The Path Forward (Part 1)

Chris Brown
Jul 24, 2017 · 4 min read

As you might know, the Houston Pension Solution became a reality when the Texas Legislature codified it into law in May. This is a significant legislative milestone that has evaded the city for more than 16 years, and one that finally provides a long-term solution to an issue that could have devastated the City of Houston.

While Houston’s pension reform was a major hurdle that had to be cleared to keep the city from careening into financial despair, there are still several financial steps the city should take to build a brighter financial future. Some of these steps can be worked toward immediately, and some will require a long-term commitment to creating a brighter financial future for our city.

Here’s a look at the City of Houston’s financial path forward.

The City of Houston’s ultimate financial goal must be passing a structurally balanced budget every fiscal year.

A structurally balanced budget is achieved when recurring revenues match recurring expenditures.

The concept is not dissimilar from the way one approaches their personal finances — we should spend less or equal to what we make. So, the goal is to arrive at a point where the City of Houston spends as much (or less!) than it brings in on a yearly basis. Achieving a structurally balanced budget will require that the city fundamentally changes its approach to developing its budget.

The first step is to increase transparency in our financial reporting to help better identify and understand the source of the structural deficiencies in our budget.

This will not only help the city identify the root of the issue — it will also give the public an opportunity to learn more about how the city manages taxpayer dollars. We can’t address fundamental budget weaknesses without first knowing their point of origin, so this is a critical step for the City of Houston to take.

In 2014, I helped author the city’s financial policies. These policies are in place to help promote fiscal responsibility, increase transparency, and help identify any structural financial weaknesses. While these policies are a strong foundation, it’s critical that we remain diligent in our work toward improving the city’s financial future.

It is also critical that the city stops relying on one-time, non-recurring funding sources to fill holes in the budget.

One-time funding sources are finite and thus will not always be available as a method to plug holes present in the budget. In addition, many of these one-time funding sources are tangible assets the city owns, so selling them off decreases the city’s total assets and further exacerbates its structural financial imbalance. Put simply: relying on non-recurring revenue sources to address budget deficits is not a sustainable way to develop a budget and will only add to the city’s financial imbalance.

Another important note: oftentimes when we discuss the city’s budget, the conversation centers around ending fund balance. While this is a relevant financial metric, the indicator that most reflects the city’s structural balance (or imbalance) is net current activity.

As it’s used in the city’s budgeting process, net current activity is calculated by simply subtracting the city’s total expenditures from its total revenue.

In more personal terms, think of net current activity as the total you get by subtracting your spending from your income. As the chart above demonstrates, the City of Houston has historically spent significantly more than it has brought in, leading to deficits in the tens — and even hundreds — of millions of dollars for the past ten fiscal years.

These deficits are then filled with one-time revenue sources and transfers from other funds which, when reflected in the ending fund balance, help get the city back in the black. While this allows the city to “plug” structural budget imbalances, this is not a viable long-term solution to fix the city’s overarching financial issues.

The only way the city can remedy these issues is by spending less than it brings in. Or, in other words—by achieving a structurally balanced budget.

The positive impact of achieving structural budget balance will be significant and will dramatically improve the city’s financial trajectory.

The deficits the city has faced in recent fiscal years have handcuffed its ability to develop a true long-term financial plan, and have precluded it from achieving structural budget balance. With a structurally balanced budget, that problem is resolved and the city can more accurately plan and execute long-term financial projects.

Our commitment to adopting a structurally balanced budget will also have positive implications on the way major credit rating agencies view the City of Houston. A structurally balanced budget would likely lead to credit upgrades, as well as significant improvements in the city’s debt and financial risk outlook. That means lower borrowing costs — which would ultimately result in significant savings for city taxpayers.

A structurally balanced budget is a lofty goal, but one I believe is critical to the financial future of our city. I’ll be talking about the additional steps the city can take to reach this significant financial milestone in the days to come— so stay tuned!

Chris Brown

Written by

Chris B. Brown is a fourth-generation Houstonian and has served as Houston City Controller since January 2016.

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