The Galveston City Council did two things right Thursday about the city’s struggling pension plans.
First, it resisted suggestions to put aside more taxpayer money for the plans before there’s a clear reason to do so.
Second, it decided to take the time to better understand the plans.
It should do one more thing: help the public understand how these plans work and what the city is proposing to do about them.
The city has set aside $2.63 million to help restore order. That’s a lot of money for the public to contribute. Taxpayers should understand what they’re being asked to do.
The public could ask some good questions about these plans. For example, why does the city think it must do something now?
In the old days, the city had an independent Finance Committee that occasionally made headlines. When public pensions in other cities began tanking, the committee asked a law firm in Houston to review the city’s obligations.
The question asked was whether the city had a legal obligation to meet the unfunded liabilities. The answer was no.
Were the top-notch lawyers wrong? Did folks misunderstand the law firm’s letter?
The separate pension plans for civilian, police and fire are complex. But taxpayers who manage their own retirement accounts can be trusted to grasp the basic problem.
The police and fire pension funds are defined benefit plans, which private businesses started abandoning decades ago as simply unaffordable.
In the police plan, employees and the city contribute about 12 percent of the employee’s salary — generous percentages, compared to most private plans. Actuaries estimated that those contributions would be enough to fund benefits, given investments that generated 7.5 percent a year for 40 years. That estimate was lowered to 7 percent.
If you’re responsible for your own retirement plans, you might suspect that there are not a lot of investments that promise a 7 percent annual return. You might suspect that a lot of police officers retire before 40 years.
You might further suspect that this investment plan isn’t realistic.
The police plan is now facing $29 million in unfunded liabilities. For perspective, the city’s entire general fund budget, which includes operating expenses for the police and fire departments, is about $52 million.
Given that the law requires that a majority of those on the pension plan’s board be appointed by the police, rather than by representatives of the taxpayers, how is it that the taxpayers are responsible for the unfunded liabilities?
If you’re looking for a road out of this mess, here are a couple of suggestions.
First, it’s past time to ditch the defined benefits plan.
Second, there is a moral question that’s larger than the legal question. Public employees deserve fair treatment, and the council has the difficult job of deciding what’s fair, both to the public employees and to the taxpayers who are being asked to help bail out flawed plans.
Fairness is going to take time, openness and a thorough reworking of these plans. Throwing money at these plans today and hoping they will suddenly look sensible tomorrow isn’t going to cut it.
• Heber Taylor