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Volume XV Number 22 - September 25, 2016     RSS Feed   

A Periodic Newsletter for Committed Texas Conservatives

In This Issue

Update: Texas Republican Leaders Take Lead, Support GOP From The Courthouse To The White House

Radical Islamists Are Trying To Kill Regular Americans And The Democrats Still Have Their Heads In The Sand

Inspector General For The Department Of Homeland Security Reveals Failed Vetting Process

Houston Pension Reform Plan In Process, Will Need To Study This One

Turner's Pension "Plan": The Good, The Bad And The Incredible, Guest Editorial by Bill King

Why Is Hillary Taking Coumadin? Submission by Dr. X, Board Certified Internal Medicine Specialist

Red, White and Blue
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Gary Polland
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Thoughts This Fortnight

Update: Texas Republican Leaders Take Lead,
Support GOP From The Courthouse
To The White House

It has now been 28 days since TCR first wrote about key GOP elected officials who have called out other leaders and voters to support Republican candidates from the Courthouse to the White House, and you have yet to hear from Harris County GOP Chair Paul Simpson and State GOP Chair Tom Mechler!

Radical Islamists Are Trying To Kill
Regular Americans And The Democrats
Still Have Their Heads In The Sand

We don't know about you, but we are tired of the standard Democratic reprise in response to the radical Muslim terror events in New York, New Jersey and Minnesota, we need "to refrain from getting out ahead of the investigation," stated by President Obama on September 19, 2016; or Mayor of New York Bill de Blasio who on September 18, 2016, said, "...there is no evidence at this point of a terror connection," and on August 20, 2016, after the arrest of the Muslim terrorist responsible would only say, "...this was an act of terror."

Love or hate Donald Trump, he tells it like is is - we are dealing with radical Islamic terrorists and has a plan to get control of who enters the country.

It seems to be a broken record, but once again we were attacked by a radical Muslim who entered the country due to a decision made by our leadership regarding immigration.

It's time to stop these crazy policies. This November, if you want to bring in 65,000 more Syrian refugees next year and more in the future, vote for Hillary Clinton. If not, you must vote for Donald Trump.

Terrorism expert Robert Spencer commented, "The denial and willful ignorance of American officials in the face of this ongoing war is getting people seriously injured and killed. It is time to stop counting coincidences and to start calling what is happening by its right name."

Inspector General For The Department Of Homeland Security Reveals Failed Vetting Process

Remember all the "talk" about vetting of refugees? Well, the A.P. reports about the Inspector General's audit of Homeland Security and found - you are not going to believe it - at least 85% of immigrants from countries of concern to our national security were granted citizenship while they had pending deportation orders! You can't make this up!

Houston Pension Reform Plan In Process,
Will Need To Study This One

To Mayor Turner's credit, he is trying to reform the bloated and in-debt Houston public pension system.

With limited release of information and with not all the players signing on, it's premature.

A few early comments and concerns - Why is the City proposing to guarantee the 7% return on investment in a 1% world?

There is other information you need, and former Mayoral candidate Bill King analysis is as follows.

Turner's Pension "Plan":
The Good, The Bad And The Incredible

Guest Editorial by Bill King

Sylvester Turner announced his pension "plan" yesterday. I put the word plan in quotes because the outline Turner delivered was so painfully sparse of details it is hard to even describe it as a plan. Turner also used the word "deal" although it was not at all clear who has agreed to the proposal or what terms had been agreed upon. Even many of the people standing with Turner at the press conference almost immediately began to hedge and distance themselves from some of his claims about the plan. Within minutes the Fire Fighter Union was tweeting out snarky comments about the proposal.

I am at a loss to understand why so much of this plan must remain secret at this point. When pressed by reporters about the details for the $2.5 billion in supposed savings from benefit reductions, Turner said he would not reveal that information until the agreement was signed. Are not the taxpayers of Houston, who will ultimately be asked to pay for this plan, entitled to know the details now, before a final deal is reached? This process should be completely transparent because this issue is so critical for the future of our City. There is no excuse for this secrecy.

In addition to Turner's comments at the press conference, I have also been able to obtain notes from several sources who have had private briefings with Turner and his team. It is not clear why this private groups are entitled to more details than the public.

Nonetheless, from the public comments yesterday and the information from the private briefings, I have been able to draw a broad outline of Turner's plan. The elements of the plan fall into three categories: the good, the bad and the incredible. Following what my mother taught me, I will start with the good.

The Good

Lowering the Assumed Investment Rate

The City has finally admitted that the 8-8.5% projections for the pension plans' investment returns are unrealistic and far above the assumption used by other pension plans. The new plan will assume a 7% return instead. This may still be too high, but, at least, it is more in line with the national average.

How much the pension plans earn from their investments is a critical component to the ultimate cost of the pension plans. Generally, about 70% of the funds to pay for pensions come from these earnings. So a relatively modest change in assumptions regarding plan earnings can make a very large difference in how much the plans are underfunded.

