Whitmire’s Budget Proposal Buys the City Time

You may have seen my op-ed in the Houston Chronicle, regarding my views on Mayor Whitmire’s budget proposal for the upcoming year. Because the paper has limited space for an op-ed, I wanted to provide my regular readers with some additional details and context.

My basic takeaway is that it buys us a couple of years to address the City’s more fundamental financial challenges. It is not a permanent fix.

The City’s finances are wickedly complex and involve several different funds. Its largest and most pressing challenge for the last two decades has been the General Fund. The General Fund pays for most of the services the City provides, such as police, fire, parks, etc. Importantly, it does not fund the water and sewer system, which in City lingo, is the Combined Utility System (“CUS”). State law requires that utilities, such as water and sewer, be accounted for and operated separately. Think of it as a separate entity or subsidiary of the City.

The City entered the current budget cycle, needing a little over $200 million to balance its General Fund. Its five-year projection shows that number ramping up to over $500 million by 2030 (see p. 51). 

Of course, a structural deficit in the General Fund is nothing new. Since the City’s ill-fated decision to dramatically increase its pension benefits in the early 2000s, a succession of City Controllers have been warning that the deficits would ultimately become unsustainable, either requiring massive property tax increases or a reduction in expenditures. 

The plan that the Whitmire administration laid out involves three basic elements. The one that has gotten the most attention, but is by far the least consequential, is an entry-level garbage fee of $5 per month. The City currently has only 393,000 garbage customers, so at $60 per year, the fee will only bring in about $23-24 million. After collection losses and exemptions that Council will likely add for seniors and potentially others, the real number will probably be closer to $20 million.

The real General Fund relief comes from transferring all garbage collection to the CUS and imposing a fee on the CUS for use of the City’s rights-of-way. Transferring the Solid Waste Department to the CUS will transfer about $100 million in expenses from the General Fund to the CUS.

State law dictates that a municipality cannot make a “profit” from its utilities to use for other purposes. However, it does allow municipalities to charge a utility for various items. Specifically, cities are allowed to charge a utility for the right-of-way it uses to run its lines.  Every major city in Texas imposes such a charge on its water and sewer utility, and other utilities, such as Comcast and CenterPoint, pay similar fees. They are generally set as a percentage of the utilities' revenues. Whitmire’s budget proposal calls for a 5% charge, which is toward the lower end of what other Texas cities charge their utilities (see p. 19). This will move about $100 million from the CUS to the General Fund. 

So, moving the Solid Waste expenses to the CUS and charging it for the rights-of-way will generate about $200 million in relief for the General Fund. Because this is a permanent change and not a one-time fix, it reduces the projected General Fund deficit in 2031 to under $200 million.

The principal question that this proposal raises is whether the CUS can afford this $200 million hit. My judgment is that it can in the short- to medium-term, but whether it can in the longer term is an open question.

There was a time when the CUS was in dire straits. During the early 2000s, it was technically insolvent as its liabilities exceeded its assets. However, since then, water and sewer increases under Mayors Parker and Turner in 2010 and 2021, respectively, have dramatically improved the CUS’s finances. From being insolvent in the early 2000s, it reached a fund balance of $4.4 billion last year, with almost $2 billion in liquidity. In addition, over the last three years, it has invested $2.4 billion in capital improvements to the system and reduced its bond debt by almost $1 billion.

Also, last year the City obtained a $1 billion loan from the Texas Water Development Board on favorable terms to repair the dilapidated East End Water Plant. According to my sources, more help from the State may be on the way. Which, by the way, is one of the reasons that poking the Governor in the eye over 33 people being turned over to ICE was such a stupid idea.

So, the CUS is flush for now. However, in the longer term, it faces significant challenges. Our wastewater system leaks like a sieve, which means we regularly dump untreated sewage into our bayous and streams. The City has been under a series of consent decrees with the EPA since the 1980s for violating the Clean Water Act. And, of course, we have all heard reports that the freshwater system loses billions of gallons each year through leaks. So, there is still a lot of work to be done. Some estimates put the amount of investment needed in the $14 billion range.

Although not officially part of this year’s budget, the Whitmire administration has signaled its intent to begin to increase the garbage fee in 2028 by $5 per year, eventually raising it to $25 per month. If that were to happen, it would take about half of the burden off the CUS.

The Whitmire administration is also promising to use the new resources to improve garbage pickup. You will have to excuse me for being skeptical. I have heard a similar promise from every mayor in my lifetime. None has succeeded.

This is primarily because the City's operations do not operate on a viable economic scale.  The City picks up only a relatively small portion of the total garbage. It does not service apartments or businesses, and about a quarter of households have already fled the City’s abysmal service in favor of private haulers. I suspect that many others will follow suit as the fee begins to ramp up.

This leaves the City with a patchwork of fewer than 400,000 customers spread over 600 square miles. That means routes are impossibly long and inefficient. The only logical solution is to outsource the entire thing, which I suspect will ultimately be the case. Indeed, the imposition of the garbage fee may accelerate that day. But if the City insists on continuing to operate a fundamentally inefficient garbage model, it will ultimately need to ramp up the garbage to keep from impairing the CUS fund.

On balance, I think the proposal is a reasonable stopgap. But make no mistake, this is not a permanent solution to the City’s financial woes. And they are not problems we can tax our way out of. To cover the currently projected General Fund deficit, not to mention catching up on our woefully antiquated infrastructure, would require nearly a 60% increase in property taxes over the next five years. That would violate the city charter and state law and prompt a taxpayer revolt.

We will eventually have to face some difficult choices. I do not believe that dramatically increasing property taxes is the answer, and that it would only serve to drive more Houstonians to the suburbs. 

Instead, we need to reconsider giving away half of our sales tax (~$1 billion) to a transit agency that carries fewer riders than it did in 2004 and giving away $200 million in our property taxes to TIRZs that mostly lavish projects on wealthy neighborhoods. 

Whitmire should come down hard on overtime. Large recurring overtime is a management failure. Whitmire should make it clear to the managers of the departments where this has been a problem for years that their jobs are on the line if it continues. 

In fact, we need to completely rethink our models for public safety. For years, we have just thrown more money at HPD and HFD, with little to show for it. Those departments are still about the same size today as they were 20 years ago. No "boots on the ground" have been added. HPD’s clearance rates remain at abysmal levels. The Ernest & Young efficiency study indicated that HPD and HFD were, by far, the most top-heavy departments in the City.

These will be the real challenges. Hopefully, the City will use the time this proposal buys to do the hard, and sometimes unpopular work, to actually address the City's long-term financial viability.