Fitch: Houston, TX Pension Proposal Has Positives and Risks
The proposal also includes the issuance of $1 billion of pension obligation bonds (POBs). Fitch views POBs as a neutral to negative credit consideration, noting the possible impact to overall financial flexibility and additional investment risks associated with their use. A key consideration is the use of proceeds from a POB borrowing: if proceeds are used to boost a system's assets, they essentially replace one long-term liability with another. It is Fitch's understanding that Houston's POB proceeds would be used in this manner, rather than replacing contributions, and thus Fitch does not consider this deficit financing. POB use does entail interest rate risk, as investment returns on POB proceeds must exceed the cost of borrowing for the strategy to be considered a financial success.
POBs are typically used for plans that are poorly funded and with questionable long-term sustainability, and Houston's pension programs fit into this category. Use of POBs alone typically is insufficient to correct underlying sustainability concerns and provides only temporary relief in the absence of broader reforms. However, POB use in conjunction with reforms to benefits and contribution practices increases the odds of strengthening funding positions and improving long-term sustainability.
Fitch's evaluation of a local government's long-term liability burden measures overall debt totals and net pension liabilities as a percentage of the economic base (as measured by total personal income). Houston's burden currently is moderate at roughly 14%. Fitch will conduct a thorough analysis of Houston's pension reform program once agreements between all parties are executed and any necessary legislative approval is obtained.