Houston’s plan is not financially sustainable

City controller: Stop leaning heavily on the short-term gimmicks

Despite the passage of the fiscal year 2020 budget, Houston’s most significant financial hurdle still looms large: its structurally imbalanced budget.

A structurally balanced budget is one where recurring revenues match or exceed recurring expenditures. For the city, that simply means spending less than or equal to what it takes in.

The city has a statutory requirement to adopt a “balanced budget” but no requirement that the budget be structurally balanced. These imbalanced budgets have relied on non-recurring funding sources such as drawing down on savings, deferring maintenance, selling assets and a variety of other one-time funding sources to close their structural deficits.

This is not financially sustainable.

Balancing a budget by taking large drawdowns the city’s reserves leaves little breathing room to address financial emergencies. The city’s financial policies require a 7.5 percent reserve. The Controller’s Office anticipates ending this fiscal year $129 million above the reserve, but projects ending FY 2020 with only a $27 million cushion.

That’s very little margin for error. Those funds have been used several times in recent years. Immediate needs after Hurricane Harvey required a

$20 million cash infusion from the Budget Stabilization Fund that has not yet been replenished. A lower than anticipated U.S. Census Bureau population count created a $17 million hole in the FY 2019 budget. And most recently, Senate Bill 1152 is projected to decrease revenue from the city’s telephone and cable franchise by $20 million.

A healthy fund balance is critical for weathering economic downturns.

Most economists expect the U.S. economy to enter a recession by Fiscal Year 2022. To be ready for it, those same economists would recommend that the city increase savings and pay down debt now, during good economic times. Spending city reserves on a structural deficit means we won’t have the savings we’ll need when the economy slows.

Adopting a structurally balanced budget also means ending the practice of deferring payments into future fiscal years, as well as selling tangible assets to plug deficits.

For FY 2020, the city is deferring a cumulative $934 million in maintenance costs. De

ferring costs gives the city temporary budgetary relief, but those costs must be borne in future fiscal years. It’s kicking the can down the road.

Similarly, selling assets such as real estate provides the city with immediate liquidity to fill budget holes, but reduces the city’s overall net worth.

Houston faces real budget challenges. The good news is that several critical steps have already been taken to get the city closer to adopting a structurally balanced budget.

The most significant step was addressing the city’s unfunded pension liability. Assuming a 7 percent discount rate, that liability had ballooned to $8.2 billion. Since the Houston Pension Solution became law in 2017, that liability has been cut nearly in half, to just over $4 billion. Credit is due to Mayor Sylvester Turner, City Council, the city’s employee groups, the Legislature and everyone else who helped achieve those reforms.

City Council has also taken a vocal role in working toward a structurally balanced budget. In fiscal year 2018, City Council adopted an amendment that requires reporting the city’s true structural deficit in future fiscal years.

It’s important to note that Houston’s structurally imbalanced budget is not a new issue: The city has faced a structural budget deficit of at least $100 million for many fiscal years and across several administrations.

But if the city does not take the urgent steps needed to adopt a structurally balanced budget every fiscal year, its ability to deliver high-quality services to its citizens, make vital investments in its infrastructure and prepare for the storms — natural and financial — will be in serious jeopardy.

It’s past time for the city to get serious about its structurally imbalanced budget. Houston’s financial future depends on it.