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The Next Chicago? Houston Faces Pension Crisis In Latest Example Of Local Government Fiscal Folly

Tyler Durden's picture




 

When it comes to state and local government crises, Illinois and Chicago, respectively, have become the poster children for what not to do if you want to be considered fiscally responsible. 

Illinois’ budget crisis was thrust into the national spotlight earlier this year when a State Supreme Court struck down a pension reform bid, setting off a series of events which culminated in Moody’s downgrading the city of Chicago to junk. 

From there, the nation media picked up on the story, leading to all sorts of amusing coverage including several pieces documenting the plight of Illinois lottery “winners” who the state began paying in IOUs thanks to the fact that Springfield couldn’t pass a budget even with the help of  $30,000/month “guru” and Laffer disciple Donna Arduin.

The fiasco culminated in the October announcement by Comptroller Leslie Geissler Munger that the state would miss a $560 million pension payment in November. As a reminder, here’s a look at Illinois pension problem: 

 

Now, as WSJ reports, cracks are starting to show in Houston, where public sector pension plans have been underfunded for years. Here’s more: 

Houston is weathering a prolonged plunge in oil prices, but the city may have an even bigger problem: its pensions.

 

Though economic growth has only slowed, not stalled, in Texas’ largest city, its finances are showing what several investors and analysts describe as warning signs.

 

Those include a rapidly growing gap in funding its retirement plans for public workers and a limit on its revenue-raising capabilities imposed by a voter-approved cap on property taxes.

 

The $3.2 billion pension-funding gap is threatening Houston’s Aa2 credit rating from Moody’s Investors Service, hurting demand for its debt and emerging as an issue in the city’s mayoral race.

 

 

Moody’s this summer warned it may downgrade the city’s debt if Houston fails to address its pensions, noting the cap limits the city’s financial flexibility.

 

A downgrade could lower prices for outstanding bonds and increase Houston’s borrowing costs at a time when it needs improved infrastructure.

And as we’ve documented extensively, this is a growing problem in America:

Houston is the latest U.S. city to face threats from credit-rating firms and investors over bulging pension obligations. Investors have grown concerned about state and local governments’ ability to address unfunded retirement costs. Examples include Chicago and the states of Illinois and Connecticut, whose unfunded retirement costs have ballooned after investing losses from the 2008 financial crisis and chronic underpayments by policy makers.

“Correcting” the problem means either, i) increasing revenue, i.e. raising taxes, or ii) cutting back on public services.

Houston residents are reluctant to support any tax increases [but] unsustainable pension costs have contributed to reductions in hiring of police officers and spending on pothole repairs.

Of course the situation isn’t helped by the ubiquitous (among public sector plans) practice of using outrageously optimistic return assumptions: 

Among other concerns, the city’s plans assume relatively high investment returns of 8% or above, meaning the funding gap may be understated, said Marc Watts, chairman of the Greater Houston Partnership’s Municipal Finance Task Force.

Yes, “relatively high investment returns,” as in, “returns that in today’s world can’t possibly be generated by anything that even approximates a conservative mix of assets.” Of course Moody's is not a fan of these type of assumptions. As we documented back in June, after 2008, Moody’s stopped relying on the investment return assumptions of cities and states opting instead to use its own models. Unsurprisingly, this led the ratings agency to adopt a much less favorable view of state and local government finances.

And while some city officials claim concerns are overblown, a more realistic assessment seems to be that sooner or later, perpetually borrowing from the future will catch up to the city and as we saw with Chicago, Moody's isn't exactly shy about pulling the trigger lately. Don't forget, one energy job generally creates the purchasing power of three non-energy jobs, which, in the face of a prolonged slump in crude, doesn't bode well for Houston's economy. We'll leave you with the following from John Bonnell, senior portfolio manager of tax-exempt investments with San Antonio-based USAA Investments who spoke to WSJ:

“If they end up doing nothing to address this budget issue, 10 years from now Houston could be facing the same problem Chicago is now."

 

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Mon, 11/16/2015 - 15:02 | 6800838 0b1knob
0b1knob's picture

< Next Chicago?

< Next Detroit?

Mon, 11/16/2015 - 15:12 | 6800857 hedgeless_horseman
hedgeless_horseman's picture

 

 

Q: How can this be possible when the City of Houston's homeless outreach vans are new Mercedes Benz?

A: Business owners donate the money to the police.

