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Circling back to city finances

I have three things to say about this.

BagOfMoney

This time, [City Finance Director Kelly] Dowe insists, the $126 million deficit he projects for the budget year that starts next summer is not going to disappear, as past projected shortfalls have. There are no more payments to defer, he says, no more valuable city-owned land to sell.

As a result, the city could be facing layoffs and cuts to services within a year – perhaps pool closures, restricted library hours and parks going to seed, and perhaps worse.

“We have an unsustainable financial model,” Councilman Dave Martin said. “We cannot continue to do this. If we continue down this path, we’ll be belly up.”

Dowe and his boss, Mayor Annise Parker, know Houstonians are confused as to why their government would face layoffs and service cuts while the region’s economy booms.

There are several reasons for this, all a decade or more in the making.

The city has been spending more than it brings in for years, a structural gap driven chiefly by soaring pension costs and, in recent years, a spike in debt payments. Houston typically bridges this gap by budgeting conservatively, being happily surprised when tax revenues exceed projections during the year, then using those “extra” dollars to balance the next year’s budget.

To balance the current budget for the fiscal year that started last week, council approved taking $86 million from last year’s leftover savings, the largest such transfer in a decade.

“Obviously we carry the reserves over from year to year. That’s money that’s not generated or not expected to be generated in the next budget cycle,” said Controller Ronald Green, the city’s elected financial watchdog. “Clearly, if you want to be technical, it is not a structurally balanced budget.”

This history of disappearing deficits has made some council members skeptical of just how dire current projections are. Dowe acknowledged that he originally projected an enormous shortfall for the current budget, which wound up being balanced without layoffs or service cuts.

But he also ticked off a litany of reasons that he says will make another easy fix harder in the future.

First, the city has run into a cap on property tax revenues that voters imposed a decade ago. Houston can collect more property taxes each year than the year prior, but is limited to the combined rates of inflation and population growth.

The city now knows exactly what it will collect each year from its largest source of revenue, and no number of new skyscrapers or townhomes will change that. The typical way the city has wound up with “extra” money at the end of each year is thus gone. Without the cap, the city would have had another $53 million to spend this year.

[…]

Each of the next two years also will bring a $50 million payment to the police pension, triggered under the pension board’s contract with the city because sluggish investment returns have eroded its funding level.

Without an increase in revenue, Dowe said, the only option is to cut services.

“Debt is what it is, pensions are what they are,” he said. “We will continue to get more efficient, we will continue to cut costs where we can, but in the long term it would be hard to say you wouldn’t affect services with the outlook we have.”

Debt payments for past public projects have risen by more than half over the last five years, to $346 million this year, and are projected to reach $411 million by 2020. Pensions are devouring $308 million of the city’s main operating fund this year, nearly three times what is spent on parks and libraries combined.

1. There’s no serious solution to this problem that doesn’t include repealing the revenue cap. Every candidate running for office runs on a promise of promoting economic growth and prosperity. Houston has had that these past few years, but thanks to the cap we’re being penalized for it. Fifty-three million dollars is a lot of money and would do a lot to reduce the scope of the problem we’re facing, and that’s just for this year. You want to argue that we don’t have a revenue problem in Houston I’ll be sympathetic, but that doesn’t mean that throwing away extra revenue like this makes any sense. There is no good reason not to use all available resources.

You may argue that the people won’t go for it, and you may be right. What evidence we have from limited polling certainly suggests that’s a strong possibility. To that I say, how about a little leadership from those who want to be Mayor? Politicians love to talk about “making the tough choices”, yet somehow choices like this never seem to be on the table. To be fair, at least some Mayoral candidates have mentioned this – I know Chris Bell has, I’ll have to check on some others – and Mayor Parker has brought it up as well. Any candidate who says they want to make “tough choices” but doesn’t consider this is to my mind not to be taken seriously.

2. Similarly, I don’t know how anyone can look at the debt figures and not support ReBuild Houston. One of the defining purposes of ReBuild Houston was to pay down existing debt and reduce the amount of future debt needed to pay for infrastructure. Put aside the extra revenue stream that ReBuild Houston represents, why would you want to add to the debt burden at this time? I’m not against using debt to invest in the city’s infrastructure, but now is not a very good time for it. What exactly is the case for going back to a bond-based system of paying for street and drainage improvements?

