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Citizens for Public Accountability Houston's $1.7 Billion Operating Losses

Citizens for Public Accountability Houston's $1.7 Billion Operating Losses

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Published by: liberalbill on Sep 14, 2010
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09/22/2010

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JULY 2010 BY: BOB LEMER 
GRAPHICS: PIPER WILLIAMSON
CITY OF HOUSTONTOTALOPERATING LOSSES
FISCAL YEARS 2004-2009
$$11..77BBIILLLLIIOONN 
 
2
The City of Houston Is Teetering On The Edge Of A Fiscal Abyss
By: Bob Lemer
Executive Summary
The City of Houston is teetering on the edge of a fiscal abyss, as proven by: (a) the audited financial statements and other data
included in the City’s latest (2009) Comprehensive Annual Financial Report (CAFR); and (b) the fiscal year 2010 “actual” dataand the fiscal year 2011 “budgeted” data, both included in the City’s official budget for fiscal year 2011.In my opinion, the City’s only hope for sol
ving this fiscal crisis is for the business sector to immediately and assertively becomeinvolved in the situation and help guide the City out of its frightening fiscal crisis. The business sector has a vital need to do thisbecause a collapse of the City
’s finances would seriously harm the economy for the entire Houston metropolitan area.
 
The severity of the fiscal crisis is evidenced by the City’s deficit of $1.7 billion in unrestricted assets at June
30, 2009
, the as of date for its latest publicly ava
ilable audited financial statements. In other words, the City‟s unrestricted assets at June
30, 2009 totaled $1.7 billion less than the already recorded liabilities the unrestricted assets would have to cover.
The crisis is further evidenced by the fact
that the City’s currently positive general fund balance exists solely
because the general fund balance has been wholly financed by the proceeds of long-term pension bonds
. SeeExhibit G.The $1.7 billion deficit in unrestricted assets at June 30, 2009 resulted from operating losses of $1.7 billion for fiscal years 2004-2009(Exhibit A). The vast majority ($1.5 billion) of the $1.7 billion of losses occurred during fiscal years 2004-2008--before the currentserious economic recession. The $1.5 billion of operating losses occurred during fiscal years 2004-2008 even though each of those fiscalyears saw record levels of revenues from property taxes and sales taxes.
Houston‟s $1.7 billion of operating losses is incredibly worse than the operating results of the rest of Texas‟ 10 largest cities. But the $1.7
billion of operating losses is really staggering when compared to the operating results of the larger cities in the essentially bankrupt Stateof California. And even the rotting city of Detroit had better operating results than Houston. See Exhibit B.
The $1.7 billion of Houston losses resulted primarily from overly generous and totally unsustainable pensionand other retirement benefits such as health care. The $1.7 billion is almost twice the total annual propertytax revenues of the City.
The sudden granting of overly generous pension benefits and the evidence that they are unsustainable over time are well illustrated bythese Exhibit C and Exhibit D facts: (a) Per Exhibit C, as of June 30, 2003, the pension plans had been paid practically all amounts(except for a net $54.4 million liability) required to be accrued by generally accepted governmental accounting principles; (b) Per Exhibit
D, the City‟s contributions to the plans, as a per cent of p
ayroll costs, rose dramatically during 2004-2009; and (c) Yet, per Exhibit C, the
City‟s pension liabilities still mushroomed to an astounding $1.2 billion at June 30, 2009.
 The $1.7 billion deficit was financed by delaying payment, long-term, for $1.7 billion of liabilities for benefits already earned byemployees for pension and other retirement benefits, according to generally accepted accounting principles for governmental entities. SeeExhibit C. Almost $600 million of such currently earned debt was converted to long-term property-tax-supported public obligationbonds, backend loaded so that future generations would have to pay for them, plus uncalled for extra interest costs.
The $1.7 billion deficit has effectively transferred financial ownership of the City from the Houstontaxpayers to City employees (see Exhibit E).
As shown by Exhibit E, in reality, the City’s deficit in unrestricted assets is more like $8.5 billion, rather
than $1.7 billion, due to many more not funded and not recorded retirement-
related liabilities to the City’s
employees
.
The $8.5 billion is a mind-blowing more than 9 times the total annual property tax revenues of the City.
 
Apparently the real elephant in the room now is the tremendous health care benefits for retired Cityemployees
. Exhibit C reveals that the City recorded liabilities of $485.8 million as of June 30, 2009 for earned retirement benefitsother than pensions, primarily for health care.
 
