The City of Houston closed today on a $1.005 billion pension obligation bond issuance that put the gift wrap and bow on a historic and hard-earned pension reform package that will benefit city workers and taxpayers.
Today’s sale of the bonds to investors allowed the city to deliver $250 million to the Houston Municipal Employee Pension System and $750 million to the Houston Police Officer Pension System, making good on the promises made to the systems in exchange for $1.8 billion in reduction of future benefits that the two systems agreed to.
Mayor Sylvester Turner crafted and then followed through on a solution to the city’s pension obligations woes that had eluded a cure for 17 years.
“With this sale, the residents of the City of Houston will end 2017 knowing their City is on much stronger fiscal footing than when the year began,” said Mayor Turner. “Our city first responders and employees can also go into the holidays knowing their pensions are safe and will be available to them when they retire.”
Completion of the pension reform work took place despite a failed last-ditch effort by opponents to thwart the reforms through a lawsuit.
More than three quarters of voters in the November election in Houston approved the sale of the bonds.
Earlier this year the Texas Legislature approved the reform effort with two-thirds, bipartisan majorities and Gov. Greg Abbott signed it into law. City Council had approved the plan 16 to 1 and key members of the business community gave their support.
The total of $1 billion in payments to the pension funds was for loans made by the City.
City employee pensions had suffered from more than 15 years from underfunding and payments out of the reach of city budgets, but no mayor before Turner had been successful in reaching a compromise with the employee groups and attaining legislative approval.
The unfunded pension liability reached as high as $8.2 billion and cost the City an additional $1 million per day through 2017. The pension crisis threatened the financial solvency of the City and could have forced lay-offs of thousands of employees.
Yet the reform effort succeeded without a tax increase or a large infusion of city revenue.
Also, lowering the city's pension liability changed the city's financial position to positive $1.9 billion in Fiscal Year 2017 from negative $95 million in Fiscal Year 2016.
The bond offering, which was issued in a favorable interest rate environment, achieved an all-in rate of 3.97% and attracted investors new to the City’s credit in large part because of the innovative reform measures.
The overall reforms will eliminate the $8.2 billion unfunded liability of the three pension systems over 30 years. The reforms include an innovative “cost corridor” concept that controls costs for the City. The corridor serves a risk sharing mechanism: If investments perform too far below established levels, the pension boards will cut benefits or increase employee contributions to bring costs in line.
Under the plan, which uses a more realistic 7 percent rate of return on investments, the City is required to meet its annual contribution until the unfunded liability is fully paid off in 30 years. The pension reform is a comprehensive package that experts have called a "national model.”
In November, Moody’s rating service cited voter approval of the bonds as a major factor in removing the negative outlook on the City’s credit rating. If the sale had not been completed, $1.8 billion in benefit reductions agreed to by the employee pension boards could have been rescinded, destroying much of the pension reforms.
“As the City seeks to recover from Hurricane Harvey, the worst that could have happened is the loss of historic pension reforms we reached earlier this year,” said Mayor Turner. “With this sale on the books, we can move forward knowing we have overcome one of the biggest hurdles to a fiscally sound city and focus on building a greater, more equitable city for our residents.”
“We can now say Mission Accomplished. This has been an incredible year and I am so proud of Houston, Texas,” the mayor added.