3. Finally, the pension issue. The choices are the same as they’ve always been – try to convince the Legislature to grant the city the authority to make changes to the pension plan; try to negotiate a different agreement with the firefighters; suck it up and figure out how to pay what we owe. I’m not sure why anyone thinks they’d be more successful at #1 than Mayor Parker has been, and I can’t imagine anyone advocating for #3. Maybe I’m missing something, I don’t know. I don’t know what else there is to say on this.

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10 Comments

  1. Paul Kubosh says:

    That is why we were against the last bond issue. The Mayor saw this coming and still pushed the $400,000,000 bond issue. The Mayor also wants to saddle us up with more debt by moving everyone over to the old exxon building. How about that? This was coming for a long time and no one. I mean no one cared to do a thing to stop it. This has been a ringing endorsement of progressive (whatever that is) leadership. However, no need to despair. A bankruptcy trustee can fix everything.

  2. robert says:

    I agree (about a bankruptcy trustee) I’ve been saying the magic year is 2021 for 7 or 8 yrs now….keeps getting closer and politicians keep saying everything is fine.

  3. Bill King says:

    1, The Revenue Cap charter provision only limits property tax revenue to inflation + population growth. No other revenue source is capped. During the Parker administration, City revenues are up 34% or $1.1 BILLION. Also, charter amendment provides cap can be exceeded any year, if voters approve. The reason City had not proposed an increase is because it is absolutely clear taxpayers are opposed to paying more property taxes, at least, without guarantees that increase will be funneled into specific infrastructure improvements. Overwhelming approval of HISD bond in 2012 proved that. The revenue caps were increased in 2006 for public safety, yet we have fewer police officers today than in 2006. Houston taxpayers are not going to sign any more blank checks.

    2. The case for bond financing vs. pay-as-you-go is that it is cheaper. The only “savings” from pay-as-you-go is the interest. However, if the costs of the projects rise faster that the municipal bond rate (which it normally does) delaying the projects will cost more than borrowing the money and building them now. This move to pay-as-go was particularly poorly timed because interest rates are at historic lows, construction costs have been rapidly rising in Houston, and much of our infrastructure is near the end of its useful life. Also, delaying the projects imposes a hidden tax on the residents because they do not get the benefits of the projects and therefore pay for more blown out tires, flooded homes, etc. There is a reason that almost no other major cities use pay-as-you-go.

    3. Legislature will act when Houston comes forward with a comprehensive plan that fairly addresses the pension problem. The City has only proposed changes to the fire plan. It has never proposed any changes at the Legislature to the police or municipal plan which are in much worse financial shape than the fire plan and represent a much more serious financial risk to the City. The City needs to do what the private sector did decades ago and come up with a plan that eventually migrates its pensions to defined contribution plans. The tail risk inherent in defined benefit plans is too great and they present the unavoidable moral hazard that elected officials will make pension promises then not fund them. If we act soon, we can keep the promises we have made to current employees and retirees. But continuing to make these promises to new employees is irresponsible.

  4. Steven Houston says:

    Here goes…
    PK: “The last Comprehensive Annual Financial Report from the city of Houston on the fiscal year ended June 30 stated: “As of Sept. 30, 2014, the city’s outstanding debt payable from taxes and other revenue sources totaled $13.0 billion. This is in compliance with all applicable financial policies and considered manageable.” The newer numbers should be out soon if not already but add in whatever other financial obligations the city has to arrive at total debt (Mr. King’s campaign suggests the amount is over $20 billion based on projections rather than actually incurred debt).

    That sounds horrible, doesn’t it? The catcher is, these debts range out for decades and are not some big bad balloon payment suggested by irresponsible mayoral candidates. In a city whose various funds and operations bring in about $5 BILLION A YEAR, it’s not bad at all. It’s not a license to go crazy and start issuing bonds like a lunatic for everything under the sun as one has suggested, but it is completely manageable. There’s a catch though, a fair amount of the city needs work, work that falls on the city to fix, and a second catch, there are limited funds at any given point in time to spend (or borrow) so you have to prioritize what you’re going to fix first.

    Now PK, I know you are generally a level headed guy who runs and/or co-runs various local businesses so you know how to budget, keep the wife in check, and all the rest to stay out of bankruptcy. No matter whose agenda it suits, the city of Houston is no closer to bankruptcy than you are. It brings in enough each year to make payroll and cover costs of priority operations but not do as much as elected officials want, so they defer maintenance and pesky things like pension payments to allow for more library hours, more parks, and even more capital improvements since, let’s be honest here, voters expect frills and campaign contributors at engineering firms and such all expect their payback.

