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Houston, we have a problem: a chronic structural budget deficit.
A structurally balanced budget is one in which recurring revenues meet or exceed recurring expenditures, and the Government Finance Officers Association highlights it as a best practice for city governments.
But from 2017 to 2023, Houston’s recurring expenditures have exceeded its recurring revenues by between $100 and $200 million every year. The cash shortfalls have been filled by one-time revenue sources and deferred expenses – for example the sale of land and assets, the delay of major maintenance projects into future years, and most recently, the use of one-time federal stimulus dollars.
And while the FY 2024 budget estimates a healthy $401 million reserve fund balance – well above the minimum required – it assumes that $160 million in federal ARPA dollars (a pandemicrelated one-time revenue source) will be used to fund a portion of recurring expenditures. This will require the City in the following year to find $160 million in revenue to offset the recurring expense or further draw down on its fund balance.
These budgetary sleights of hand have resulted in a balanced budget on paper, but they are not sustainable, and they have contributed to an ever-widening operating deficit. Future one-time revenue windfalls cannot be counted on, and deferred projects only drive up future costs. The $401 million in the reserve fund balance is an important stabilizer of short run budget needs but will quickly be exhausted without further action.
And as of June 30, 2022, the City’s total net position is a surplus of $5.9 billion and the unrestricted net position is a deficit of $6.3 billion.
All of this points to a growing structural budget imbalance that poses challenges to Houston’s future growth and quality of life. It will require a collaborative effort by the City’s government, businesses and communities to address this challenge and ensure the long-term financial resilience of the region.
Achieving a structurally balanced budget: Key considerations
The Greater Houston Partnership believes there is a compelling opportunity in the coming years for the City, business and community leaders to work together on strategies and policies that will enable Houston to realize a structurally balanced budget – enabling the City to grow and its people to thrive over the coming decades.
To address the challenge, leaders of the region will need to grapple with at least six key interrelated issues.
The only certainty about long term economic trends is uncertainty. For example, the City’s sales tax revenue collections for fiscal years 2022 and 2023 increased significantly as consumer spending and inflation spiked after massive government stimulus payments in 2020 and 2021. But most realistic projections anticipate a reduction in sales tax collections in the coming years as the economy cools. Inflation, recession, global trade patterns, the price of oil, geopolitical conflict – all have unpredictable knock effects on the revenue the City collects and the cost of infrastructure and services, and such uncertainty needs to be anticipated in the structural budget balancing process.
Impending financial risks
The City faces a long list of high-cost liabilities, including deferred maintenance, contractual obligations with the City’s fire department, compliance costs with the City’s consent decree with the EPA related to wastewater system improvements, the rising costs of pensions and other postemployment benefit costs, and slowing population growth within Houston MSA. Some of the specifics underscore the scale of the challenge:
- Deferred Maintenance estimate related to roads: ~$3 billion
- East Water Purification Plant Rehabilitation: $1.14 billion
- Compliance projects with the EPA’s consent decree: ~$2 billion
- Collective Bargaining for the Houston Firefighters: ~$500 – 600 million
Overuse of Tax Increment Reinvestment Zones
Tax increment reinvestment zones (TIRZs) are entities created within the City to spur new investment and growth within that area. Since 2010, TIRZs have grown rapidly in terms of revenue, revenue per capita, and the taxable property value contained in the zone. As of 2022, almost 25 percent of the City’s tax base is contained in 26 TIRZs across Houston. While TIRZs have been successful in targeting local public investments, many have outlived their usefulness, concentrating City revenue in neighborhoods that no longer need it and complicating the ability to allocate City resources most efficiently.
City and State Revenue Caps
The City’s property tax revenue cap also presents a challenge to achieving a structurally balanced budget. In 2004, Houston voters passed a cap on property tax revenue increases that requires voter approval to raise taxes above the combined annual rates of inflation and population growth or 4.5 percent, whichever is lower. But eliminating the City’s revenue cap – even if politically feasible – would not be a financial panacea, thanks to the State of Texas statewide revenue cap that requires voter approval before local governments increase their property tax revenue by more than 3.5 percent.
Houston’s Combined Utility System
The Houston Combined Utility System (CUS) is one of the largest water and wastewater systems in the United States, and it faces a number of challenging issues, including a consent decree with the EPA, substantial freshwater losses, and aging infrastructure at its water treatment plants. Recent extreme weather patterns have put additional pressure on an aging water system, with persistent low pressure in certain areas as infrastructure fails under tough conditions. Although the CUS’s net funding position is relatively robust, nearly two decades of deferring maintenance in order to help balance the budget have taken a toll on the City’s water infrastructure.
The Dedicated Drainage and Street Renewal Fund
The pay-as-you-go funding mechanism for street and drainage projects approved by voters in 2010 has failed to keep pace with depreciation and maintenance expenses. Language in the 2010 proposition has allowed the City to set aside less than the intended 11.8 cents per $100 of taxable property value, resulting in a cumulative reduction of as much as $420 million for street and drainage projects from 2012 to 2023. And the City has never spent more than half of the $650 million per year that Public Works officials have estimated should be spent on such projects.
The City’s structural budget can be brought into balance with innovative thinking and strong, sustained and collaborative leadership. The problem has grown over time and it will only be solved over time. But it must be solved. Our City’s future depends on it.
This report originally appeared in the Greater Houston Partnership on Oct. 18, 2023.