3
Very troubling, the City’s 2009 CAFR shows that the City’s un
-funded actuarial liability for health carebenefits was $3.1 billion at June 30, 2008, the last actuarially determined date. That is a much greater
amount than the City’s un
-funded actuarial liability of $1.9 billion for pension costs, as of the same date,June 30, 2008. That is very scary indeed
. See Exhibit E.
The City‟s slide toward fiscal disaster (on the full accrual basis of accounting) has been masked by diverting attention to t
he (modifiedaccrual basis of accounting---essentially cash basis) Genera
l Fund‟s “positive” fund balance.
But that is disingenuous, for the
General Fund’s fund balance has been “positive” since fiscal 2005 only because the City has used pension
bond proceeds to cover a significant portion of annual pension funding requirements
. See Exhibit G.
To the City‟s credit, its fiscal year 2011 budget does not provide for playing the pension bond issuance shell game any longe
r. However,
that source of funds has been replaced by planned significant (“fire”?) sales of City assets in fis
cal year 2011. That is nothing but astopgap measure.
The City is really up against a fiscal wall regarding possible additional revenues
. Property taxes and sales taxesmake up about two-
thirds of the City‟s budgeted revenues for the general fund for fis
cal year 2011. According to page 70 of the 2009CAFR, there is a voter-approved $0.50/$100 cap on the portion of the property tax rate that can be used to cover City general fundoperating expenses. The City already is using close to that rate. And the City already is charging the maximum sales tax rate allowed bythe state constitution.So Houston voters would have to approve any increase in the $0.50/$100 operations cap on property tax rates. And Texas voters wouldhave to approve any increase in the sales tax rate. Getting such voter approvals would be a daunting task given the hardships voters arealready experiencing in the current recession.The California cities apparently boosted their city treasuries for the short-term by increasing revenues through dramatically raising taxrates (see Exhibit B). But to what end? Apparently that only exacerbated the flight of businesses and high wage earners from the nowessentially bankrupt state of California. The same thing might happen to Houston if tax rates are increased here. As a matter of interest,
the City of Houston‟s long
-
term debt per capita already is much greater than the State of California‟s.It seems obvious to me that the only answers to solving the City‟s fiscal crisis lie in severely
reducing employee retirement benefits(which will apparently require changing state law) and severely reducing City expenses. It is my opinion, from observing the
City‟s
finances and operations for more than a quarter-century, that there is substantial fa
t in the City‟s operating costs.My opinion is basically confirmed by the fact that the City‟s operating costs have risen at approximately twice the combined
rate of increase in population and inflation over the last quarter-century, and its total debt at about four times. As previously mentioned, even inthe 2004-2008 period of record revenues from property taxes and sales taxes, the City had operating losses totaling $1.5 billion.It is evident that the City still lacks the resolve and/or ability to rein in its operating costs, even in the face of the current severe recession.According to pages 226-227 of the 2009 CAFR, in fiscal 2009 the City increased its civilian workforce by 5.5%, even more than the 4.1%increase in its classified workforce. The City already had the second largest workforce in Harris County, governmental or private sector.
It also seems obvious to me that solving the City‟s fiscal crisis is going to require a comprehensive understanding of the City‟s CAFR, the
only document that sets forth the necessary guiding information, but which incredibly is normally not issued until at least six months afterfiscal year end. Apparently none of our elected officials have the level of understanding of the CAFR necessary to solve the fiscal crisis.
That is understandable, in that the vast majority of CPAs probably don‟t understand governmental accounting and CAFRs either.
 
Mr. James Moncour, deputy director, mayor‟s office, and Mr. Craig Mason, chief pension executive, attended my July 22,
2010presentation to the Business Issues Committee of the Greater Houston partnership on behalf of the City. My presentation handoutincluded only the attached exhibits, but my verbal comments covered most of the comments in these two pages.
Mr. Moncur‟s response seemed to basically center on the City‟s favorable bond ratings. I truly cannot understand how the three
municipal bond rating agencies can continue to give the City of Houston such high bond ratings on its general obligation bonds. I believethey do so at their own peril. I suggest that the business community request that the CEOs of the three municipal bond rating agenciesrespond in writing to this document.
Mr. Mason„s response seemed to exhibit little concern over the City‟s non
-payment of such a large portion of the pension liabilitiesrecorded in accordance with generally accepted governmental accounting principles. His response seemed to be that pension fundingmust be looked at over a long period of time and there is no cause for alarm at this time. I find that position impossible to reconcile with
the facts shown in this document. Particularly when the facts in this document were derived from the City‟s CAFR, budget and
monthlyfinancial and operations documents.
 

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