Texas city plugs holes in budget, debt service fund

Pearland, Texas, turned to bond restructuring and other measures to address shortfalls in its fiscal 2023 budget and debt service fund caused by an error in the city’s property valuation. 

The city council approved a plan Monday night that counts on higher interest earnings, taps American Rescue Plan Act money, and delays some expenditures among other maneuvers to shore up the general fund. The move followed action taken last week to reduce debt service payments.

“We’re not out of the woods,” said Mayor Kevin Cole. “But I would say this helps stabilize us.” 

The city of 125,990 located south of Houston spans three counties — Brazoria, Fort Bend, and Harris. Ahead of the Oct. 1 start of fiscal 2023, Pearland received a tax rate calculation worksheet from the Brazoria County Tax Assessor that included data from the Harris County Appraisal District consisting of certified and not-yet-certified values, according to a notice on the city’s website. However, the latter was largely included in the certified values, creating a $1.3 billion overstatement of the taxable value of property in the city.

Pearland used the erroneous information to determine a property tax rate to support its $110 million fiscal 2023 budget, resulting in an estimated $10.3 million revenue shortfall after the error was discovered. Under Texas law Pearland could not adjust tax rates, the city’s general fund took a $4.7 million hit, while property tax revenue for the debt service fund shrank by $5.6 million. 

The city’s plan to address the problem appears to have eased rating agency concerns. 

“We believe the city’s budget actions preserve its fundamental financial resilience in the form of still ample liquidity in the general fund and debt service funds,” said Jose Acosta, an analyst at Fitch Ratings, which rates Pearland AA. “Regarding the debt service fund in particular, the bond restructuring provides ample current year savings but does not incur material present value losses and preserves a fund balance cushion for any additional adverse revenue variances.”

Moody’s Investors Service, which rates Pearland Aa2, said in a report last month that even with the $5.6 million revenue loss, “the existing debt service fund balance still provides enough resources to make fiscal 2023 debt service payments without reliance on outside transfers.” 

“They have quite a bit of liquidity across all of the funds and they have the option to refinance to buy themselves some time to let those revenues readjust post the appraisal district error,” Gera McGuire, a Moody’s senior vice president and manager, said on Tuesday.

Last week, the city restructured some of its outstanding debt to help reduce debt service payments by $4.77 million. A scoop-and-toss restructuring of permanent improvement refunding bonds sold in 2014 and 2016 pushed $4.3 million of payments due in 2023 into future years.

“By deferring the repayment of the 2023 maturities, the debt service requirements increased in each of the years 2024-2028 by approximately $965,000,” Pearland’s finance department said in an emailed response to questions. “The net present value loss (cost) to the city was $39,509.”         

Pearland is also defeasing $9.5 million of $11.98 million of certificates of obligation sold in 2019. Money to pay off the debt in January will come from a $10 million reimbursement by a tax increment reinvestment zone based on growth of incremental taxable values within the zone, according to the finance department. The move will reduce debt service payments between 2023 and 2029 by $475,000 annually.

Last week, the city council agreed to hire legal counsel for potential litigation related to the valuation error.