Houston Daily

All governmental entities in Texas are required to issue an Annual Comprehensive Financial Report (ACFR) within six months of the end of its fiscal year. These reports must comply with the Government Accounting Standards Board’s (GASB) rules. For larger entities, the reports are very lengthy, running hundreds of pages, and written in accounting and financial jargon that requires specialized knowledge to decipher. As a result, the reports are rarely used by the public or even those in the media.

At the Center for Tax and Budget Policy at the Baker Institute, we have decided to begin reviewing the ACFRs for the City of Houston, Harris County, Houston ISD, Metro, and the Harris County Toll Road Authority on an annual basis. To kick off this initiative, we have just released our first review, which is of the City of Houston’s most recent ACFR.

The City’s fiscal year runs from July 1 to June 30. It issues its ACFR about six months after the close of the fiscal year. In January, the City issued its ACFR for 2023-2024. While the reporting period straddles the Turner and Whitmire administrations, the report reflects the last budget, which was adopted under the Turner administration in the spring of 2023.

We synthesized the 358-page ACFR down to a 20-page review and attempted to simplify it as much as possible.1 However, I will have to warn you that it is impossible to avoid the use of many technical accounting terms, and because the City’s finances are so wickedly complex, it is still a difficult read. For that reason, we plan to hold townhall-type meetings to review each of the ACFRs as they are released, where citizens can ask questions. The review of the City's audit is scheduled for this afternoon at the Greater Houston Partnership’s offices downtown. But unfortunately, it is already sold out. In the future we will get you more notice and schedule larger venues for the meetings.

Here are some highlights from our review:

• The City ended the year with a nearly $5 billion unrestricted deficit. This has come down over the last three years, however, mostly as the result of a torrent of federal assistance.

• The City continues to be hobbled by its pension obligations. Even though the pensions’ investments have performed well over the last several years, reducing the likely future liability, the City is spending over half a billion dollars annually to make contributions to the plans and payments on pension bonds issued in the past to shore up the plans.

• While the City, like most other major cities, has long received federal grant funds regularly, the amount of those funds increased dramatically in the last few years. In 2021 and 2022, federal funds made up more than 30% of the City’s revenues. In total, from 2021 through last year, the City received $6.1 billion in grants. However, that has already begun to recede and given the current political climate in the Washington is likely to continue to do so.

• The City’s population has flatlined since 2016. If this trend continues, it will be difficult for the City to expand its tax base.

• The City’s General Fund, which pays for most of the services the City provides to its citizens (e.g., police, fire, EMS, garbage disposal) has been and continues to be under considerable stress. The two principal sources of General Fund revenue are property and sales taxes. Property tax receipts have consistently increased, but sales taxes declined slightly last year. When discounted inflation, sales tax receipts have shown only tepid growth over the last decade.

• The stress on the General Fund will increase with the City’s loss in a lawsuit alleging that the City failed to make the required contribution to the Dedicated Drainage & Street Renewal Fund (DDSRF) as mandated by the City Charter. The court found that the City had been shortchanging the DDSRF by approximately $100 million annually.

• The City continues to grossly underinvest in the upkeep of its infrastructure. Last year, the City resurfaced only 131 lane-miles of its streets. That is the lowest level since the City began reporting this metric, and it is less than half of what engineering standards require to maintain the streets.

• The City’s water and sewer system, which is financed through a segregated fund, has seen its fund balance rise significantly over the last several years thanks to aggressive rate increases. However, regulatory scrutiny by the EPA of the wastewater system, combined with the rapidly deteriorating condition of the City’s principal freshwater plant, suggests that the fund will be financially strained for many years.

I wish I could bring you less gloomy news, but unfortunately, the City has, over several decades, worked itself into a very difficult place. Many of these problems would have come home to roost in the last administration had it not been for the largess of the federal government. With the likelihood of those funds drying up, the city will be forced to address the structural deficit that many have been warning about for some time.

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.