This week, the Greater Houston Partnership (GHP) issued its State of the City’s Finances report. The report once again documents what many of us have been saying for over a decade. The City has been running, and continues to run, a persistent structural deficit that is unsustainable.

The report was prepared by John Diamond, a Rice public finance professor. He primarily used the City’s annual audits to document that the City has continued, for over a decade, to spend more than it’s recurring revenue. He also highlights problems looming just over the horizon, such as the on-going dispute with firefighters over their pay, massive amounts of deferred maintenance on City facilities and infrastructure, and the chronic problems of paying for retirement pensions and health benefits we have promised our employees.

The current administration has been crowing recently that it is going to leave the City with its largest general fund surplus in years. This is technically true. In recent years, the general fund balance at the end of the fiscal year has been running in the $250-$300 million range. The administration and the Controller estimate the general fund surplus at the end of this fiscal year will be $466 million and $416 million, respectively.

The general fund surplus is the equivalent of how much money you currently have in your checking account. If you just inherited some money from a relative or if you are not paying your bills, you might have a healthy balance in your checking account, but it does not indicate much about your long-term financial prospects.

In the City’s case, it has received a huge influx of funds from its Uncle Sam, and it has not been paying its bills for some time. So, it does indeed have a healthy balance in its checking account, but one that is about to dissipate rapidly.

The Bailout

For many years, the City has been the beneficiary of grants, primarily from the federal government. These are for a variety of programs, with law enforcement, airport construction and housing, being among the largest.¹ From 2011 through 2018, the City averaged receiving a little over $400 million per year in grants. However, the grants ticked up in 2019 and 2020, before skyrocketing in 2021 and 2022. In the last two years, the City received just under $4 billion in grants, about equal to what it had received in the previous ten years.

‍

In 2022, grants made up a staggering 30% of all City general fund revenues.

The huge surge in grant funding was mostly related to the aid the federal government sent in response to the pandemic. It was originally assumed the local governments would have a catastrophic decline in revenues because of the lockdowns and massive public health expenses containing the virus. However, neither of those fears materialized to any significant degree and the federal aid ended up mostly being windfall for local governments, including the City of Houston.

Not Paying Our Bills

At the same time, the City has continued to kick the can down the road on a number of pressing issues, creating enormous future costs and liabilities. The highest profile of these is the ongoing dispute between the City and its firefighters. A lawsuit is currently pending to determine how much the firefighters are owed in back pay. While it is difficult to predict the outcome of the litigation, most knowledgeable observers think the City will ultimately end up owing the firefighters hundreds of millions of dollars.

And there are less publicized looming liabilities that dwarf what the City may owe to the firefighters. One of the largest will be the price tag catch up on our street maintenance. Regular readers may recall that I wrote a post earlier this year, showing that the City has, for over a decade, only been replacing about a third of the necessary lane miles per year. This is a chart from the GHP report summarizing the largest ones:

Also, the GHP report shows that while this administration has made some progress on the pension and health benefits owed to its employees, those problems are far from solved.

Conclusion

I am thrilled that the GHP has weighed in on the City’s unsustainable financial trajectory. But frankly, the fact that the City was on this path has been apparent for some time. The City Controller, Chris Brown, has flatly stated in each of his annual reports for the last eight years, that the City’s structural deficits had to be addressed. The City Council has received multiple briefings from him and the Finance Department staff highlighting the problem. And yet, little corrective action has taken place. And if I were a told-you-so sort of guy I would pull some of my 2009 op-eds that originally highlighted these problems.

Unfortunately for the next mayor, there will be no avoiding the hard choices we are facing. It seems highly unlikely Congress is going to be in the mood to continue to bail out local governments given its own financial problems. And many of the pending liabilities and deferred maintenance issues will come to head during the next administration.  His or her task will be daunting to say the least.

__________________________

Note 1: You can review some of the detail on grants received by the City by looking at the annual audits of the grants they are required to provide to the federal government.