Houston Facing Pension Crisis

Commentary

Houston Facing Pension Crisis

In this report, Josh McGee and Michelle Welch of the Arnold Foundation reveal a bleak picture of Houston’s pension systems. The city’s three major pension plans are unfunded by at least $3.1 billion, which is $1 billion more than the city’s total general fund revenue. As a whole, Houston’s pensions are only 75 percent funded.

Several factors contribute to the pension problem. The most important factor is the city’s failure to fully pay the Annual Required Contribution each year since 2006. Additionally, its pension systems adopt optimistic investment return assumptions that are among highest in the nation, ranging from 8 to 8.5 percent. The report finds that lowering the assumed rate of return to 7 percent would drop the plans’ funded ratio from the current 75 percent to 63 percent and would nearly double the unfunded liability. This also means that pension debt, and consequently contributions, will likely increase substantially in the future when actual investment returns fall short of the plans’ unrealistic assumptions.

The report warns that Houston may follow in the footsteps of Chicago unless it acts soon to contain its pension debt. Possible actions include negotiating changes directly with workers, fully funding the pension systems, paying off the pension debt in 20 years or less, revaluating risky assumptions, and improving accountability and transparency.

To read the full report, go here.

Truong Bui is a policy analyst at Reason Foundation, where he works on the Pension Reform Project.