A few days before Christmas, the City of Houston released its Comprehensive Annual Financial Report (CAFR) for FY2017-2018. In recent years, the City’s standard operating procedure has been to release the CAFR over the holidays to minimize the attention it will receive because the news is generally not good.
This year is no different. The City’s net position, that is, the difference between all of its assets and all of its liabilities, fell by just over $1 billion. About $300 million of the reduction was an operating loss, current expenses exceeded current revenues. The balance was due to a change in the accounting rules for the expense of providing health benefits to the City’s retirees (commonly referred to as “OPEB”). As of the end of FY2017-2018, the City’s net assets stood at $762 million.[i] The City’s unrestricted net position hit a negative $6.45 billion, the largest unrestricted deficit in the City’s history.[ii]
The City’s operating loss of $300 million came notwithstanding that the City’s revenue rose by $209 million, a 4.3% increase over FY2016-2017. Sales tax revenues were up by 6.6%. Notwithstanding this robust increase in revenue, I am sure that Turner and others will renew their call to repeal the property tax cap and raise your property taxes even more.
This year’s CAFR once again confirms that the City is on an unsustainable fiscal trajectory. Chris Brown, in his introduction to the CAFR, bluntly states that the City’s budget is not structurally balanced and relies on accounting gimmicks to “balance” the budget each year. He is right. If we don’t get our arms around the City’s financial problems, they will adversely affect our long-term growth and competitiveness.
[i] Some of you may recall that in 2016, the CAFR showed for the first time in its history that the City’s net position was a deficit. In 2017, the City booked a $1.9 billion gain from the changes to its pension plans. I won’t get into the bizarre world of pension accounting here, but simultaneously with booking this gain, the City also deferred $1.7 billion of pension expenses to be recognized over the next five years, which in my opinion makes the gain booked by the City in 2017 completely bogus. Click here to see the CAFR disclosure on the deferred pension expense.
[ii] A governmental entity’s “unrestricted net position” is calculated by subtracting its capital assets and those funds that are legally restricted to a particular purpose. It is not unusual for a governmental entity to have a negative balance in its unrestricted net position; however the size of Houston’s deficit at over $6 billion is alarming.
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The City of Houston is a financial disaster. The Finance Department has been and is now managed by mayoral lap dogs! The next mayor needs to replace the old guard at city hall with critical thinkers who will challenge the existing ways of operating, understand the need to privatize certain services, and reduce administrative staffing which is duplicative in many instances.
Interesting that the outside auditors do not comment on the deficit in their opinion. There is no “going concern” issue if COH demonstrates sufficient future cash flows to operate. That may be fine but COH does not have a structurally balance budget resulting in annual deficits which will only increase the City’s deficit.
Where will it all end and when will City leaders wake up and take notice!!
Neil D.