In our case -- using a 7% assumed rate of return instead of the 8-8.5% the City previously used -- the unfunded liability balloons from $5.5 billion to $7.7 billion. Adding the pension obligation bonds issued in the White administration raises the total pension-related debt now owed by the City to $8.3 billion. It is sobering to remember that the plans were fully funded as late as 2001 and disturbing to remember that less than a year ago the City was claiming it only owed $2.5 billion.

Plans Agree to Reduce Some Benefits

The other good news in the "plan" is that Turner says that all three pension plans have apparently recognized that the current level of benefits is unsustainable and that each has identified benefit reductions their members can live with. According to Turner, these changes will reduce the unfunded liability by approximately $2.5 billion. However, as I mentioned Turner specifically declined to detail these reductions in the press conference. In the private briefings, the Turner team has said these savings mostly come from reductions in the cost of living adjustments ("COLAs") to pension payments and the deferred retirement option plan ("DROP"), which allows some employees during the last ten years of their employment with the City to collect both their salary and their pension as though they had retired. Apparently some other relatively minor changes have been discussed, such as the amount employees will contribute and retirement ages.

There certainly could be $2.5 billion in savings from just reducing the COLAS and the DROP, but without specifics about the changes there is no way to quantify what those savings might be. Still, the fact that the pension plans recognize that there are going to have to be some changes to the benefits is encouraging.

The Bad

No Switch to Defined Contribution Plans.

The worst part of Turner's plan is that he has taken any conversion from defined benefit (DB) to defined contribution (DC) plans off the table. In the news conference, Turner claimed that the City had studied switching to defined contribution plans and that they would cost more. This is complete nonsense.

Over the last several decades the private sector has almost completely abandoned defined benefit plans in favor of defined contribution plans for the simple reason that they are cheaper and because they allow the employer to control its costs. To suggest that our geniuses at City Hall have discovered something the entire private sector missed when it converted from DB to DC plans is ludicrous.

The reason defined benefit plans do not work is because they rely on our supposed ability to predict how much money we need to set aside today to pay benefits due decades from now. How much should be set aside depends on many financial and demographic factors. As I have previously noted, one of the most important of these is how much the pension plans will earn on their investments. We cannot predict interest rates next month, much less 30 or 40 years from now.

Also, in recent years all of the factors that affect the costs of a defined benefit plan have been trending higher. In particular, people are living longer and investment rates have been declining. The last two years have been particularly tough with respect to investment returns: All three of the City's plans badly missed their targets, in fact.

The truth is we have no idea how much money we need to set aside today to ensure there will be sufficient funds to pay the benefit promised. Advocates for a continuation of the current system contend that they can calculate how much needs to be contributed each year. You will hear them refer to this as the "ARC", which stands for the "annual required contribution" or the "actuarially required contribution." It is a complete fraud. So much so, that the accounting rules that went into effect this year have completely eliminated the concept.

We simply have no ability to know what DB plans will cost taxpayers in the future. There is no certainty for taxpayers or City employees and hence no permanent solution to the City's pension problem without a plan to eventually transition to defined contribution plans.

$1 Billion of New Pension Obligation Bonds

One of the more disturbing features of Turner's new plan is that he wants to issue $1 billion of new bonds. The proceeds will be transferred to the pension plans to reduce the unfunded liability. This, of course, does not increase or decrease the total pension debt, it merely changes the creditor from the pension plans to investor bondholders.

The idea of refinancing the pension debt is not, in and of itself, a bad one. Some of you may recall that I proposed refinancing the pension debt during the campaign, but only as part of a plan that would address long-term costs/liabilities by transitioning to DC plans.

But issuing new bonds to facilitate the continuation of the current, broken financial model is a terrible idea. At best, it is another temporary, albeit convenient, political fix that City taxpayers will be paying for over the next 30 years. Both the Government Finance Officers Association and the Society of Actuaries recommend against the issuance of pension obligation bonds.

35% of Payroll

Turner has said that the new plan will include a limit on the City's contribution to pension plans in the future. This is a good idea. However, there are two problems.

First the limit that is being discussed is 35% of payroll. This is absurd on its face. How many private employers do you know that contribute 35% of a person's pay to a retirement plan? Harris County contributes 13% to its employees' plan. And worse, under Turner's plan, the City would have to contribute this amount for the next 30 years! How are we ever going to be able to hire new police officers and pay them a decent salary when we are committed to putting 35% of their pay into a pension plan?

The second problem is that it is unclear what will happen when the necessary contributions exceed 35% which they undoubtedly will, probably within the next few years. What is the enforcement mechanism?

Repeal of Property Tax Cap

Where taxpayers will feel the pain from this plan is that Turner is coupling it with a repeal of the property tax cap. He said he would ask voters to repeal the cap next November.

