6 - 6Shares
The City recently issued its monthly financials for the first quarter of its fiscal year (July-September). The City has obviously faced serious financial challenges in the current environment which have exacerbated its long-term structural deficit.
The City’s monthly financial report is basically a cash flow statement, focused on the balance in its general fund. We will not get a full accrual look at the City’s financial situation until the audit is released next month.
The most ominous news is that our Controller, Chris Brown, is projecting that the City will bust its minimum required unrestricted balance at the end of the year. In 2014, City Council adopted an ordinance that the City keep at least 7.5% of its expenses on hand in the general fund as a financial cushion. Based on current projections, that would require a fund balance of about $160 million. The FY2020-2021 budget adopted by Council anticipates drawing down the general fund to $179 million, which would be the lowest level since 2012.
However, the Controller is estimating that the fund balance at the end of the fiscal year will come in about $60 million below the requirement. The Turner Administration is still projecting the reserve will be close to the budgeted amount. The principal difference between their projections are their estimates for sales tax revenues. The budget projected a 1.5% decline from last year ($685MM→$675MM), which seemed unrealistically optimistic to many. The Controller has estimated sales tax will drop by 12% to $610MM.
Since the beginning of the pandemic, the City’s sales taxes have been off by about 9%. However, the sales tax receipts for November (which reflects September sales) were up by 2% over last year. It is the first time since March there has been a year-over-year improvement. My guess is that it will come in somewhere between the Administration’s and the Controller’s estimates. But absent any other adjustments (like reducing expenses), anything over a 3% decline will bust the reserve requirement.
There is not any immediate consequence to the City busting its reserve minimum. The ordinance essentially states the reserve minimum as a goal without any required corrective action.
There is one wildcard that could dramatically improve the City’s near-term financial prospects. It has received $405MM in COVID relief funds but only spent about $70MM. There is a lot of uncertainly over exactly what these funds can be used for. Under the guidance issue by the Treasury Department, the funds are primarily to be used for the reimbursement of expenses incurred responding to the pandemic. They cannot be used to replace of lost revenues. Under the current rules, the City will probably have to eventually send most of the money back. But there is some reason to believe that a Biden administration might loosen the rules. If the City could apply even a substantial fraction of the money to its sales tax shortfall, it could more than make up the difference and relieve some of the shortfall in short-term.
The current financial exigency is yet another reminder that the City has made no progress on addressing its underlying structural deficit. As a result, it continues to struggle to deliver reliable municipal services and even to a greater degree to make the infrastructure investments we so desperately needed . . . and in the process make Houston a less attractive place for people and companies to locate here.