    At any time in the coming years, a mayor can take the hit and greatly reduce many capital expenditures for a term or two in order to pay down debt. If that means a few dozen more tires blown out by drivers who refuse to pay attention, so be it but as bad as some claim our streets are, there are few reports of tires blown because most people seeing a large potholes simply change lanes. Houston has: “…over 16,000 lane miles of streets, over 60,000 stormwater manholes, over 100,000 stormwater inlets, over 900,000 street name and traffic control signs, over 17,000 freeway and under bridge light fixtures, over 50,000 fire hydrants and traffic signals at over 2,000 intersections…” per the city website. You and I both know I’ve traveled on more of them than any mayoral candidate ever will over the past several decades (I’m sure King is more familiar with Kemah than I am, Turner with Austin, and Hall with Piney Point) and most of those streets are good enough to withstand a few years of austerity budgeting.

    As far as a bankruptcy judge is concerned, I don’t profess to be a legal expert in the field but given some of the slanted op-eds one of the candidates used to put out before the Chronicle cut the strings, I feel more than up to the challenge of providing a counterpoint here. With an elected city council that just voted to keep up their million dollar slush funds for each district (kudos to your brother and a few others for voting against them this year) and continued to spend every nickle they could scrape up, I’m willing to bet that items deemed “non priority” by city charter and recent council votes get bigger cuts. I’ll go so far as to suggest said judge will find past practice of closing down fire and police academies for a few years worth it just as leaving spots unfilled when 150 cops retire per year or a somewhat lesser amount of firemen; only modest changes needed to fix the problem to the point where said judge would laugh in the face of those claiming the city was truly in need of filing, the desire by some to cheat employees curious to say the least.

  5. Steven Houston says:

    Robert, since you base your time line on very specific years, perhaps you can entertain us with at least the slimmest of rationale behind your belief. I’m not fussing at you, just find that going so far out time wise that literally anything could happen. Maybe you’re of the belief that a sweeping market change will slam the country or that the next mayor is fiscally worse than the last 5 or 6 we’ve endured but by all means, please provide at least a scintilla or reasoning if you would.

  6. Steven Houston says:

    Mr. King:
    1) Houston voters have traditionally not agreed with your singular focus on pensions and finances, candidates like Tatro, Kelley, Frazer, and numerous others all failing to win the mayoral or controller seat (exception being Kelley but he lost after one term, a rarity locally). In a city with a total budget of over $5 BILLION a year, focusing on pensions as the big, bad wolf bankrupting the city when they current amount to about 6% of the total budget sure seems like a vote catcher to me (sarcasm intended). Even if you paid the amount needed per year, spread out on a 30 year basis, it comes to under 10% and even if you change plans to ANYTHING ELSE, the city is already the low cost leader for employee compensation in big cities here in Texas as well as elsewhere. The belief that “as long as we have a lot of applicants for jobs, we must be paying just fine” is silly on the face of it, given the reductions in qualifications over the years. PS: Even under a defined contribution plan, one where the city won’t have the ability to be flexible as needed, you’ll still be paying out of pocket a similar amount only to provide a smaller benefit.

    2) According to your own campaign literature, the city is in debt over $20 BILLION and paying almost $350 MILLION a year in interest alone (not including the tens of millions in fees and other costs). That’s about “three [and a half] times what is spent on parks and libraries combined” yet you want to issue debt for pensions, streets, and other infrastructure which will further restrict city leaders long after you’re gone. Parker already slit the throat of retirees by largely eliminating their medical subsidy, something no other major city (hint: even Detroit subsidizes retiree medical more and that’s AFTER the bankruptcy court rulings) has done to that extent despite long held promises and employment contracts. In complete fairness, there is a balance between using bonds and “pay as you go” to achieve things but you can’t have your cake and eat it too; complaining about huge levels of debt while promising to issue gobs more of it seems hypocritical, yes?

    Oh, and those “hidden fees” you complain about are very true and usually discarded from the calculation of capital work projects in any meaningful manner. From 2008 to ~2012, construction firms were giving fire sale prices to stay afloat and keep payroll fed too, so suggesting such costs are always cheaper than doubling the cost by issuing bonds isn’t as big a panacea as you are selling. It varies and measuring the benefit of a particular project is not cut and dry.

