Fitch: Houston, TX Pension Proposal Has Positives and Risks
Houston, TX mayor Sylvester Turner's pension reform proposal
contains several positive elements while also introducing some
level of risk. The proposal, which the mayor outlined in broad
terms in a speech on Sept. 14, includes reforms to benefits and
contribution practices that could improve the sustainability of the
city's pensions. Reforms include benefit changes in the municipal,
police and fire plans that reportedly could reduce the combined
unfunded liability of the programs by 1/3; implementation of a
closed 30-year amortization period; a reduction in the discount
rate to 7% from rates currently ranging from 7.08% to 8.50%, and a
requirement that the city make the actuarially required
contribution annually. Fitch cautions that achieving even a 7%
return assumption carries risk given recent market performance and
the low interest rate environment.
The proposal also includes the issuance of $1 billion of pension
obligation bonds (POBs). Fitch views POBs as a neutral to negative
credit consideration, noting the possible impact to overall
financial flexibility and additional investment risks associated
with their use. A key consideration is the use of proceeds from a
POB borrowing: if proceeds are used to boost a system's assets,
they essentially replace one long-term liability with another. It
is Fitch's understanding that Houston's POB proceeds would be used
in this manner, rather than replacing contributions, and thus Fitch
does not consider this deficit financing. POB use does entail
interest rate risk, as investment returns on POB proceeds must
exceed the cost of borrowing for the strategy to be considered a
POBs are typically used for plans that are poorly funded and
with questionable long-term sustainability, and Houston's pension
programs fit into this category. 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's evaluation of a local government's long-term liability
burden measures overall debt totals and net pension liabilities as
a percentage of the economic base (as measured by total personal
income). Houston's burden currently is moderate at roughly 14%.
Fitch will conduct a thorough analysis of Houston's pension reform
program once agreements between all parties are executed and any
necessary legislative approval is obtained.
For more information on Fitch's position on pension obligation
bonds, see 'Pension Obligation Bonds: Weighing Benefits and Costs,'
dated March 31, 2015 at www.fitchratings.com.
Additional information is available at
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Fitch RatingsSteve MurraySenior Director+1-512-215-3729Fitch
Ratings, Inc.111 Congress Ave., Suite 2010Austin, TX 78701orDouglas
OffermanSenior Director+1-212-908-0889orAmy LaskeyManaging
Director+1-212-908-0568orMedia RelationsElizabeth Fogerty, +1