City Deficit Widening
If you missed, I had an op-ed in Sunday's Chronicle highlighting recent declines in the City's sales tax collections and its effect on the City's already shaky finances. [ Click here. ]

In this year's budget the City originally projected an operating deficit in its general fund of $90 million dollars for the year ending June 30, 2010. However, both the Administration and the Controller have conceded that the budget was overly optimistic and now estimate that the deficit will be $130-145 million. However, revenues are coming in weaker than even these revisions suggest. Unless revenues improve or the new administration makes some immediate cuts, it appears that this year's deficit could swell to $175 million.

The real problem, however, will be next year. With built-in increases in personnel costs, especially pension and health insurance costs, the gap next year will likely be north of $200 million. To make matters worse, the City's general fund reserves will have been spent down to minimal levels. So the new mayor and council are going to really have their work cut out for them next spring when they put together the FY2010-2011 budget.

Ugly Solvency:
The Coming City of Houston Budget Crisis
In case you missed it, Loren Steffy had an excellent column in Sunday's Chronicle on the state of the City's finances. [ Click here to view it ]

Steffy paints a pretty bleak picture. But, if anything, he has understated the problem. It appears that the City will end FY2009-2010 near the minimum set by State law in its general fund. However, the situation in FY2010-2011 will be much worse. Most of the City's revenues lag the general economic activity. So even if there is a recovery next year the City's revenue will likely not see much growth. The problem is that there are built-in increases for salaries, pension payments and health insurance costs. With these increases and flat revenues, it appears that next year's budget deficit will be $200 million or more with reserves already at the State minimum.

Despite the conventional wisdom that the City's financial problems are due to current economic downturn that is not the case. Since 2002 the City has been running structural deficits primarily relating to the escalating costs of the pension and retirement health insurance plans. Since 2002 the City's contributions to these plans have been growing at over 14% per year, while general fund revenues have only grown at about 4%. These two trend lines have been inexorably on a collision course for the last decade. The current economic downturn just got us to the scene of the accident a little earlier.

But here is the really bad news. The contributions that the City has been making to these plans are not sufficient to fully fund the promised benefits and over the last five years the City has been forced to borrow 30-year bond money just to have the cash to make the plan contributions the City has made. So far, the City has borrowed over $200 million on these "pension bonds" that has been used to make its current contributions. (About another $400 million has been borrowed to make back payments.) How is this for sobering? The City will end this year with significantly less than $200 million in reserves. In other words, had the City not been borrowing to make its plan contributions for the last five years, the general fund would now be completely depleted. Now that is ugly.