Fitch Releases Preliminary Analysis of Pension Reform Plan

According to Mayor Sylvester Turner’s communication staff Janice Evans released that in the first analysis of Mayor Sylvester Turner’s pension reforms by a financial market expert, Fitch Ratings writes the proposal “includes reforms to benefits and contribution practices that could improve the sustainability of the city’s pensions.”  Fitch also comments on the plan’s use of Pension Obligation Bonds, noting this is not deficit financing because the POBs will replace an existing liability rather than as a substitute for the City’s required annual pension contributions.

“This early validation from a global leader in credit ratings and research is encouraging and a sign we are on the right track,” said Mayor Turner.  “The plan we have put forth is the only plan that provides both immediate and long-term financial benefits and takes the pension issue off the table for good.”

The proposal the mayor will present to state lawmakers for consideration in the upcoming 2017 legislative session will immediately reduce and later eliminate the City’s $7.7 billion unfunded pension liability and costs considerably less next year and every year after when compared to what the City would need to pay in the absence of reform. The plan includes:

  • Benefits changes that immediately reduce the unfunded liability by $2.6 billion while still maintaining defined benefit plans for City employees
  • A closed 30-year payoff period
  • $1 billion in POBs
  • A more realistic rate of return of 7% for future investments
  • A requirement that the city makes the full required annual contributions to the pension systems
  • Limits on annual costs going forward and mandatory negotiations on benefits changes to bring costs back in line if they exceed the specified limits

According to Fitch’s analysis released Friday, “use of POBs alone typically is insufficient to correct underlying sustainability concerns and provides only temporary relief in the absence of broader reforms. However, POB use in conjunction with reforms to benefits and contribution practices increases the odds of strengthening funding positions and improving long-term sustainability.”

Fitch and other credit rating agencies have previously cited Houston’s pension liabilities and voter-imposed revenue cap as credit concerns.  Once the City’s pension problems are fixed, Mayor Turner has said that he will ask voters to repeal the revenue cap. 

Mayor Turner intends to ask City Council to approve his plan within the next few weeks.  Bill filing begins in Austin in mid-November.

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