The city of Houston has issued $1.01 billion in pension obligation bonds toward its pension reform package, known as the Houston Pension Solution, which will immediately reduce the city’s $8.2 billion in unfunded liabilities through future benefit reductions.
With the bond issuance, “the city upholds its promises to its pension systems and residents, and drastically improves its financial trajectory,” said Houston City Controller Chris Brown in a statement. “Houston residents can rest easier today knowing that meaningful pension reform is finally in place.”
Houston’s pension reform plan received support from Houston City Council, the Texas Legislature, and Houston voters, who voted for the issuance of pension obligation bonds in November.
“The city’s all-in True Interest Cost (TIC) for this issuance came in at 3.965411% – significantly lower than we initially anticipated,” said Brown. “This represents significant cost savings, and demonstrates investor confidence in this plan’s impact on the City of Houston’s bottom line.”
Of the $1.01 billion in bonds, $750 million in liquidity will go to the Houston Police Officers Pension System (HPOS), and $250 million will go into the Houston Municipal Employees Pension System (HMEPS). Brown said the liquidity shores up the more than $1 billion in deferred payments to the pension systems, and was critical to the systems’ buy-in of the city’s pension reform plan.
The Houston Pension Solution plan, which was passed in May, moves to a 30-year closed-loop amortization schedule, and uses a 7% assumed rate of return on investments. The plan prohibits the city from deferring payments to the systems. The 7% discount rate is balanced by the implementation of a risk sharing mechanism known as the “risk-sharing corridor,” which caps the city’s contribution rate and sets boundaries for its pension costs. The corridor is intended to protect the city, while ensuring that it upholds its financial promises to its employees.
The plan was supported by two of the three pension systems, labor organizations representing city employees, and more than 40 CEOs and Houston-area business leaders who signed a letter of support. However, the plan was opposed by the Houston Firefighters’ Relief and Retirement Fund, which complained that the final proposal had removed three amendments that had been supported by the firefighters’ pension, but opposed by the mayor’s office. The removed amendments would have given the firefighters more time to negotiate, and would have protected retired firefighters from being subjected to benefits reductions.