"The foundation was put together by business leaders who wanted to
assist the police department by funding the latest equipment and
technologies the officers need," said Charlene Floyd, the foundation's
executive director. "Since 96 percent of the (HPD) budget goes for
salaries and administrative cost, that doesn't leave a lot for the
latest technology."

How are business owners going to feel about making up a shortfall in the cops pensions?

Mon, 11/16/2015 - 15:14 | 6800890 froze25
froze25's picture

Chicago first then Detroit that is the order of decay.

Mon, 11/16/2015 - 15:16 | 6800902 SethDealer
SethDealer's picture

Houston needs more blacks, they are big taxpayers.

Mon, 11/16/2015 - 15:22 | 6800924 FreeShitter
FreeShitter's picture

More mexicans, more anchor babies...oh wait 

Mon, 11/16/2015 - 15:23 | 6800926 tmosley
tmosley's picture

No, they need more lesbians in the administration.

Mon, 11/16/2015 - 15:27 | 6800951 Tom Servo
Tom Servo's picture

NIRP will save them!

 

oh wait...

 

Mon, 11/16/2015 - 15:38 | 6801012 Abby Normal
Abby Normal's picture

Send in the Syrians!

 

Mon, 11/16/2015 - 15:46 | 6801050 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

Houston is the libtard capitol of Texas. What a hole. -"DFW resident"

Mon, 11/16/2015 - 16:25 | 6801264 MorningWood
MorningWood's picture

You couldn't be more wrong.  The DPRA, Democrat People's Republic of Austin, is the libtard capitol of Texas.  -"Wanna buy an overpriced house?"

Mon, 11/16/2015 - 16:54 | 6801434 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

MW, I lived in Austin for over 8 years. Yes, it has a large population of libtards. At least it is a nice place to go. Houston is just a dump.

Mon, 11/16/2015 - 18:13 | 6801776 cheka
cheka's picture

tx is like other states -- libs, freaks, free sh-t army fustercluck in the big cities

Mon, 11/16/2015 - 17:13 | 6801532 EINSILVERGUY
EINSILVERGUY's picture

Nope.  As someone who lives in Houstonnd and lived in Austin for 25 years, Austin is the libtard capital. Houston is rushing to catch up but its still Austin

Tue, 11/17/2015 - 11:30 | 6804449 yellowsub
yellowsub's picture

That $50 million resort made for illegals is going to get crowded there soon.

Mon, 11/16/2015 - 15:57 | 6801086 daveO
daveO's picture

Exactly. Starving pensioners and dilapidation is small potatoes in comparison to electing emotionally regressed individuals. That's all that matters in ''Feelwings'' USA!

Nice ass at :37

https://www.youtube.com/watch?v=CyBcHUe4WeQ

Mon, 11/16/2015 - 16:40 | 6801358 shovelhead
shovelhead's picture

I couldn't last that long.

Mon, 11/16/2015 - 18:54 | 6801176 azusgm
azusgm's picture

Way to go, Annise Parker! That chart shows data during her regime. In fact, she was the Comptroller/Finance Director/Whatever under Bill White. Mayor White made a cut to pension promises as one of his first acts in office. That caused plenty of grumbling downtown, but he did it anyway. He cautioned that more cuts probably were needed and that the city did not dare get silly. Obviously, his successor lacked the discipline. Besides that, Houston is said to have one heckuva bond program. I guess Houston is supposed to grow without a pause for the next 30 years.

Mon, 11/16/2015 - 15:23 | 6800929 LowerSlowerDela...
LowerSlowerDelaware_LSD's picture

"Houston is weathering a prolonged plunge in oil prices"

They are weathering prolonged control by leftist politicians.  Promise free stuff to all of your voters but don't worry about paying for it.

Mon, 11/16/2015 - 16:20 | 6801236 shovelhead
shovelhead's picture

Because those 25 year old Bluebird school buses they haul your kids around in are not classy enough for homeless people.

"Yo, like, dem shorty buses are like stigamacisin us freestyle people."

Mon, 11/16/2015 - 15:05 | 6800840 JustObserving
JustObserving's picture

The next Chicago is the Federal government with unfunded liabilities of $210 trillion per Kotlikoff.

That's only $1,720,000 per taxpayer

Mon, 11/16/2015 - 16:26 | 6801265 shovelhead
shovelhead's picture

"The kid will pay for it."

"?"

"Well, some 20 odd years after he gets born, he'll have to get a job right?

So no problem."

