Public employee pensions across the country are soaring, pitting unions against municipalities. Can Houston mayor Annise Parker bring her city’s most stubborn fund to the bargaining table?
The offices of the Houston Firefighters’ Relief and Retirement Fund are nestled in a wooded enclave near the George Bush Intercontinental Airport. On a cold, wet morning in early February, behind the glass doors and the blond-brick facade, the building offered refuge from the harsh reality outside. For more than 6,500 active firefighters and retirees, the HFRRF itself does exactly that, providing protection against forces that want to reduce their retirement benefits. And recently those forces—once relegated to the realm of argument and public pressure—have turned to a full-scale legal assault.
In January Mayor Annise Parker brought suit against the fund, seeking changes to a thirties-era state law that has left the city powerless to control the amount it must contribute to the firefighters’ retirement. The suit is the second in as many years, and Todd Clark, the fund’s chairman, says he has no intention of bending to Parker’s demands. Sitting in the HFRRF’s second-floor boardroom, Clark dismisses the lawsuits as a political vendetta against the firefighters, who supported Parker’s opponents in the past three elections. He claims that she wants to gain control of the pension and slash its benefits to pay for other city programs. “We’re being attacked by this mayor, and we’ve been attacked since day one,” he says. For her part, Parker claims that she simply wants to have a say in how much the city commits to retirees.
While Houston is faring better than many other cities, it is, like cash-strapped municipalities across the country, confronting an ugly truth: thanks to rising health care expenses and longer life spans, cities are finding it difficult, if not impossible, to afford the open-ended promises made to workers in years past. Pensions like the $3.7 billion managed by the HFRRF are an anachronism in the modern American workplace, where cheaper, “self-directed” retirement plans such as 401(k)s tend to dominate, at least in the private sector. Houston’s firefighters have a defined-benefit plan, which means the fund must pay for employees’ retirement benefits for as long as they live, regardless of the actual cost.
Generous public-sector pension plans have endured because city leaders have realized that boosting retirement benefits is a lot easier than raising salaries. Raises, after all, come out of the current budget. Pensions don’t have to be paid for decades—long after the current leaders are out of office. “It’s just a complete abdication of responsibility,” says Shad Rowe, a Dallas investment manager and a former member of the state’s Pension Review Board. “It isn’t a problem that gets better as you ignore it.”
Parker, having served three terms as city controller, understands the situation better than many elected officials. The city’s problems began in 2001, when then-mayor Lee Brown agreed to increase benefits to such an extent that some employees would receive more in retirement each year than they did while working. Brown claimed he supported the increase because budget constraints had effectively frozen employees’ salaries for years and because the actuarial firm Towers Perrin found that the changes would have little impact on the city budget. It quickly became clear that that was not the case—in 2003 the city faced a billion-dollar pension deficit. (It should be noted that Towers Perrin worked for the firefighters’ pension fund, not for the city. After the deficits surfaced, the city finally hired its own actuarial firm.) Before the 2001 agreement, the city was required each year to contribute to the HFRRF an amount equal to about 13.5 percent of firefighters’ average base pay, which did not include overtime. Given that 15 percent is regarded as ideal by most pension experts, this was a manageable number. But the 2001 contract stipulated that the pension formula take overtime into account, which caused the numbers to balloon. By 2009 the city was required to contribute 29.4 percent of workers’ base pay. The fund, though, which had some leeway because of investment gains, agreed to lower the amount to 23.9, which is what the city has paid since, saving tens of millions of dollars. Still, the city predicts that it will pay $90 million into the fund in fiscal 2015, which is more than Houston spends on libraries or parks or trash collection. (The city contributes about 20 percent of the pension’s funding; the rest comes from employee contributions and investment gains.)
A decade ago Parker’s predecessor, Bill White, shrank the city’s obligations to the police and municipal employee pensions. But the HFRRF has refused to budge. It has had no reason to. The other pensions had large unfunded liabilities—debts they had no means of paying off—which gave the city leverage to hammer out an agreement. The HFRRF, though, weathered the recession relatively well; its unfunded liability of about $490 million sounds like a lot, but the HFRRF remains 87 percent funded, a level many pension experts consider workable.
A state law that pertains only to Houston’s pensions specifies that the city’s contribution rate can’t be adjusted unless all sides agree to talk about it, a provision known as “meet and confer.” As long as the HFRRF refuses to meet, there’s no conferring, and Clark says he has no reason to talk, because any compromise would mean sacrificing benefits. “At the end of the day, the firefighters would lose the hard-earned benefits that were promised from past administrations,” he says.