Make no mistake, a repeal of the property tax cap means that your property taxes will go up. And as will be clear from the analysis below, Turner's "math" cannot work without the largest tax increase in the City's history.

The Incredible

When it comes down to the bottom line, pension math is actually quite simple. If a plan is underfunded the only way to remedy the shortfall is to add more money (increase the assets) or reduce the benefits (decreasing the liability for future payments). There is no magic or alchemy that can avoid this basic equation.

Of the roughly $8 billion of pension debt the City has accumulated, Turner's plan would eliminate about a quarter of it by reducing benefits. Exactly how the other three-quarters would be eliminated is something of a mystery.

Turner says that his plan will amortize the remaining debt over 30 years without increasing the amount the City is contributing. That is mathematically impossible.

The City's annual contribution to the pension is divided into two parts. The first part is the cost of benefits that its employees earned that year. This is referred to as the "Service Cost" or the "Normal Cost." In addition to this amount, the City is supposed to contribute enough to pay off any underfunding in 30 years.

The City is currently contributing about $400 million each year to the plans. A little less than half of that goes to pay for the current cost. That only leaves a little over $200 million each year to pay down the accumulated pension debt.

Even if the benefit reductions really cut the pension debt down to $6 billion as Turner claims, you cannot service $6 billion in debt over any timeframe, much less 30 years, with $200 million per year. Just the interest on this debt will run well over $300 million per year. So it is impossible to pay back the $6 billion in debt without dramatic increases to the City's contributions at some point.

And that brings us back to your property taxes. Property taxes are the only revenue source over which the City has any substantial degree of control. And so the only way the City will be able to pay for the ramped-up contributions to the plans that will be needed in the future is to increase property taxes.

And the increases will not be small. If City were to amortize the $6 billion in debt with level payments over 30 years, it would require annual payments of nearly $500 million. Added to annual current cost means a contribution of nearly $700 million each, or $300 million more than the City is currently contributing. It would take a 30% increase in the tax rate to pay for this increase in contributions.

And that assumes that the proposed benefit reductions actually add up to a $2.5 billion reduction in the pension debt and that the plans earn 7% on their investments indefinitely into the future and that there are not significant increases in life expectancy over the next 30 years. In other words, there is plenty that could go wrong and necessitate even larger contributions to the plans and ever larger tax increases. State Sen. Paul Bettencourt has estimated that it will take a 50% tax increase to pay for a continuation of the City's current defined benefit system.

Conclusion

I commend Turner for attempting to take on the pension issue. It is a difficult, in fact nearly intractable, problem. He will be criticized from all quarters regardless what he does. But that does not mean that Houstonians should blindly line up to support a bad proposal. And from what I can discern at this point, this is a bad proposal. It cuts benefits and throws the City even deeper into debt, but promises no permanent solution to the problem.

Our City is at a critical juncture. We know what happens to cities that overtax and under serve their citizens. We have seen it in Detroit, Chicago and many other cities. The City is already losing some of its largest taxpayers and the overwhelming majority of the growth in the region is occurring outside the City limits. And unfortunately this is not the only challenge the City is facing. We will likely be looking a very large increase in water and sewer rates in the near future due to our sewer system being out of compliance with the Clean Water Act.

We cannot afford to kick the can down the road again on the pension crisis. If we do not get real reform done this time and get it right, the City may well be on a fiscal trajectory from which there is no recovery.

Why Is Hillary Taking Coumadin?
Submission by Dr. X, Board Certified Internal Medicine Specialist

Board Certified Internal Medicine Specialist and friend of TCR, Dr. X, raises serious unanswered concerns about Hillary Clinton's true health condition.

Coumadin is taken long term for: (1) Atrial fibrillation to prevent blood clots from developing in the upper chambers of the heart and breaking off and causing strokes; (2) Clotting disorders which can result in blood clots, typically in the legs. These can break off and result in blood clots to the lung (pulmonary emboli) and which can be a cause of sudden death; and (3) Short term following a cardiac stent.

Also, a patient with pneumonia doesn't go into her daughter's house for an hour and come out fine. If that were the case, we wouldn't need antibiotics.


TCR on the Air

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Upcoming shows:
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About Your Editor

Gary Polland is a long-time conservative and Republican spokesman, fund-raiser, and leader who completed three terms as the Harris County Republican Chairman. During his three terms, Gary was described as the most successful county Chairman in America by Human Events - The National Conservative Weekly. He is in his nineteenth year of editing a newsletter dealing with key conservative and Republican issues. The last fifteen years he has edited Texas Conservative Review. As a public service for the last 13 years, Gary has published election guides for the GOP primary, general elections and city elections, all with the purpose of assisting conservative candidates. Gary is also in his 15th year of co-hosting Red, White and Blue on PBS Houston, longest running political talk show in Texas history. Gary is a practicing attorney and strategic consultant. He can be reached at (713) 621-6335.

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