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Why revenue caps suck

I’ve been expecting this.

Mayor Annise Parker

Mayor Annise Parker

Despite a booming economy that is the envy of much of the nation, the city of Houston could face hundreds of layoffs and cuts in service next year as it runs headlong into a revenue cap put in place by voters a decade ago.

Mayor Annise Parker sounded the alarm Thursday as she rolled out her plan for a $5.2 billion overall budget for the fiscal year that begins July 1. Driven by soaring pension costs, contractual raises for employees and the increased cost of servicing the city’s debt, the proposed budget envisions an 8 percent increase in the general fund, which is fed chiefly by property and sales taxes and funds most basic city services.

The spending plan would expand single-stream recycling to all households, add $10 million for pothole and street repairs in addition to what will be spent through the ReBuild Houston program, and provide a $2.6 million increase for the city’s Bureau of Animal Regulation and Care.

The real challenges, Parker and others said, await next year, with the fiscal year 2016 budget and beyond.

The hot economy is, in some sense, to blame, as sprinting increases in property values are expected to run the city smack into the decade-old, voter-approved cap on revenues that would force a cut in the property tax rate, carving millions of dollars from the budget.

Combined with weaknesses that have lurked on the balance sheet for years, primarily soaring pension payments and a spike in servicing the city’s debt over the next four years, Parker said conversations with the council and public on how to address the shortfall must begin now.

“I’ll be very clear: If the cap stays in and there are no other sources of revenue, there will be layoffs,” Parker said. “The Houston economy is going to continue to grow. We have held the line on taxes, and yet, there’s a forced tax rollback just when there’s more and more demand for services. The options are raise revenue, cut spending, both, or go to the voters in 2015 and amend the charter.”

The cap holds city property tax revenues to the combined rates of inflation and population increases.

If voters reject any changes – such as raising the cap for public safety spending, as former Mayor Bill White did – Parker said cuts could be nearly as drastic as when 776 workers were let go during the recession in 2010.

You can see the expenditure summary here and the Mayor’s press release here. I’ve been fearing this problem for some time now. Back in 2010, when Mayor Parker was grappling with the giant budget shortfall that resulted from the depressed economy, her team put out a graphic “balance the budget” tool that allowed you to decide how to apportion the shortfall. It did have an option built in to raise revenues, but as the tool was constructed you could only fill in part of the hole by raising taxes or whatever. The reason for that is the revenue cap, passed in 2004, that limits annual increases in property tax revenue and water and sewer rates to the combined increases of population and inflation for Houston or 4.5 percent, whichever is lower. Are you experiencing bad times and need more revenue to avoid cutting staff and programs? Too bad. Are you in good times and would like to invest in infrastructure or pay down long-term debt with the bundles of extra property tax revenue rolling in? Too bad, you have to cut the tax rate. If that forces cuts elsewhere because costs increased faster than the artificial limit you imposed on revenue growth, too bad. Is this a great idea or what?

City Finance Department Director Kelly Dowe said he will order departments to seek efficiencies, but that will not bridge the gap; nor will fee increases. The city cannot fix its pensions or the revenue cap by itself, he added, leaving only cuts to services or extending debt payments to a future’s mayor’s term, which Parker won’t do.

Just such a debt bubble, created by past refinancings, is coming due over the next four years. General obligation debt payments will jump from $297 million this fiscal year to $355 million by fiscal 2018 before falling.

White’s 2006 maneuver to increase the original 2004 revenue cap by $90 million for public safety spending simply “delayed the day of reckoning,” Dowe said.

“Here we are, public safety costs have gone up $90 million over the 2006 to 2014 time frame,” he said. “It’s going to be up to everyone to decide whether what seemed like a good idea in 2004 is really a good idea in 2014.”

Yeah, well, some of us thought this was a lousy idea back in 2004. The projection of what may be to come in 2015 was entirely predictable in 2004. We’re likely to get sidetracked from here into another squabble over the firefighters’ pension fund. I don’t have the patience to adjudicate this again, I just care about dealing with that stupid revenue cap. I’m glad to see Mayor Parker bring it up, and I hope she does turn her attention to it one we pass the NDO and get past the Uber/Lyft battle.

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4 Comments

  1. Steven Houston says:

    Not that I completely disagree with you Kuff but those revenue caps do serve a valid purpose. It’s all well and good that revenues are up substantially but don’t forget where those revenues are coming from, regular people for the most part. Granted, some established debts like pensions can be “fixed” merely by adding another 10% or so a year for awhile, easily affordable in boom years but infrastructure like city streets and major projects are not so easily fixed without the “extra” money coming in.

  2. Bill Daniels says:

    The revenue caps were a brilliant idea, seriously. The point of all that was to help property owners keep the property they own. What happens when an area gentrifies? The taxes go up so much, folks are forced to sell their property because they can’t pay the tax on it. Well prices are up all over Houston, so without the caps, where are all these displaced folks going to go?

    The city needs to live within its means, and if that means pain as pensioners take a bigger and bigger chunk of the money in the till, then that’s what it means. Maybe that pain will inspire some future mayor and council to

  3. Bill Daniels says:

    reign in unsustainable pension promises in the future.

  4. Steven Houston says:

    The pension promises are not unsustainable, they are merely one portion of total compensation to employees. Given Houston’s pensions are a great deal less lucrative than other big cities in Texas and the country, one should ask the question: How can all the other major cities in Texas pay bigger salaries, bigger pensions, and offer better medical care for lower rates to employees?

    Think about it for a moment, from cradle to grave, Houston pays much less yet seems to have the toughest time remaining fiscally responsible. That most employees took huge benefit cuts ten years ago, plus twice more since then for municipal workers, further cuts seem irresponsible. If Austin, San Antonio, Dallas, and others can afford paying much more and offering better pensions, continuing to call current Houston pension benefits “unsustainable” seems laughable.

    A few years back, the state of Wisconsin made huge waves by cutting benefits, Houston area pundits started suggesting it was Houston’s turn. These clueless individuals were schooled that 1) Wisconsin’s new pensions were still far above those of Houston, 2) only then started requiring employees to contribute and at a rate nearly half what Houston employees had to contribute for a very long time, and 3) their medical benefits to retirees were so superior to those offered by Houston (the city just tripling the cost of retiree health care for workers) that it was tragic. That the hack and slash crowd were using the example without checking into it showed their ignorance on many levels. Wisconsin’s “gutted pensions” were still better than the best Houston ever offered, never mind after the wave of cuts starting in 2004.

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