Noteware: The City of Houston Has A Spending and Priorities Problem, Not A Revenue Problem

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As the reality of the City’s budget has become apparent in recent weeks, Mayor Annise Parker and even some prospective 2015 mayoral candidates have begun to call for more revenues. This has led others to question whether the City of Houston has a revenue problem or a spending problem, given revenues that have increased nearly every year for over a decade.

Let’s turn to the numbers. City revenues in all funds (general and enterprise) have increased consistently and dramatically since 2002, the last year the city balanced its budget under the accrual basis of accounting. In 2002, total revenues were $2.6 billion; in 2015, total revenues are budgeted to exceed $4.064 billion, an increase of 56% in 13 years.

Revenue growth over much of the last decade was driven by dramatic increases in water and sewer rates. Voters narrowly approved the “rain tax” in 2010, further boosting revenues. Although the recession produced slight decreases in total revenues in Fiscal Year (FY) 2010 and FY 2011, total revenues recovered quickly in 2012, reaching record levels in 2013. The rebound was driven largely by sharply rising values of commercial and residential properties in certain areas of the city.

Property tax revenues are expected to rise so rapidly in the coming fiscal year that they will reach the cap imposed by Proposition 1, the 2004 voter-approved city charter amendment to limit City revenues (which I will discuss in a forthcoming article). Put simply, the city charter effectively says property tax revenues are so high that the City cannot raise them further.

In 2002, City expenditures (and revenues) totaled $2.6 billion. In 2015, expenditures are budgeted at $4.199 billion – an increase of 61.3% over the same 13 years. Spending has consistently outpaced revenues.

Where is the money going? According to a recent presentation by the City of Houston’s chief financial officer, general fund expenditures are dominated by personnel costs, with classified personnel (police and fire) accounting for 73% of the total. Rising pension and healthcare costs have helped to drive up costs. But base pay and other benefits have risen even more dramatically over the last decade, outpacing Houston’s private sector.

Analysts of government performance often compare the costs of delivering government services against a combination of population growth and inflation. If inflation rises and the population grows, for example, then the cost of providing services can be expected to rise proportionately. What if population is flat and inflation is moderate (as the City of Houston has experienced during the past 15 years)? In 2002, the cost of Houston government per capita was $1,314 ($2.601 billion divided by population of 1.979 million). By 2013, the per capita cost had risen to $1,922 ($4.151 billion divided by a population of 2.160 million) — an increase of 46%!

When private companies encounter difficult financial conditions, they try to figure out how to do more with less by prioritizing. In contrast, our municipal government seems to spend more without doing more. In recent weeks, the City Council has even been struggling to define its “core” mission and services, in an effort to cut the budget by 1%. That’s not a typo.

I draw three simple conclusions: 1) the City has run consistent deficits since 2002 despite having taken in record revenues most years; 2) despite these record revenues, the City’s spending has grown even more quickly; and 3) given Council’s recent struggles, it is increasingly clear we also have a severe priorities/leadership problem!

Now, what do we do about it?

A version of this article appeared in the Houston Business Journal on January 9, 2015

Jim Noteware
About Jim Noteware 18 Articles
Jim Noteware is a Houston-based real estate developer, focusing on suburban master-planned and urban infill communities. He also specializes in the turnaround of distressed properties, portfolios and organizations. He has served two big-city mayors, in Houston and Washington, D.C., working to improve the performance of large troubled public agencies.