Houston to escape latest budget hit with state funds

Houston dodged a blow to its fiscal 2025 budget when Texas officials Wednesday freed up state funds to help pay the city's share of costs to remove debris created by two fierce storms this year.

The situation underscored fiscal problems the nation's fourth-largest city faces from natural disasters that could compound its growing structural budget gap, which has led to depleted reserves and negative rating outlooks.

Mayor John Whitmire, whose administration is working on a budget fix, said he informed Gov. Greg Abbott of the city's need to come up with its share of clean-up costs from May's derecho windstorm, which was followed by Hurricane Beryl in July.

"The model that I took to Austin (was) that we had to collaborate, that we were broke and we owed (the Federal Emergency Management Agency) money," Whitmire told the city council at its Thursday meeting, adding the result of his effort marks "just the beginning of the (city's) collaboration with the state, the county, and other jurisdictions."

While state officials said the $50 million will flow to southeast Texas communities, Houston is working with the Texas Division of Emergency Management and expects most if not all of its costs for debris removal to be covered, according to Whitmire's spokeswoman.

FEMA is expected to reimburse 75% of the estimated $210.6 million in storm-related costs, leaving Houston to come up with an estimated nearly $40 million from its general fund, according to a September disaster overview from the city's finance department.

The state's announcement stopped an attempt by some Houston City Council members to push for a higher maintenance and operations property tax rate to avoid cuts to the fiscal 2025 general fund budget. Instead, the council will vote on keeping the current $0.55160 rate on each $100 of taxable value at its Wednesday meeting.

Council Member Sallie Alcorn, who chairs the budget and fiscal affairs committee and who signed on to the proposal for a higher tax rate, said while the city explores shared services, cost cuts, and other measures to deal with a $230 million deficit next fiscal year, it must also look at the revenue side of the equation in order to be fiscally responsible.

"We will need help from the taxpayers at some point when the timing is right," she said.

In addition to future weather-related disasters, Houston, which is subject to state-wide and local caps on its annual property tax revenue, must deal with other spending pressures.

In July, it sold $612 million of general obligation judgment bonds to fund a lump sum payment for current and retired firefighters to cover overtime pay from fiscal 2018 through 2024, under a court-approved settlement. That deal also included a five-year collective bargaining agreement that boosts firefighter pay. Contract negotiations with the police union are expected next year.

Houston Controller Chris Hollins has warned the budget could face a hit between $110 million and $120 million should the city lose its latest appeal in a lawsuit brought by taxpayers over how much property tax revenue is allocated to the drainage fund.

The municipal market buy side will get to hear from city and other officials when Hollins hosts the city's ninth annual investor conference on Oct. 22.

Federal American Rescue Plan Act money has helped Houston boost its general fund balance, which was estimated at $467.6 million at the end of fiscal 2024 and was projected to fall to about $280 million in fiscal 2025. The city council in June approved a $7.3 billion all-funds fiscal 2025 budget, which includes about $3 billion of general fund spending.

Shrinking reserves were a major factor cited by Fitch Ratings and S&P Global Ratings when they revised their outlooks on Houston's AA ratings to negative from stable earlier this year. The city has a stable outlook on its Aa3 rating from Moody's Ratings.

S&P's mid-year outlook report for local governments nationally warned of the potential emergence of budget gaps as the last of federal stimulus money is spent.

"At this point, even if there is some vulnerability for some places with having a (fiscal) cliff after that federal money runs out, we don't see it in most places as having a credit impact on the kind of general credit quality," Jane Ridley, S&P's local government sector leader, said at a Volcker Alliance special briefing in September.

The rating agency's report also said that without additional authorization, FEMA funding could fall short, "a notable concern given a summer storm season that is expected to be heavier than normal."

Other Texas are also facing financial pressures.

The Dallas City Council approved a $1.9 billion fiscal 2025 general fund budget last month that includes an initial contribution increase to its Police and Fire Pension System under a plan to ramp up funding to actuarially determined levels over five years to comply with a state law aimed at keeping the retirement system solvent.

The city has submitted the plan to the Texas Pension Review Board while litigation filed by the pension system remains active, according to a Dallas spokesperson. The system, which adopted its own plan that ramps up contributions over three years, is seeking clarity from the court on which entity is authorized to submit a plan.

Dallas, which is rated AA-minus by S&P and AA by Fitch Ratings, could face downgrades if its current pension funding troubles are not addressed, analysts at the two agencies warned ahead of an April city bond sale.

The latest five-year financial forecast for Austin, which in August adopted a $1.4 billion general fund budget, projects a deficit that grows from $13.2 million in fiscal 2025 to nearly $60 million in fiscal 2029 under the current maximum property tax rate the city council could approve in the absence of a higher rate passed by voters.

In September, Moody's Ratings cut its Aa2 rating on about $727 million of Pflugerville's outstanding GO debt to Aa3 and revised the outlook to stable from negative. The downgrade was attributed to "the city's exceptionally high leverage, coupled with declining reserves."

"Available fund balance as a percentage of revenue decreased to 18.5% of revenue in fiscal 2023 due to cash-funded capital outlay," Moody's said. "The city's leverage is exceptionally high and growing, with a long-term liabilities ratio of more than 750% of fiscal 2023 revenue."

There was no immediate comment from the city of about 64,500 located northeast of Austin.