tax base
  • The Woodlands and Pasadena are both increasing in population, but decreasing in tax base per capita

A Closer Look at the City of Houston: From Appraisals to Outlays

Glen Rosenbaum, Partner, Vinson & Elkins

  • “As the tax base moves to the suburbs, it is tough for cities to get the necessary revenue”

Kelly Dowe, Chief Business Officer, City of Houston
Kelly Dowe Municipal Finance Presentation

  • Houston’s General Fund is mainly tax supported and to an extent fee supported
    • In FY 2014 48% from property tax, 31% from sales tax, 9% from franchise tax, and 12% from other revenue
    • In FY 2015 49% from property tax, 31% from sales tax, 8% from franchise tax, and 12% from other revenue
  • The tax cap limits the growth of the City’s property tax revenue to the lesser of population and inflation growth or 4.5% growth
    • City officials are allowed to raise an additional $90 million of revenues above the limit level for public safety though
  • Public safety is the majority of General Fund
    • It accounts for 59% of the estimated FY 2014 budget and 58% of the proposed FY 2015 budget
  • The budget does not have much room to decrease services besides public safety personnel and efficiency changes
  • Actuarial City Contribution as a percent of payroll increased dramatically for the three pension funds from FY 2002 to FY 2005
  • A State constitutional amendment was passed in November 2003 to prohibit local municipalities from reducing accrued pension benefits
    • A general election was held in May 2004 where citizens of Houston elected to opt out of the State constitutional amendment
    • Although available, the option to reduce accrued pension benefits has not been utilized
  • The position of Chief Pension Executive was created to enhance communication among all stakeholders and promote better decision making
  • The City has issued approximately $608 million in Pension Obligation Bonds since 2003
  • “General Fund shortfalls are coming in next few years for the City”

John Diamond, Ph.D., Edward A. and Hermena Hancock Kelly Fellow in Public Finance, James A. Baker III Institute for Public Policy
John Diamond Municipal Finance Presentation

  • Houston public employee pensions are underfunded by $3 billion as of July 1, 2012:
    • Houston Municipal Employees Pension System (HMEPS) unfunded accrued liabilities = $1.6 billion
    • Houston Police Officers’ Pension System (HPOPS) unfunded accrued liabilities = $0.9 billion
    • Houston Firefighters’ Relief and Retirement Fund (HFRRF) unfunded accrued liabilities = $0.5 billion
  • Other post-employment benefits (OPEBs) are underfunded by $2.1 billion according to the 2013 City Comprehensive Annual Financial Report (CAFR)
  • The City of Houston chronically contributes less than the ARC
    • “The City will have to increase payments in next few years, but it is very difficult to see this occurring because the City is already running a deficit”
  • “Borrowing money is the worst idea”

Understanding the Pension Discussion

  • Melissa Noriega, Former State Representative and Former City of Houston City Council Member
  • Todd Clark, Chairman of the Board of Trustees, Houston Firefighters’ Relief and Retirement Fund
  • Ralph Marsh, Executive Director, Houston Firefighters' Relief and Retirement Fund; President, National Association of Government Defined ContributionAdministrators (NAGDCA)
  • Terry Bratton, Chair, Houston Police Officers’ Pension System
  • John Lawson, Executive Director, Houston Police Officers’ Pension System
  • Sherry Mose, Chair, Houston Municipal Employees Pension System
  • Rhonda Smith, Executive Director, Houston Municipal Employees Pension System
  • 6-year term-limits make long-term outlooks very difficult because elected officials often want to focus on short-term issues
  • Police and fire fighters do not get social security
  • State and local economies benefit from retirees spending the money they receive from their pension payments
    • Over time, the economy will feel the impact of the shortfall in retirement funding
  • In Houston, about 25% of fire fighters are at retirement age, about 30% of police officers are at retirement age, and about 22% of municipal workers are at retirement age

Featured Speaker

Bill King, Columnist, Houston Chronicle
Bill King Municiapl Finance Presentation

  • Houston has about $3.7 billion of unfunded liabilities right now
  • The City’s debt is not just the $3.7 billion in unfunded liabilities, but also includes Pension Obligation Bonds (POBs)
    • The real debt is over $4 billion
  • HFRRF is 86% funded, HPOPS is 75% funded, and other employees systems are 53% funded
  • In 2023, the ratio of City to Employee Contribution for the funds will be as follows:
    • Fire- 3.5:1
    • Police- 4.4:1
    • Other Employees- 24.5:1
    • Total- 6.2:1
  • In 2013, about 35% of property taxes went to paying the City’s ARC
    • In 2023, it is projected that the retirement plans would require 43% of property taxes to go toward paying for the plans
  • “Long-term degradation in services and infrastructure or significant property tax increase is in the City’s future”

The Big Picture

  • Are Public Pensions Keeping Up With the Times? - Richard W. Johnson, Matthew M. Chingos, and Grover J. Whitehurst – Brookings Institution
  • This paper discusses how retirement plans for public employees in the United States are financially unsustainable in most states because of years of underfunding and less-than-expected investment performance, and undesirable in terms of recruiting and retaining the best public employees.

  • Improving Public Pension: Balancing Competing Priorities - Patten Priestley Mahler, Matthew M. Chingos, and Grover J. "Russ" Whitehurst – Brookings Institution
  • This paper lays out a clear framework for evaluating proposed reforms to public pension systems with the goal of balancing the interests of public employees and taxpayers, which can sometimes seem at odds. The authors believe that any well-designed pension plan will strive to meet three goals: providing retirement security to workers, ensuring fiscal sustainability, and maintaining or improving the productivity of the public-sector workforce. They assert that a collective defined-contribution approach to pension reform combines many of the advantages of the defined-benefit plan currently favored in the public sector with those of the defined-contribution plan prevalent in the private sector.

