Local NewsTaxes & SpendingHouston Finance Head Warns of Massive Budget Deficit After Federal COVID-19 Funds Expire

The state’s largest city has been using federal COVID relief dollars to plug budget holes and provide raises, but is lurching towards a fiscal cliff once the federal funds expire.
March 31, 2022
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During monthly presentations on the city’s finances this week, Controller Chris Brown warned that Houston could be facing a budget deficit of as much as $300 million by 2025.

“I would expect, especially in the out years, particularly in 2025 and [20]26, a structural imbalance projected — probably double what it was when I first came into office,” said Brown during a meeting of the Houston Budget and Fiscal Affairs Committee Tuesday.

While noting that Houston had been operating with a structural imbalance prior to the pandemic, Brown explained that the city’s use of American Rescue Plan Act (ARPA) and Coronavirus Aid, Relief, and Economic Security (CARES) Act funds to temporarily balance the books was contributing to the problem.

“All of the federal money is a one-time financing source,” Brown explained. “In the simplest of terms, any time you add a recurring expenditure and fund it with this one-time source, you are exacerbating the structural imbalanced budget that we have.”

Brown said some of the deficit stemmed from spending programs adopted by previous city administrations, but added, “The reality is that there are a lot of decisions this body has made that are adding to those recurring expenditures.”

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In response to a question from Councilman Mike Knox, Brown said the council had voted to use $182 million in federal funds from ARPA and CARES to plug the past year’s budget deficit.

“Had we not gotten this federal money, we would have had to lay off over 2,000 employees during COVID,” said Brown. “Now the problem is we’ve increased our expenditures; once that money runs out, I think we might have to lay off 3,000 employees.”

Among the recurring expenditures covered by ARPA and CARES funds, the city council approved an 18 percent raise for firefighters to be phased in over three years using $115 million in federal dollars, but without a plan to continue the pay increase in year four. 

Council members last week approved a contract with the Houston Police Officers Union giving officers a 10.5 percent raise, but firefighter compensation has been tied up in litigation for several years.

Brown noted that it seemed likely that the courts would rule in favor of the firefighters, after which the city may have to provide five years of back pay and pension expenses, a number he declined to estimate but said would be “substantial.” 

Brown, first elected to office in 2015, said the city should instead use federal funds to pay one-time expenses rather than recurring costs.

James Quintero, policy director for the Texas Public Policy Foundation’s (TPPF) Government for the People project, told The Texan, “There are some real concerns about not only how COVID monies are being spent, but what they could lead to.”

“We need to have a come to Jesus moment about how these funds are being used,” said Quintero.

Calling the use of one-time funds for recurring expenses “very bad budgeting practice,” Quintero said he encourages local governments to use third-party entities to conduct efficiency audits to help find improvements in management practices and budgeting. 

Last year, TPPF also warned that federal COVID dollars came with certain strings attached that would make it “almost impossible to shrink government.” 

At least one small Texas city, Brady, rejected ARPA funds on those grounds.

Both Brown and city Finance Director Tantri Emo presented reports this week, but Emo, an appointed member of Mayor Sylvester Turner’s administration, estimated the city’s general fund balance as $21 million more than Brown’s.

While presenting a different set of figures and projections, Emo did not dispute that the city’s revenues were increasing. Brown and Emo both suggested the city would need to find additional revenue sources to match the increase in expenditures. Emo pointed to Houston’s revenue cap as a potential issue.

Approved by voters in 2004, Houston’s charter requires voter approval for property tax increases above the previous year’s property tax revenue plus 4.5 percent, or revenues plus the combined rate of population growth and inflation, whichever is less. Property taxes account for 25 percent of the city’s revenues, and the limitation does not apply to the other 75 percent of revenues coming from sales tax and other fees. 

Knox noted that despite the cap on the property tax rate, “annually we receive an increase in the tax money that we receive from individual property owners.” 

During her presentation, Emo said that the city was continuing to pursue “outcome-based budgeting” as recommended by the controversial PFM Consulting Group, which is also advising the Harris County government on reforms and spending.

According to city documents, “whereas line-item based budgeting communicates how much the city is spending on things,” an outcome-based budget will allocate funds based on expected results, or “desired outcomes.”

Although Brown had championed an online financial transparency portal for voters to peruse city expenditures, Turner’s office canceled the project last year. 

Also on Wednesday, the city’s Women’s Commission formally recommended the city adopt a 12-week paid leave policy for employees who had worked for the city for at least six months “after the birth, adoption, or placement of foster-to-adopt child, along with other benefits that include support for pregnant women.”

Houston’s Fiscal Year (FY) 2022 budget totaled $5.1 billion, an increase of $228 million from the previous year. The city is currently in the planning stages for the FY 2023 budget which will begin on July 1, 2022.

Councilmember Edward Pollard, also vice-chair of the Budget and Fiscal Affairs Committee, said, “If you look at it from the private sector…you have to work within your confines.”

“But it seems as if on the government side we find ways to band-aid things together and keep moving to the next year. But there will be a time when we will have to make some really tough and hard decisions to ensure the financial stability of the city.”

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Holly Hansen

Holly Hansen is a freelance writer living in Harris County. Her former column, “All In Perspective” ran in The Georgetown Advocate, Jarrell Star Ledger, and The Hill Country News, and she has contributed to a variety of Texas digital media outlets. She graduated summa cum laude from the University of Central Florida with a degree in History, and in addition to writing about politics and policy, also writes about faith and culture.

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