Houston faces $100 million financial 'gut punch'

Houston officials raised concerns on Wednesday over a $100 million budget hit from a recent court decision and its impact on the city's already strained finances, which spurred negative rating outlooks.

The Texas Supreme Court on Friday declined to take up Houston's appeal of an April state appellate court ruling in favor of plaintiffs in a 2019 lawsuit that challenged the city's ability to adjust a slice of property tax revenue voters dedicated to drainage and roads to comply with a voter-approved tax cap.

The nation's fourth-largest city said it would be forced to allocate at least $100 million annually to the Dedicated Drainage and Street Renewal Fund, according to the appeal filing.

In his report to the city council, Houston Controller Chris Hollins called the high court's decision "a real gut punch to the city of Houston financially," warning the $100 million payment due June 30 to the fund would decrease fiscal 2025's projected $350 million fund balance to $250 million, while pushing the structural deficit to an "unsustainable" more than $300 million.

"I'm concerned that we're getting too close to a time when, without drastic cuts or a new revenue, I won't be able to certify the next budget, even if I want to," he said. "I'm concerned about our ability to continue providing critical services in the face of our financial realities."

He proposed the creation of a joint emergency task force "to map out all the options available to us and be transparent about them with the public."

The potential outcome of the litigation is no surprise, according to Mayor John Whitmire, who pledged to fix the city's finances.

"We're in contact with the plaintiffs and we'll be meeting with them to see if there's a timetable that could be adjusted as we seek out additional revenue and look at all of our options," he said.

Houston Finance Director Melissa Dubowski said a collaboration with the Metropolitan Transit Authority of Harris County has freed up $50 million and that she will soon share an Ernst & Young study identifying areas for efficiencies, opportunities, and coordination with the city council.

The city's finances were already struggling in the wake of last year's settlement with firefighters, which included a $650 million, bond-financed lump sum payment and a five-year collective bargaining agreement that increases pay by up to 34%.

Fitch Ratings and S&P Global Ratings revised their outlooks on Houston's AA ratings to negative from stable last year, citing shrinking reserves as a major factor. The city has a stable outlook on its Aa3 rating from Moody's Ratings.