May 26, 2023

The City of Houston is Not Starved for Revenue

The City of Houston is Not Starved for Revenue

The Houston Chronicle editorial board has once again called for a referendum to end to what it and many others mischaracterize as a “revenue cap” on the City of Houston. There is absolutely no cap on the City’s revenues. That is most easily demonstrated by the fact that the current budget proposed by the Turner administration calls for a nearly 11% increase in city revenues over last year’s budget. That will come on top of a 7.3% increase in actual revenues last year.

The editorial board’s rationale for increasing property taxes is that an increase is needed to pay for updating decrepit water meters that are causing havoc with water billings. That rationale is flawed on several levels.

First, property taxes go into the City’s general fund. Any expenses related to the water and sewer system must be paid from the “combined utility system” fund, which derives its revenue from water and sewer bills. The general fund and the combined utility system fund are segregated and cannot be comingled. So, even if property taxes were increased, the new funds could not be used to buy new water meters.

Further, there is no indication that the City has not replaced the old water meters because of a lack of funding. The Administration’s proposed budget shows that the combined utility system will end this fiscal year with a fund balance of $1.2 billion. In addition, because of the cumulative effects of the 2010 automatic annual increases in water bills and the 2021 five-year step increases, the City is projecting a 22% increase in water and sewer revenue in the new budget. That will come on top of a 17% increase from last year. According to the most recent City audit, the combined utility system had surpluses in the last two years of $481 million and $894 million, respectively.

In 2004, Houston voters passed a charter amendment that provided that if City Council wanted to raise property taxes and water and sewer bills by more than the sum of population and inflation or 4.5%, they would need to get voters’ permission to do so. The City has wholesale ignored the limitation on water and sewer bills, using an exception in the charter amendment that relates to bond covenants. It has, more or less, complied with the limitation on property taxes. However, because the charter amendment is also riddled with exceptions, property taxes have normally increased by more than the stated limit. In the proposed budget, the City is projecting a 7.6% increase in property tax revenues.

The amendment had no effect on the City until 2015. According to the City’s audits, the City’s revenues increased between 2015 and 2022 by 38%. Inflation during that same period was 24%. And since 2015, the City’s population has been virtually unchanged. So, the City has not needed additional revenue to service new residents.

During that same period, the average annual salary in the Houston region rose by 17%. In other words, since the charter limitation began affecting the City’s tax rate, its revenues have nonetheless been rising more than twice as fast as Houstonians’ wages.

But laying aside that financially there is no case that the City needs to increase property taxes to pay for broken water meters, a referendum to repeal or modify the 2004 charter amendment is particularly pointless, given that in 2019 the State adopted a similar limitation on cities. That legislation limits year-over-year increases in property tax revenue by cities to 3.5%, without voter approval. So, repealing the 2004 charter amendment would have little effect.

The editorial board is certainly correct that the current issues with inaccurate water meters are critical and must be addressed immediately. Of course, that can be said about a variety of issues the City is facing, including garage pickup, illegal dumping, the condition of our streets, water main breaks, the need from more police officers and many others. And addressing some of those issues may require additional funding.

But if there is any lesson I have learned over my years of working in and observing government, it is that just throwing more money at a problem rarely helps. We need to reimagine how the City of Houston delivers services to its residents and conduct a comprehensive performance audit of every City department before we ask Houstonians for yet more of their hard-earned tax dollars.

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