Mon, 11/16/2015 - 15:04 | 6800841 Never One Roach
Never One Roach's picture

" No one saw this coming. "

 

... esp the fat cat recipients ....

Mon, 11/16/2015 - 15:05 | 6800847 MadVladtheconquerer
Mon, 11/16/2015 - 15:09 | 6800867 TrustbutVerify
TrustbutVerify's picture

They promised too much, maintained the false promise, while knowingly underfunding the pension fund.  Now they're going to want us to bail them out?  

Mon, 11/16/2015 - 15:25 | 6800932 LowerSlowerDela...
LowerSlowerDelaware_LSD's picture

Just say no.

Mon, 11/16/2015 - 17:01 | 6801466 Omen IV
Omen IV's picture

Exactly the Just Say No Defense is the best option

 

BK all the states counties, cities- pay nothing - and take the heat - the cops will play games but they in the end will suck it up since what they get paid is double what their true value is - just gut the system and start over

Mon, 11/16/2015 - 15:37 | 6801008 NoDebt
NoDebt's picture

Yes.

Please note that today's "they" are different people than yesteryear's "they" so you can't be mad at them.  

Mon, 11/16/2015 - 15:53 | 6801083 Never One Roach
Never One Roach's picture

Declare bankruptcy and renegotiate all those bloated contracts.

Tue, 11/17/2015 - 11:31 | 6804453 yellowsub
yellowsub's picture

That's almost every state, it's more unsustainable than social security...

Mon, 11/16/2015 - 15:10 | 6800874 aliki
aliki's picture

can't escape the math of the situation.

but when u do try to bring that up, you are branded a racist who hates children & clean air/water.

Mon, 11/16/2015 - 15:29 | 6800958 Seasmoke
Seasmoke's picture

This is how I handled them.....

 

I am a racist and hate children. So ??  What else you got. This is about being ripped off by public parasites. 

Mon, 11/16/2015 - 16:11 | 6801194 azusgm
azusgm's picture

Yeah, and the frontrunner to replace the lesbian mayor is Sylvester Turner. Don't expect to see an adult in that office.

Long race cards.

Mon, 11/16/2015 - 15:17 | 6800903 Give up. Realit...
Give up. Reality is not scientific nor even mathematical.'s picture

Face it folks.  It's them against us.

Mon, 11/16/2015 - 15:21 | 6800918 Professorlocknload
Professorlocknload's picture

Ten years out Houston "might" be facing the same trouble Chicago is facing now? Considering a 4 year election cycle, that possibility will be extended out ten more years at each election. Kinda like perpetual motion.

Mon, 11/16/2015 - 15:21 | 6800919 DetectiveStern
DetectiveStern's picture

My local government just sent me a letter threating to fine me £1000 for not registering to vote. I voted in fucking May! What the fuck kind of government threatens to fine someone £1000 for not filling in a form that won't be relvent until the next election. The UK government.

Fuck the fucking politicians.

Mon, 11/16/2015 - 15:21 | 6800920 chrsn
chrsn's picture

uhhhhh . ...  man, get the 1% to pay for it, dude ... .  they have everything and will, like, totally heed what our politicans want . . .

Mon, 11/16/2015 - 15:23 | 6800928 Fuku Ben
Fuku Ben's picture

Another ZH post to reaffirm my previous posts. Did anyone investigate their early payout options since my last post (1rst one below)?

If so I'd be curious to hear what if any options someone has. Don't wait. The fraud is nearing its end.

http://www.zerohedge.com/news/2015-09-16/how-underfunded-are-us-corporat...

http://www.zerohedge.com/news/2015-08-16/goldman-weighs-americas-pension...

http://www.zerohedge.com/news/2015-08-12/solyndra-20-nears-bankruptcy-bo...

Mon, 11/16/2015 - 16:41 | 6801369 Clesthenes
Clesthenes's picture

Here's my option.

Mon, 11/16/2015 - 15:24 | 6800931 markitect
markitect's picture

All these big cities are more or less the same in how they fund employee pensions.  The comptrollers all go to the same seminars, use the same big investment funds.  If you think Chicago is so much worse than your city, well now Houston is joining the club.  Dont be surprised when your local government finally admits what shady accounting tricks they've been up to a few years from now.  At least Chicago has been honest about the mess all along which makes me think they have a chance to pull out of it ( even I cant believe I just typed that )

Mon, 11/16/2015 - 15:31 | 6800978 Aubiekong
Aubiekong's picture

What buying union votes with public tax dollars is a bad idea?

