City, critics divided over budget issue

As reported in the Chronicle.

Depending on the source, it is or isn’t balanced
By BRADLEY OLSON
Copyright 2009 Houston Chronicle
May 30, 2009, 7:38PM

Does the city of Houston have a balanced budget?

Like so many things in politics, it depends on whom you ask.

For wealthy businessman Bill King or City Councilwoman Pam Holm, the answer is no, since Mayor Bill White’s administration is planning to spend about $50 million more from its general fund in fiscal 2010 than it will take in from taxes and other revenue streams.

To Bob Lemer, conservative tax accountant and longtime critic of City Hall, the answer is an emphatic no. Lemer said a 2008 audit of Houston’s finances over the past five years shows the city in the red to the tune of $1.5 billion if it were to do its books like a private company.

And if you see things like the mayor, Finance Director Michelle Mitchell and most City Council members do, the answer is a strong yes in the sense that the city is not spending money it does not have.

Who is right? All of them, each in their own particular way, said City Controller Annise Parker.

“We have used borrowed money to meet some of our current obligations, which is, I think, fiscally unwise,” Parker said. “But while Mr. King and Mr. Lemer are out waving the red flag, I just have the yellow flag of caution up.”

Wild card: economy
Questions surrounding the city’s financial strength will only intensify as hearings over the mayor’s $4 billion fiscal 2010 spending plan continue through next month. Some, including Parker, believe the budget could leave Houston in a precarious position if the economy worsens or calamity hits.

And although the rhetoric has grown thick on the subject of just how balanced the budget really is, the distinct points of view on the matter could reshape the spending plan in unexpected ways.

In the course of his administration, White said he consistently has made sure the city built up its “fund balance” — governmentspeak for reserve or savings — to pay for large expenses and to improve the city’s bond rating. The latter is a key factor in holding down the cost of borrowing.

At the end of this fiscal year on June 30, the city’s reserves are projected at $220 million. Under White’s proposed budget, fiscal 2010 will end with $171 million in unspent funds, meaning the city will have drawn down its reserves by $49 million.

Careful about borrowing
White said the city built up the balance with the expectation of spending it on certain big expenditures, such as raising the pay of firefighters. That means the budget is balanced, he said, despite the fact that expenses will outpace revenues by the $49 million.

“I know accounting, and I know what operating cash flows are, and we increased our cash by collecting more money than we spent,” White said. “And we do not borrow, unlike the federal government, to pay for operations. We only borrow money for long-lifed investments or to repay debt.”

Although the mayor is right that the city has not borrowed to pay for operating expenses, Parker said, it has used debt to pay for obligations that in previous years would have been paid through the tax- and fee-supported general fund, the city’s main operating budget. In other words, the use of debt for certain expenses freed up money for the city to spend on operations.

The debt, much of it the result of borrowing to meet pension obligations, also is a primary reason the city has built up its reserves, the city controller said.

“Part of the reason we have healthy fund balances is that we borrowed the money instead of tapping the fund balance,” Parker said. “We used pension obligation bonds to meet current (pension) obligations.”

For some, the $49 million dip into the reserves is enough to declare the budget unbalanced.

“How do you justify expenditures being greater than revenue?” Councilwoman Holmasked. “How is that being fiscally responsible?”

Cost of building boom
For Lemer, the author of a 2004 ballot proposal to limit city spending, the $49 million question is moot. He argues that the city racked up a cumulative deficit of $1.5 billion from 2004 until 2008.

“That is absolutely frightening,” he said. According to his research, the main driver of that has been borrowing to keep up with costs for the city’s pension debt.

But White said that when the city has borrowed to pay pension expenses, it has reduced other borrowing accordingly, so its overall debt levels have remained low relative to its assets.

“The ratio of debt is down from where it was in the early ’90s, and it is very competitive with other cities,” the mayor said.

Parker said the city’s spending has exceeded revenues by $1.5 billion from 2004 to 2008 because Houston has been on a building boom since the administration of Mayor Bob Lanier, borrowing to pay for new infrastructure that helps fuel growth.

“We have invested back in the city of Houston,” she said. “Our long-term debt has gone up sharply, but our infrastructure assets have gone up in valuation as well. We’re a growing city, and we’re trying to meet the needs of that growth.”