Pension Costs

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scottm
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Pension Costs

Post by scottm »

In light of what's going on in Wisconsin, check out Houston's dilemma...

City faced with staggering contributions to pensions
http://www.chron.com/disp/story.mpl/edi ... 89052.html
The city of Houston is mandated by state law to maintain three separate pension plans for its employees: one for firefighters, one for the police and a third for all other municipal employees. In this column I am going to summarize the financial status of these plans. When you have finished reading you will be certain that I am on drugs or otherwise mentally impaired because these numbers are, in the truest sense of the word, unbelievable. However, all of the information here comes directly from reports issued by the three plans, is publicly available and was confirmed by the city's chief pension officer.

Each of the plans has the same basic structure. However, there are significant differences between the three, especially as it relates to the benefits available to the members. For these purposes I have aggregated the data, for while the differences between the plans may mean a great deal to the members, they are less significant to the taxpayers.

In 2000, the city contributed approximately $100 million to its three pension plans. By last year, the contributions had more than doubled to $229 million. To put this amount in some perspective, it is more than the budgets of the Parks, Library, Solid Waste and Health departments combined. And believe it or not, it gets worse. Each of the plans' actuarial reports projects the amounts of future contributions that will be required to fund the plans. According to these projections, the city's contributions in 2020 will have to be increased to more than $500 million. That will be about half of all of the property taxes collected by the city by that time.

But wait, it gets worse. Over many years, the city has made contributions to the three plans. These contributions were adjusted periodically to assure that the plans were adequately funded to eventually pay the promised benefits. This worked reasonably well through about 2000. At that time, the plans had no unfunded liability. However, beginning in 2001, City Council and the state Legislature granted a number of increases in the benefits for which there had been no prior funding. As a result the assets that had been set aside were no longer adequate to cover the estimated liability for future payments, thus creating, for the first time, an unfunded liability.

So how much is this unfunded liability? Well, it depends on how you count it. According to the most recent actuarial reports available, the so-called "official" unfunded liability is $2.1 billion. However, as with many things in this area, there are special rules that serve mostly to obfuscate the real situation. Principal among these is a rule that provides that pension plans do not have to recognize all of their investment gains and losses as they are incurred. Instead, the gains and losses are smoothed over typically five years. As a result, there is always a difference between actual market value of the assets held by the plans and value used in the actuarial calculations. Because the plans suffered substantial losses in 2008-09 (like the rest of us), currently the market value of their assets is $1.5 billion less than the value used in the actuarial calculation — meaning that if the city were forced to settle up on its likely future pension obligations today, it would be $3.6 billion short.

Now you are probably thinking that with the mammoth contributions that are projected over the next 10 years, surely we will be paying down this unfunded liability. Wrong. After we have escalated the contributions to more than a half a billion dollars in 2020, the unfunded liability, according to the actuarial studies, will have increased to $5.3 billion.

On top of that, we owe about $600 million on pension bonds issued from 2004-09. So let's just call it an even $6 billion we will owe on pension obligations in 2020.

To put that in some perspective, the total bond debt the city has accumulated in the course of its entire history for everything we have built, such as streets, water plants, airports, libraries, police and fire stations and parks, is only about $12 billion. In less than a generation, we will have run up half the debt on pension obligations it took our forefathers to incur in 175 years of building this city.

And, by the way, if you are not yet sufficiently depressed, this does not count the city's liability for the retirees' health care, for which no money has been set aside. The most recent estimate of that liability was $3 billion.
$500M in pension payments in 2020 with $5B in unfunded liabilities.
And this does not include the health care costs. The #s are just nuts!
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