Mon, 11/16/2015 - 16:14 | 6801210 azusgm
azusgm's picture

Public worker unions are not legal in Texas.

Mon, 11/16/2015 - 15:40 | 6801021 Banker Buster
Banker Buster's picture

Houston property taxes are one of the highest in the U.S.  

Mon, 11/16/2015 - 15:41 | 6801030 ToSoft4Truth
ToSoft4Truth's picture

 Detroit is already looking for more bailouts.

 

Mon, 11/16/2015 - 15:44 | 6801042 Lucky Leprachaun
Lucky Leprachaun's picture

And they'll get them via the printer.

Mon, 11/16/2015 - 15:46 | 6801049 react1200
react1200's picture

Gutted by LIBOR, Freetrade and bailouts.

Mon, 11/16/2015 - 15:56 | 6801092 Thisisbullishright
Thisisbullishright's picture

50K a year for a retired teacher payed out for 20 to 30 years each....

Yeah, that's doable!

 

Mon, 11/16/2015 - 15:58 | 6801111 youngman
youngman's picture

They could cut salaries and pensions.....but NOOOO they can never do that

Mon, 11/16/2015 - 16:20 | 6801238 Bemused Observer
Bemused Observer's picture

You can do that for new hires, sure. But the problem is the ones who have already earned theirs. I don't care what the budget issues are, you don't pull that rug out from someone who has already earned theirs. They can't get that time back, and can't make new plans at this stage of the game.
You pay the ones you promised, and learn the valuable lesson of NOT making promises you can't keep.

Raise the damned taxes if you must...and if the people get pissed, then let them go after their elected officials, who caused this mess in the first place. But you DON'T screw the ones who did what they were supposed to. They kept their end, now 'the People' must keep theirs.

I am SO sick of all this 'blame the pensioners' nonsense. People were happy to take their labor, and made promises. Many of them did not make alternate plans, and aren't part of the S.S. system, because they didn't think they needed it. Just because somebody stole the money doesn't mean 'the People' are off the hook.

Mon, 11/16/2015 - 16:38 | 6801344 Clesthenes
Clesthenes's picture

Open up YOUR checkbook.

And, don't forget, I promised them nothing.

Mon, 11/16/2015 - 18:54 | 6801987 squid
squid's picture

Mr. Bemused! Thank you so much for volenteering YOUR capital to fix this problem.

 

Send your cheque to the city of Houston.

 

The pensioners will thank you.

 

Cheers,

Squid

Mon, 11/16/2015 - 18:58 | 6802011 tarabel
tarabel's picture

 

 

Spoken like someone on the verge of government retirement.

Why do you think the choice is between keeping promises and reneging?

Reneging is gonna happen in either an abrupt, catastrophic break or as a managed easing away from un-keepable promises.

Even the IRS knows that sometimes you gotta take what you can get and move on, regardless of what is actually "owed".

The status quo will not stand. Period.

Mon, 11/16/2015 - 19:07 | 6802048 skipjack
skipjack's picture

Hey, bozo, my "rep" didn't ask my permission. They just voted for more shit for the unions, I mean the chilluns.

 

Fuck the  "public servants". They get better pay and benefits than any private sector mid level manager or below, and they can go suck a tailpipe if they think taxpayers are going to fund all those "promises".

Mon, 11/16/2015 - 19:32 | 6802140 Not My Real Name
Not My Real Name's picture

They kept their end ...

Yeah, they kept their end alright ... by working with crony politicians who agreed to these unrealistic unworkable deals in exchange for their votes. They get no sympathy from me.

Mon, 11/16/2015 - 16:06 | 6801117 jesus_loves_you
jesus_loves_you's picture

Houston has great diversity because Houston is a sanctuary city. Houston has great diversity because Houston has a lesbo dyke mayor who is more interested in homos being able to use whichever bathroom they fancy rather than boring city finances. There will be unfunded liabilities for the next mayor to worry for.

When one drives away from Houston's gilded enclaves of white privilege they will find a vast human cesspool of diversity. Dirty stinky humans from all around the globe that trash the local neighborhoods the same way they trashed their old hoods back home. They diddle their childerns and eat neighborhood dogs. Cats too, sometimes. 

Don't leave home whithout an extra 15 round mag is the rule in Houston. I just keep one in the console full time. Open carry comes to Texass 1/1/2016.

