Bill King: City of Houston releases its 2018-19 annual audit (CAFR)

by Bill King

Just before Christmas, the City released its FY2018-20191 Comprehensive Annual Financial Report (CAFR), more commonly referred to as its “annual audit.” There is some good news, but it comes with some big question marks. Mostly it is just the latest chapter in the chronicle of the City’s long-term fiscal deterioration. The situation was aptly summarized by our City Controller, Chris Brown, in his introductory letter:

Another critical financial goal the city must work toward – and eventually reach – is achieving a structurally balanced budget every fiscal year. Adopting a structurally balanced budget will require increased transparency in the City’s financial reporting to help identify the source of the structural deficiencies in the budget.

The good news is that the City cut its operating deficit in the general fund from $500 million to $134 million. The bad news is that most of the improvement came from non-recurring items and accounting “adjustments.” For example, two-thirds of the improvement came from a $242 million increase (52%) in “grants and contributions.” I could find nothing that explained this unusually large increase in the audit’s notes.2

I will have more to say after I have had a while to study it more closely, but here are a few other highlights from the audit:

  • Those who think the City is laboring under a “revenue cap” will be shocked to learn that its government activities revenue shot up from $3.2 billion to over $3.45 billion, a 7.6% increase. This is the largest annual revenue increase in the last decade.
  • The audit shows that the total Citywide headcount was down by about 650 from last year. However, about half of that reduction came in HPD. According to the audit there was a reduction of about 250 police officers. There is some indication that HPD regained some of those losses in the second half of 2019.
  • The total amount of asphalt used by the City to fill potholes fell from about 13,000 tons to just over 11,500, the least amount the City has used in over 20 years. The City claims it is using less asphalt because it has started doing more concrete panel replacements, which are more durable and should last longer. I cannot find anything in the audit that reports or compares that metric, but just from my own observations around town, it does seem like more concrete panels are being done.
  • The number of lanes resurfaced increased slightly from 142 to 153 miles, but is still far below the 300-400 needed for a routine replacement cycle.
  • The total value of all of the taxable property in the City increased by a paltry 0.9% last year. This is the slowest growth rate since the Great Recession.
  • The audit includes annual population estimates that it obtains from the Census Bureau for the last decade. First, it shows that the City’s population growth has slowed to a crawl in the last three years, averaging just over 0.4%. The other interesting thing from this table is that the population in 2011 dropped by 7%. That represents the difference between the 2010 estimate and the actual count in 2011 based on the 2010 census. If history repeats itself with the 2020 census and we learn that the current estimate is too high, it would have far-ranging impacts.

  • The total pension expense was down nominally from $947 million to $923 million. But most of the decrease came from non-cash adjustments such as assumption changes. The total unfunded pension liability was up by $44 million, but the City paid down its pension bonds by $40 million, leaving the total pension debt largely unchanged.

I first read a City audit in 2008. Since then, every audit has been the same story: The City spends more than it receives in revenue. Since 2003, the City’s finances have been dominated by the retirement benefits it has promised its employees. The City grossly underestimated the costs of the benefits, especially the increase in benefits granted retroactively in the early 2000s.

Ever since, the City has been continually grappling to come to terms with the actual size of the retirement liabilities. Its attempts to shore up the plans have continually swallowed up the City’s increases in revenues, resulting in the City skimping on reinvesting in its infrastructure and providing basic services.

Sure, there is plenty of stupid, special-interest spending that makes the situation worse. The idiotic $200 million investment in bus lanes on Post Oak comes to mind. But the fundamental financial conundrum for the City has been, and will be for many years, how to deal with its looming retirement debts in a time of likely slower growth.

 


1 July 1, 2018 through June 30, 2019. The entire report is available here (PDF download).

2 I will be using the terms “governmental activities” and “general fund” interchangeably, although they are technically not the same. “Governmental activities” is a term that appears in the audit and includes all of the City’s financial activities except for true enterprise funds, principally the water & sewer system and the Houston Airport System. The term “general fund” is a term used for the City in its budgeting and excludes a number of funds that are technically not enterprise funds, i.e., the Dedicated Drainage & Street Renewal Fund. There is about one billion of funds that the auditors include in “governmental activities” that are not included in the “general fund” for budgeting purposes.


The article above is reprinted by permission of Bill King. Feel free to submit topical articles/essays/releases for our consideration to bloghouston@gmail.com. As with our usual articles, the views expressed are those of the author.