Texas Bill Threatens Houston’s Financial Wellbeing
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Commentary

Texas Bill Threatens Houston’s Financial Wellbeing

Legislation to grant mandatory arbitration privileges to the Houston Fire Department could have severe negative impacts on Houston's finances.

The Texas House Urban Affairs Committee is set to consider legislation that would grant mandatory, binding arbitration privileges to the Houston Fire Department. Given some of the major ongoing legal disputes between the city and its firefighters, if enacted, House Bill 2087 could have a profound and lasting impact on the future financial health of the nation’s fourth-largest city and largest fire department in Texas.

Binding arbitration is a quasi-kangaroo court, where a third-party arbiter or panel of arbiters – who have zero expertise in Houston budgeting nor fiduciary responsibility to the citizens of Houston – hear arguments from the city and firefighter representatives on pay disputes, labor contracts, and other collective bargaining issues. After hearing these arguments, the arbiters typically try to find a middle ground between the two parties, or in some cases, completely side with the more compelling argument.

However, because the city has fiscal limitations and a perpetual obligation to balance its budget, any panel decision granting pay increases above what the city can afford means they must raise taxes or cut services elsewhere based on a decision rendered by an unaccountable arbiter.

The issue of binding arbitration is one that many local governments have been dealing with for years. But Houston’s situation is made more serious by outstanding lawsuits that are already threatening the city’s finances.

One such lawsuit revolves around the impasse in contract negotiations in the wake of Proposition B,  passed by Houston voters in 2018, which required that firefighters be paid the same as their police counterparts. The city filed a motion to have that proposition be declared unconstitutional, and the Harris County District Court agreed. The firefighters have appealed that decision, and that appeal is currently still awaiting a conclusion. If the appeal overturns the Harris County District Court decision, thus implementing Prop B, Houston would be required to pay around $100 million in extra annual pay raises to its firefighters, plus additional retroactive back pay to Prop B’s effective date.

A second lawsuit sought to overturn pension reforms passed by the state legislature in 2017, Senate Bill 2190. Houston recognized that it had been underfunding its pensions through poor assumption setting and worked with the state to enact legislation that would bring sweeping changes to its systems. This included dropping the assumed rate of return down from  8.5 percent to 7 percent, increased retirement eligibility ages, put new restrictions on receiving retiree cost of living adjustments, and set the city on a better path to pay down its pension debt. Paying down that debt – by consistently paying actuarially determined contributions each year – was made a matter of state law with SB 2190 in 2017. This means that the city has a firm commitment to make the necessary payments to their pension plans.

While many applauded the changes SB 2190 brought about, the Houston firefighters remained in opposition to the bill and filed a suit against the state in July of 2019. The firefighters won that case in October of 2020, successfully arguing that the Texas Constitution granted the ability to change those types of assumptions only to the governing body of the local pension system, not to lawmakers. Although the lawsuit only addressed the assumption changes, the court’s decision ultimately overturned the entirety of the changes in SB 2190, and the matter is currently on appeal.

These two lawsuits, plus the current impasse in negotiations between the city and their firefighters, leave the future finances of Houston in a precarious position. If Proposition B is upheld, and an arbiter rules in favor of the firefighter’s requests for pay increases, Houston could be looking at hundreds of millions of dollars in additional costs. One of those costs would be in additional pension contributions. Houston currently contributes over 32 percent of each firefighter’s pay to the Houston Firefighters’ Relief and Retirement Fund. Additional pay increases have the double-whammy effect of also increasing the city’s required contributions into the plan, which already sat at $84 million in FY 2020.

HB 2087 comes during a major inflection point for Houston and its firefighters. Because the bill is so carefully crafted to only affect the city of Houston, it seems the proposed legislation is attempting to insert the state into the negotiations of one of its local governments and some of its employees. It is unclear what legitimate public policy rationale state legislators would have for intervening in local labor disputes and creating a preferential treatment for one employee cohort in one Texas city, especially when it could so easily hamstring the city’s ability to control its own fiscal destiny, risking its future service delivery and quality of life for its citizens and public safety personnel alike.

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