Mon, 11/16/2015 - 17:16 | 6801549 EINSILVERGUY
EINSILVERGUY's picture

Ditto. Drive aroound Harwin, Richmond and Westheimer. Its a third world down there

Mon, 11/16/2015 - 18:45 | 6801934 azusgm
azusgm's picture

But the Indian food is good in that area.

Otherwise, I never went near there.

Mon, 11/16/2015 - 16:10 | 6801187 WTFUD
WTFUD's picture

Domino Effect

Mon, 11/16/2015 - 16:17 | 6801225 22winmag
22winmag's picture

Gold-plated pensions for empty skirts and suits that rode a desk for 20 years.

Mon, 11/16/2015 - 16:34 | 6801317 Clesthenes
Clesthenes's picture

Now we need to compare state and federal retirement systems with the private retirement system (SS Admin).

I recently did a study of these retirement systems.  Using an Excel spreadsheet, I gave each category identical earnings histories, and then computed the monthly retirement “benefit” (actually, the return of invested money; at least in the case of the privately-employed).

Result?

The Social Security sucker got $1500 / month.

State bureaucrat, $6300 / month.

Federal, $4,200 -$5,200 / month.

Again, each had identical earnings histories.

Mon, 11/16/2015 - 16:44 | 6801385 Nue
Nue's picture

Part of Houstans problems is that a large influx of Katrina Refuges have become permentally settled.

"as many as 40,000, by some estimates, permanently have settled in the Houston metro area."

http://www.houstonchronicle.com/news/houston-texas/houston/article/Ten-y...

Granted it's not the only reason their in this mess but it certainly has not helped things in the long run. Imagine the finances’ of any city when a large contingent of non-contributing, crime and violence prone people get dumped on them in mass. Driving up insurance rates driving out business and taxpaying residents.   

Mon, 11/16/2015 - 17:02 | 6801464 financialrealist
financialrealist's picture

Most of these pensions are FUBAR, with a few outliers. Pensions crisis headlines are like coach roaches, for every one you see and read about, there's a dozen you don't.

Mon, 11/16/2015 - 17:06 | 6801489 WTFUD
WTFUD's picture

Don't worry WAR will keep our minds off of this Depression.

Mon, 11/16/2015 - 17:07 | 6801496 react1200
react1200's picture

Credit boom of the 80s = abundant liquidity, devaluation of money

Freetrade = bye bye industry, we need cheaper goods due to inflation, centralize wealth

Bailouts = now that glass stegall is gone, we can centralize wealth further and bankrupt the country once derivatives explode

LIBOR =  bankrupt municipalities by overcharging them and forcing them into early termination fees 

FED Reserve's ZIRP = will stay at 0 if not negative since the real economy (production) is gone.  

 

Mon, 11/16/2015 - 17:11 | 6801519 EINSILVERGUY
EINSILVERGUY's picture

Houston is becoming a shithole. i know caused i lived here in the 70's and early 80's moved away and then moved back in 2006. just bought some land near Aggieland. Got to get the fuck out of here

Mon, 11/16/2015 - 18:20 | 6801809 cheka
cheka's picture

houston's not bad if you avoid the south, se, e, ne, sw, nw, n, cental sides of it

Mon, 11/16/2015 - 18:20 | 6801815 ssrodes
ssrodes's picture

It's a good thing that pensioner's don't know how to read their cities CAFR.  I wonder if ZH will have the guts to discuss the CAFR con.

Mon, 11/16/2015 - 18:24 | 6801834 cheka
cheka's picture

we don't talk about balance sheets.  isn't that illegal or something?

i'm with you - sell some of that sh-t and shore up the funds

same goes for social security -- dc has 100+ trillion balance sheet.  a small portion sold would shore up ss funds for a loong time.  they used ss money to buy/maintain these assets.  SELL SOME OF THAT and put it back

Mon, 11/16/2015 - 18:52 | 6801970 azusgm
azusgm's picture

Weyerhauser or Georgia Pacific might very well pay good money for part of the Sabine National Forest. Sabine County and the school district might appreciate the taxes. That acreage ended up in federal hands as the result of a bankruptcy, not because it is 100% unique.

Mon, 11/16/2015 - 22:03 | 6802641 kaboomnomic
kaboomnomic's picture

Land of the DEBT. And nothing else..

Tue, 11/17/2015 - 11:24 | 6804430 yellowsub
yellowsub's picture

NJ state pensions is already $56 billion underfunded, surprised they're not in a crisis soon...

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