    3) The city proposed changes to the fire plan because a) the other two plans have a great deal more flexibility in them, b) both of the other plans worked with the city more during tight times, and c) both of those plans gave away BILLIONS in concessions long before anywhere else was even talking about it while remaining far less compensated than other cities in Texas and elsewhere. As a result, HFD’s pension is far better funded and largely untouchable but what kind of precedent do you set when the groups that worked with you the most and gave up the most get hammered again, based solely on their willingness to help? To HFD’s credit, they are also one of the lowest paying big city departments in the nation (and state) so their quite reasonable rational is that cuts are off the table given total compensation levels.

    Let’s say your former law firm had been the body the city tried to defer payments to under Bill White instead of pensions. Do you think the partners would have remained silent as the total amount owed climbed into the billion + arena? Morally speaking, since you bring it up, wouldn’t they reasonably expect to be paid even if it came at some inconvenience to the city? And lest it not be said enough, municipal employees took big cuts while paying more for less medical coverage too, another of those “hidden costs” you like to selectively bandy about, just like the way they can’t collect their greatly reduced pensions until they are in their 60’s, the cops in their mid 50’s (both groups losing their access to a deferred retirement program available everywhere else, for employees hired after the changes in 2004 and 2007). The only point of contention brought up worthy of checking out was HFD increasing their DROP program before they were fully funded, not a huge savings.

  7. Steven Houston says:

    Kuff:
    1) I believe the city can easily operate with the $5 billion a year it makes but that would mean cuts to services, less infrastructure repair, and systemic changes in programs like the TIRZ we have bantered about of late. When you take $150+ million a year and hand it over to narrow interests for their personal gain, you have to expect problems. That some are going to build even larger parks that will need even more funding each year to maintain, it creates a downward spiral eclipsed only by fanciful schemes to issue tons of more debt without considering the impact of the interest payments.

    2) It’d be nice if the courts ruled ReBuild was okay but all funds taken in under the fee had to be used for appropriate projects. In this day and age of flexible financing and shuffling of funds, I wouldn’t hold my breath as some shyster will find a way around anything another one of them writes into law.

    3) The municipal and police pensions are unlikely to give further concessions without fire giving something up. Rather than bully employees, change plans or try your hand in the bankruptcy courts as some would seek, especially given the way some vilify the employees as if they were to blame, perhaps it would make sense to try and negotiate as Turner or Bell might. Those suggesting such pensions are unlike what other municipal employees get elsewhere are correct to a degree, every major city offering bigger, better, and more while also offering better medical for less cost to employees and better direct pay. Much of the amounts or debt people like Mr. King or Costello attribute to pensions is pure speculation too, no one knowing what the markets will bear in future years.

    For example, last year the police pension system made a net 17.4% return on investment, it’s 30 year average netting 10.3%. The municipal system netted 16.39% last year, 13.5% the prior year, etc. HFD’s pension netted 17.53% last year, three year average is over 10%, and so on… I recall a certain chicken little suggesting the city would collapse years ago, repeating it several times as growing numbers of people ridiculed his columns. Sure, if the city keeps treating pensions as a “fund it when convenient” program, problems will increase just as if it defers maintenance or makes other poor decisions but blaming such a small part of the budget for all ills is the kind of leadership the city can’t afford even if various candidates come up with some decent ideas.

    This year would have been a problem had the pensions not had great years in the market, the same for the next two years as mentioned briefly in the article. HPD wisely put in a contract clause that requires the city to fund it to 80% once it hit that level, hence the “$50 million” that was “saved” this year and might hit the budget with next year as it flirts with the milestone. If push comes to shove, let the number of personnel drop a few hundred in police and fire, changing policies as needed to stay within the budget and pay the bills (just like we all have to at times). Will it mean fewer hours at the library? Perhaps but go to almost any library in the city and count heads on a given day to find many are vastly under utilized. The same goes for where to place individual cops or EMT professionals, flexibility the key.

    And if anyone read this far, my apologies but only simple minds believe in universal, simple solutions where no one experiences any pain as a result, such is the problem with campaign slogans by politicians.

  8. Paul kubosh says:

    Steven…hell of a comprehensive reply. Just way to much to respond to. You are the man for such a response.

  9. Steven Houston says:

    Some day, when your brother runs for Mayor (or commissioner’s court), if his principles are aligned with mine; I’ll do a bunch of his policy work for free. If he becomes a one trick pony like a certain “other” candidate who doesn’t think things through, I’ll be his albatross. lol

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