Compensation of public employees is a three-legged stool comprising pay, health benefits, and pensions. Firefighters in Houston accepted lower pay—they rank 139th among departments nationwide, below departments in Austin, Brownsville, and Plano—in exchange for better retirement benefits. White believes that eventually the city will have to insist on still lower pay for workers if it can’t gain a measure of control over increases in pension contributions. “The more you have to pay out for pensions, the less you have available to pay out for salaries,” he says. “Then you’re not able to attract the people that you need in highly skilled positions.”
While Parker wants to rein in the city’s commitment, she hasn’t proposed cutting benefits for retirees who are already receiving them. She wants the HFRRF to agree to the same changes that White got the other two funds to agree to: reducing benefits for new hires, extending the length of time that employees must work before becoming eligible for benefits, and adjusting the overtime program to reduce its impact on benefits. Clark doesn’t want to consider such concessions; pensions, like unions, hate the idea of tiered pay structures because it undermines solidarity among workers.
Parker’s hands are largely tied by the state law, which prevents city leaders from reneging on promised pension benefits—a law similar to those on the books in many other states. The difference in Houston’s case is that the law includes a provision specific to the city mandating that the HFRRF’s board, which determines what the city pays, must be composed of six firefighters, two citizen members chosen by the firefighters, and two city appointees. As a result, Houston’s contribution is basically dictated by the firefighters. “State law that applies only to Houston is unreasonably restricting our ability to protect taxpayers and keep our commitment to secure and sustainable firefighter retirement benefits,” Parker said in a statement. “We have to have the ability to negotiate these benefits at the local level.”
Unable to bring the HFRRF to the table, Parker turned to the courts, suing in 2012 over the soundness of the pension fund’s accounting. She demanded to see internal data used to set its contributions, which the HFRRF refuses to provide. The city won, the pension fund immediately appealed, and a ruling is pending. Then, in January, Parker filed a second suit, claiming that the board structure, which prevents the city from having any meaningful input in how much it pays into the fund, violates the state constitution.
Other cities have had mixed results in challenging such state controls, but it’s clear that across the country, pensions are under siege. Budget austerity at the federal level has pushed more financial burdens onto the states, which in turn have shifted them to cities. At the same time, many taxpayers, some of whom lost their private-sector pensions years ago (or are too young to have ever had them), wonder why public employees should get such a good deal. Over the past twenty years, most private companies have shuttered their pensions and shifted employees to cheaper 401(k)s, in which the employee and sometimes the employer contribute a relatively modest percentage of the employee’s salary to a retirement account, which is then subject to the ups and downs of the stock and bond markets.
The creators of 401(k) plans did not intend for them to be the sole source of retirement income, and most Americans approach retirement today without knowing if they have enough money to pay their living expenses and, more important, medical bills. Parker has never suggested that she wants to convert the city’s pension plans to 401(k)s, but you can understand why Clark would look at the current landscape and figure that it makes little sense to give an inch. Why surrender to uncertainty just to make the city’s budgeting process easier?
After all, fighting fires is different from most other jobs, and a reminder of that difference is visible from Clark’s office window. On the fund’s grounds, a pink-granite memorial stands, erected in honor of firefighters killed in the line of duty since the Houston department was formed, in 1838. Most accountants or IT consultants or advertising executives don’t risk their lives rushing into burning buildings to save others. That, Clark points out, is why firefighters deserve the benefits they’ve been promised. The physical demands of the job and the exposure to smoke, dangerous chemicals, and potential carcinogens make firefighters a breed apart from most workers. “By retirement, your body is beat up,” Clark says. And firefighters worry that reduced benefits won’t adequately provide for their families if they die on the job.
Clark knows what’s happening in other cities, but he points out that Houston isn’t Detroit. With the oil boom, companies are moving to town, and tax revenue is rising. He believes Parker is fanning public fear to gain control over the HFRRF, which is far better managed than many other pensions. “The problems are manufactured,” he says. “Pensions are the low-hanging fruit, but all pensions aren’t bad.”
The Legislature has shown little interest in changing the law that handcuffs Parker: what elected official wants to vote against firefighters, especially when it’s the city, not the state, that’s spending the money? That’s why Parker is now going through the courts. I ask Clark what would happen if the pension loses the latest lawsuit. “We’ll appeal,” he says, just as the HFRRF did with the city’s last suit. And if they lose either of those at the appellate level, the fund will appeal again. “We’ll go all the way to the Supreme Court if we have to,” he vows, no doubt well aware that every day the fund holds out is one more day that a bunch of new retirees may become eligible for the benefits they were promised. Outside, a cold rain continues to fall.