Our priorities for the New Year are apparent:
Pensions, pensions, pensions, PENSIONS!
The Houston Police Department has never been shaken like it has recently regarding pensions.
Many of have blamed me, the HPOU, the pension trustees, the mayor and City Council. Let’s see how we got here and where we must go if we want to continue having defined benefit pensions.
I recall around 2001 when my mother, who received an HPD pension until she died, called me and stated that something was wrong with her check because it was much larger than previous checks.
I called the pension office and found that retirees were recalculated at the current rate on top of their compounded COLA’s and the check would be larger from that point forward. In fairness, at that time, the pension system was over 100 percent funded and the trustees then believed it was the right thing to do for those whose pensions were a much smaller percentage than today.
Who would have ever dreamed then that we would later experience a 2008 and double-digit losses?
None of us currently in DROP started in this department knowing we would later get DROP. DROP was introduced in order to stem retirements and keep staffing levels up following Mayor Kathy Whitmire’s disastrous decision to close the Houston Police Academy for three years due to budget constraints in the late 1980’s.
Had DROP been designed like others across the country and similar to how the current bill takes it, we would not have to be making adjustments and cuts. For example, I cannot find any other pension system in the country where the biweekly contribution goes into one’s DROP account.
Our monthly benefit should be paid via three sources – employee contributions, employer contribution and interest on the fund. When the employee contribution goes into one’s DROP account, it removes part of the funding mechanism for the monthly benefit and adds to the funding shortfall.
Currently, less than 50 percent of the department is in DROP, but more than 50 percent of the fund is in DROP accounts.
If the trustees chose not to do anything and the Legislature does nothing, then nearly 100 percent of funds could be in DROP accounts in the next 10 to 15 years.
If we have another 2008, it could be much sooner. Therefore, something has to be done to ensure pension checks continue for all who have been promised those checks. As the chair of the Texas House Pension Committee stated in Houston and later in Dallas, “Bring us a bill that fixes your system or we will fix it for you and you probably won’t like it.”
COLAs while in DROP appear to be headed to an end in the proposed bill. A cost-of-living adjustment is paid to assist with increased costs each year. One is not living on that income while active and thus giving a cost-of-living adjustment while in DROP is hard to justify.
Many have said that if the city had paid its fair share, we would not be in this position. Well, the current bill requires the city to pay the back payments of $750 million and our system will still be underfunded, which is why the cuts in future benefits are taking place. The current bill also prohibits the city’s ability to defer payments owed.
The current DROP rate those of us in DROP receive is seven percent and next year’s will be just over five percent. There is no bank in this country paying those kind of rates. HPOP’s returns last year were a loss of around three percent. If they are paying seven percent on DROP balances and lost three percent, then that’s a 10 percent net hit on the system.
Remember that when the pension fund loses money, no one in DROP loses any money, but the overall fund suffers greatly.
The current plan allows those who are retired to defer some of their monthly pension into their PROP account, using it like a bank, but receiving interest five to seven times what a bank is paying. The current bill will end this practice.
Is there a silver lining anywhere in this proposed bill?
I believe there are several.
First and foremost, the bill will ensure that the system can continue to pay pension checks to all in the system today and into the future. No one’s current monthly benefit will decrease one cent. Not one penny will be taken from anyone’s DROP account.
And those hired after 2004 will be under the rule of 70, which will allow many to retire several years prior to age 55.
Finally, if this bill is passed, it will carve us out from any catastrophic bill that we anticipate the Legislature will pass to fix other pensions across the state. Such a catastrophic bill could end COLAs, immediately freeze DROP, and could put new hires under a 401K-type plan.
The HPOP’s trustees did not want to roll the dice and see how Austin plans to fix pensions.
Having said that, IF the legislature comes up with a better bill that fixes our system and has less of a negative impact on our members, clearly the HPOU will support the best bill for our members.
As stated in last month’s article, beginning in January the HPOU will send out regular eblasts keeping everyone informed on pension legislation.
We have already assured each of you that we will fight to kill any bill that takes affect prior to July 2017 in order for everyone to have time to make rational financial decisions.
I have spoken with HPOPS’ Chairman Terry Bratton and asked that they hold several informational sessions so all can get the answers they need. He agreed to do that, but understandably wants a final bill to be written before such sessions can place.
It’s that Time
I want to take this opportunity to wish HPOU members and their families a joyous Christmas season and a Happy New Year in 2017!