  • A Widening Gap in Cities - The Pew Charitable Trusts
  • This report analyzes funding levels for pensions and retiree health care for municipalities across the United States.

  • The Funding of State and Local Pensions: 2012-2016 - Alicia H. Munnell, Jean-Pierre Aubry, Josh Hurwitz, and Madeline Medenica – Center for Retirement Research at Boston College
  • This study focuses on the funded status of state and local pensions. It reports on the ratio of assets to liabilities, reports on the sponsors’ required payment, shows liabilities valued at the riskless rate, projects funded ratios going forward, and discusses the future landscape of pensions at large.

  • Gauging the Burden of Public Pensions on Cities - Alicia H. Munnell, Jean-Pierre Aubry, Josh Hurwitz, and Mark Cafarelli – Center for Retirement Research at Boston College
  • This study focuses on the comprehensive cost of pensions, which includes not only the direct costs of the contributions to locally-administered plans, contributions to state non-teacher plans, and contributions to state teacher plans on behalf of dependent school districts, but also includes the contributions made by independent school districts that serve city residents and contributions that city residents make to county plans.

  • State and Local Pension Costs: Pre-Crisis, Post-Crisis, and Post-Reform - Alicia H. Munnell, Jean-Pierre Aubry, Anek Belbase, and Joshua Hurwitz – Center for Retirement Research at Boston College
  • This brief analyzes the pension costs before the financial crisis, after the financial crisis, and after reforms for a sample of 32 plans in 15 states, including the Employees Retirement System (ERS) and Teacher Retirement System (TRS) in Texas.

  • State Public Pension Investments Shift Over Past 30 Years - The Pew Charitable Trusts and Laura and John Arnold Foundation
  • This paper looks at the shift in investments of public pension plans in the past several decades. Public pension plans have shifted funds away from fixed-income investments such as government and high-quality corporate bonds. During the 1980s and 1990s, plans significantly increased their reliance on stocks, also known as equities. During the past decade, funds have increasingly turned to alternative investments such as private equity, hedge funds, real estate, and commodities to achieve their target investment returns. Although increased investments in equities and alternatives could result in greater financial returns, it could also result in increased volatility and the possibility of losses on these assets. Thus, a sound investment strategy is critical for the retirement security of 14.5 million state and local employees who have earned more than $4 trillion in expected benefit payouts, while public pension plans have approximately $3 trillion in assets to make these payouts.

Across the States

  • Texas Fact Sheet on Pension Reform - Center for Retirement Research at Boston College
  • This analysis focuses on the pension and retiree health costs of the Texas Employees Retirement System (ERS) and the Teacher Retirement System (TRS), which make up nearly 80 percent of public plan active membership in the state.

  • The Fiscal Health of State Pension Plans: Funding Gap Continues to Grow - The Pew Charitable Trusts
  • The data in this fact sheet shows that the gap between what state and local governments have promised in pension benefits to their workers and the funding to meet those obligations continues to widen.

  • Pension Politics: Public Employee Retirement System Reform in Four States - Patrick McGuinn – Brookings Institution
  • This paper analyzes the pension reform efforts in Utah, Rhode Island, New Jersey, and Illinois as case studies in how to enact pension reform. Utah and Rhode Island enacted significant structural changes to their pension systems while New Jersey and Illinois enacted more limited changes.

  • The State of Retirement: Grading America’s Public Pension Plans - Urban Institute
  • The pension report card and interactive map grade state-administered retirement plans based on their financing; how much retirement security they provide to short- and long-term employees; and the workforce incentives they create for younger, older, and mid-career employees.

  • Texas Fact Sheet- 2012 The Widening Gap Update - The Pew Charitable Trusts
  • This fact sheet looks at Texas’ pension and retiree health benefits liabilities and contributions.

  • Why Texas policymakers must deal with pensions - John Diamond – Baker Institute Blog – Houston Chronicle
  • This piece discusses the problems with the estimated projected investment returns of pension accounts and the estimated liabilities owed by the City of Houston.

  • Rhode Island's Winding Road to Serious Pension Reform. - Charles Chieppo – Governing
  • This article discusses Rhode Island’s 2011 pension reform legislation and the subsequent efforts to resolve the lawsuits filed by public sector unions through mediation. A settlement was reached in February 2014; however, the police officers’ union rejected the deal and the court has ordered all parties back into mediation.

Houston Region

  • City of Houston's Pension Dilemma - John Diamond – James A. Baker III Institute for Public Policy
  • This presentation examines the City of Houston’s current and projected funded ratios of the pension systems as well as the cash flow requirements needed to meet the actuarially required pension contributions.

  • Next Mayor Must Fix Pension Problems - John Diamond – Houston Chronicle
  • This article discusses the City of Houston’s unfunded pension liabilities.

  • City of Houston Retired Employees Obligations (2011) - Bill King
  • This presentation examines the City of Houston’s pension and retiree health benefits obligations.

  • Series of Public Pension Articles - Bill King – Houston Chronicle
  • These articles discuss the City of Houston’s financial health and specifically focus on the city’s pension plans.

The Greater Houston Partnership Salutes Our Executive Partners