Fiscal challenges await Houston’s new mayor, controller

Houston will welcome a new mayor and controller next month amid financial challenges that include an ongoing contract impasse with firefighters and a major airport terminal project launched by the city and United Airlines last month.

With Mayor Sylvester Turner and Controller Chris Brown term-limited from running again after eight years in office, 18 candidates vied for mayor and four for controller in the Nov. 7 election.

In a Dec. 9 runoff between the top two vote getters, veteran Democratic state lawmaker John Whitmire trounced long-time Democratic Texas Congresswoman Sheila Jackson Lee with 64.4% of the vote to become mayor. In the controller’s race, attorney Chris Hollins beat former Harris County Treasurer Orlando Sanchez with 59% of the vote.

The nation’s fourth-largest city has general obligation ratings of AA from Fitch Ratings and S&P Global Ratings and Aa3 from Moody’s Investors Service, which said in a September report that Houston will have to contend with the cessation of federal pandemic aid, while it faces the potential for policy changes and new initiatives brought by a new administration.

The trajectory of Houston’s Fitch rating could depend on retroactive contracts with firefighters.

“The city’s expenditure flexibility could hinge on the outcome of these agreements,” Fitch analyst Jose Acosta said, adding the rating agency will be monitoring how Whitmire, the sponsor of a bill that became a law mandating arbitration between Houston and its firefighters union, addresses the seven-year contract impasse.

A rating upgrade could result from a contract “that results in sustainable public safety spending relative to its resource base and a reduction of carrying costs materially below 20% of governmental spending, leading to a strengthened expenditure framework assessment,” Fitch said in a September report. A deal with firefighters that weakens that assessment could lead to a downgrade.

In a debate ahead of the runoff election, Whitmire called for the fair treatment of city workers, especially firefighters. 

“The city’s ignored them, underpaid them, disrespected them for seven years,” he said, adding he will throw out Houston’s latest challenge to firefighter contract talks the first day he’s in office.

That challenge involved Senate Bill 736’s constitutionality, which a Harris County District Court judge upheld in a ruling last week. The Houston Professional Fire Fighters Association said the judge also ordered Houston to negotiate back pay and benefits starting from 2018.

Public safety is the biggest expense for the Houston budget, with property and sales taxes accounting for its largest revenue sources. 

Outgoing Controller Brown contends Houston has been plugging deficits of $160 million to $200 million with one-time revenue like asset sales. 

“Each year since (2016), the city’s structural imbalance has widened with the continued reliance on non recurring funding to pay for recurring expenditures,” Brown said in a statement. “Despite a healthy fund balance, the city will no longer enjoy federal grant funding to address this structural deficit that undoubtedly poses serious risks to the city’s ability to provide basic services and a strong quality of life.”

Houston ended fiscal 2023 on June 30 with a general fund balance of $550 million, up from $420.6 million in the prior fiscal year, according to its annual comprehensive financial report.

Business advocacy group The Greater Houston Partnership also pointed to a growing structural imbalance in its State of the City’s Finances report, which also noted Houston faces billions of dollars for deferred maintenance, compliance with a federal consent decree for its wastewater system, rising pension costs, as well as collective bargaining with firefighters.

In debates, Whitmire addressed the city’s budget, calling for transparency and the elimination of waste and conflicts of interest.

The 74-year-old Whitmire has touted his 50 years as a Texas lawmaker that spanned 10 years in the state House and 40 in the Senate, where he chairs the Criminal Justice Committee — the only Democrat appointed by Lt. Gov. Dan Patrick to head a committee in the Republican-controlled chamber.

“I can bring resources to Houston like no one else who’s ever served as mayor,” he said during a debate with Jackson Lee. “Working across the aisle gets results.”

Controller-elect Hollins said Houston “must generate new revenue or realize cost savings and efficiencies to chart a path to fiscal sustainability, while preserving the standard of services that Houstonians deserve.”

Turner has dismissed talk of structural deficits, declaring at a city council meeting last month “the sky is not falling.”

“We’re required to have a balanced budget and we have produced eight balanced budgets,” he said, adding his administration has tackled two of the three “structural financial hurdles” facing Houston. 

The city council created an other post-employment benefits trust with an initial $10 million this year, following cost-saving moves taken in 2022. Houston also shrank an $8.2 billion unfunded liability for its three pension systems to $1.5 billion with the help of reforms in a 2017 state law and the issuance of $1 billion of pension bonds.

Turner said the final hurdle — a voter-approved limit on increases in property tax revenue that has reduced collections by about $1.7 billion over eight years — is up to the public to decide. 

A potential $2.6 billion financing for a major renovation of Terminal B at George Bush Intercontinental Airport will likely become a matter for the new administrations after Brown blocked city council consideration of an initial step in a quest for greater scrutiny of bonds the city would issue.

In response to written questions from The Bond Buyer, Hollins acknowledged United Airlines as a vital partner for the city and said he will welcome the project “once I’m confident sufficient due diligence has been done.”

The controller’s office certifies the availability of funds prior to city council approval of commitments. It also sells the city’s public improvement and revenue bonds.

Hollins echoed concerns from Brown about two 2021 Texas laws that prohibit governmental contracts with companies, including banks involved in municipal bond underwriting, that are deemed to be “boycotting” or “discriminating” against the fossil fuel or firearm industries.

“The concerted effort to reduce local control is troubling — it hampers local leaders’ ability to make sound choices about who their cities do business with,” he said. “As the financial institutions best positioned to serve the city of Houston navigate this uncertainty, there remains the potential for increased costs related to future issuances.”

Hollins, principal attorney at Hollins Law Group, briefly served as Harris County Clerk in 2020, according to his LinkedIn profile. He has a law degree from Yale University and an MBA from Harvard Business School.