October 31, 2018

City has Shortchanged Rebuild Fund by Nearly $250 Million

City has Shortchanged Rebuild Fund by Nearly $250 Million

The more I study the Rebuild Houston program, the more apparent it becomes that the City’s administration of the program is a complete fraud.  The most recent discovery we have made is that the City has been using a legal loophole to shortchange the amount of money that was supposed to be transferred from the General Fund to Rebuild Houston.

Unfortunately, this is another one of those issues that is going to require us to wade off into the weeds.  But the City makes these issues unnecessarily complex for the very purpose of obfuscating how it is managing, or rather mismanaging, our tax dollars.

One section of the Rebuild charter amendment specifies how much money will be transferred from the General Fund to the Rebuild Fund each year.  The language sets aside 11.8¢ of the City’s tax rate for the transfer.  However, for the first 31 years of the program that amount is reduced by a portion of the amount the City spends on debt service on old bonds.[i]

This is the section of the charter amendment that establishes the transfer:

“An amount equivalent to proceeds from $0.118 of the City’s ad valorem tax levy minus an amount equal to debt service for drainage and streets for any outstanding bonds or notes . . .”

We know from the City’s annual audit exactly what the “City ad valorem tax levy” is.  [Click here to see tax levy table from the annual audit.]  So, we can easily calculate the portion of the total tax levy that 11.8¢ represents. And we know what the City says is the savings from their “theoretical” reduction in debt.  From there it is a straightforward calculation of what the City was supposed to transfer from the General Fund to the Rebuild Fund.

Here’s that calculation compared to what the City has actually transferred:

So, the City has transferred less than half of what the charter amendment language literally requires ($214 million vs $462 million). Their justification for shorting the Rebuild fund turns on the meaning of the word “equivalent.” Sources inside City Hall have told me that the Legal Department wrote an opinion that by using the word “equivalent” instead of “equal” the City had the discretion to make certain “adjustments” to the levy. Apparently, the levy has been “adjusted” to eliminate the portion of the levy paid to the TIRZs and the Rebuild Fund has been charged disproportionately for the effect of the property tax cap.

In short, this tortured interpretation of the plain language of the charter amendment is yet another device to use the Rebuild Fund to balance the General Fund budget while maintaining the pretense that there is a dedicated source for street and drainage improvements.  It is also particularly noteworthy that the shorting of the Rebuild fund has dramatically escalated since the change in administration. This, in part, explains why infrastructure spending has been significantly cut in the last two years.

The original backers of Rebuild Houston were mostly from the engineering community. And while they obviously had a self-interest in seeing a dedicated source of funding for infrastructure spending, they were, nonetheless, right. They had seen successive administrations scrimp on infrastructure investments when under annual budgetary pressures and thought that with Rebuild they could force future administrations to more responsibly invest in our crumbling streets and clogged drainage system.  But the language they crafted failed to create that dedicated source – principally because they underestimated the duplicity to which the City would stoop to avoid curbing its General Fund spending and to raid the Rebuild Fund.

[i] The original concept was that the City would reduce its Public Improvement Bond (PIB) debt which would result in corresponding reduction in debt service.  The savings from that reduction ins debt service was then supposed to be dedicated to spending on streets and drainage.  But as I have previously written, the City has not actually reduced its PIB debt because it started issuing bonds for other purposes, like financing vehicles.  Therefore, there has been no reduction in debt service payments to pay for new street and drainage projects.  Nonetheless the City created a hypothetical debt service reduction schedule for purposes of making the calculation.  (Click here to see schedule.)

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