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When Sylvester Turner left the Mayor’s office at the end of 2023, he boasted of a supposed surplus in the City finances. Indeed, as of December 31, 2023, the general fund showed a healthy $485 million balance. However, the fund balance was built up by kicking several problematic fiscal issues down the road to the next administration.
The first was the firefighters’ lawsuit, claiming they were owed over $1.2 billion in back pay. Turner had successfully delayed that suit until just after he left office. When Whitmire was sworn in, the trial date was ten weeks out. He was able to settle the suit for about half of what the firefighters were suing for. While some City officials have complained that the settlement was too high, it was clearly going to be substantial in any event.
A second chicken came home to roost recently when the Texas Supreme Court refused to hear an appeal from a lower court ruling that City officials had not been allocating the amount of money to the City’s street and drainage fund required by a charter amendment twice approved by the voters.
The math on this is a little complicated, so let me give you the “Reader’s Digest” version. The charter amendment specifies that several revenue sources must be set aside in a “Dedicated Street and Drainage Fund” (DSDF) and how those funds would be used. Generally, the amendment requires the funds to be spent on street and drainage improvements and repairs.
The amendment also prohibited the City from borrowing any more money for street and drainage improvements, adopting instead a pay-as-you-go model. At that time, it took 11.8¢ of the City’s tax rate to make the payments on the existing bonds related to street and drainage improvements. The amendment provided that as the debt was paid down, the savings from the reduction in debt service would go to the DSDF. When voters approved the amendment, the City tax rate was about 63¢. So, once the debt was completely paid off, about 18% of the property taxes collected would go to the DSDF if the property tax rate stayed the same.
However, in 2016, the voter-approved property tax cap, for the first time, forced the City to begin lowering its tax rate because inflation was low, and its population had begun to flatline. So, thereafter, the 11.8¢ started to become an increasingly higher percentage of the total property taxes collected by the City, making it harder for the City to balance its General Fund budget.
The Truner administration’s solution to this problem was to re-interpret the amendment to suggest the voters had intended a fixed percentage would apply and the percentage contributed would not increase when the tax rate was reduced. So, beginning in 2016, the City began reducing the amount contributed to the DSDF by an amount proportional to the amount the tax rate was decreased.
This change made a big difference in the amount the City would contribute to the DSDF. As soon as the Turner administration began using this new formula, the transfers to the City’s capital improvement program dropped by a quarter. Instead of increasing each year as the referendum anticipated, the amount generated for capital projects has been lower than 2015 in every year except one.
By my calculations in 2018, the City was shortchanging the fund by around $100 million per year. City officials have recently confirmed that the annual difference is in this range. As a result, the anticipated General Fund shortfall of something north of $200 million has ballooned to something over $300 million.
In the coming weeks, as the budget season for FY2025-2026 kicks off, we will hear more about the City’s plans to address the shortfall. I will follow those deliberations and make some suggestions.
However, this episode is another lesson that it is better to bite the bullet than kick the can. The Turner administration was faced with the dilemma that it could not continue spending at the level it wanted and comply with both the property tax cap and the street and drainage fund charter amendments. Of course, there was a very simple solution. It could have gone to the voters under the property tax cap amendment and asked their permission to raise more property taxes than the cap allowed. Ironically, the voters likely would have allowed the City to do so. It did so by a wide margin in 2006, when then mayor Bill White asked for an increase to fund more police officers.
Sadly, the Turner administration did not have the intestinal fortitude or the respect for the will of the voters to do so. As a result, we are left with another mess to clean up and millions of dollars wasted in legal fees on frivolous litigation. But worst of all, Houston lost another eight years of attempting to repair decrepit infrastructure.
Learn More About the City's Finances
You can learn more about the City of Houston's Finances in two upcoming events.
The first will be my blog readers' conference on February 22. We will devote about an hour to the City's finances in a panel discussion with At-Large Council Member Julian Ramirez, former Mayor, Controller, and Council Member Annise Parker, and Houston Chronicle reporter Mike Morris, who has written extensively on the TIRZs.
The second will be a panel discussion with Annise Parker and my colleague at the Baker Institute, John Diamond, which will focus on the City's recently released Annual Certified Financial Report. This panel discussion will be hosted by the Baker Institute and the Greater Houston Partnership at the Partnership's offices downtown.
Below are links to register for each of these events.
https://www.bakerinstitute.org/event/houstons-financial-report-2024-trends-takeaways-and-strategies
Bill King is the former mayor of Kemah, Texas. He served on Texas gubernatorial commissions studying the aftermath of both Hurricanes Rita and Ike. In 2006, he served on a task force appointed by the County Judges of Harris, Galveston and Brazoria Counties to revise the region’s evacuation plans in the wake of the disastrous Rita evacuation. In 2006, the National Hurricane Conference awarded him their Outstanding Achievement Award for his work in this area. In 2009, he was one of the founding directors of the Gulf Coast Community Protection and Recovery District, which initiated the process of attempting to build the Ike Dike.