Houston’s $7 billion proposed budget for fiscal year 2026 can now move forward following court approval of a settlement in a years-long legal dispute over misallocated drainage funds.
On Friday, Houston Mayor John Whitmire notified the city council that the settlement had been approved. He expects the budget to be certified soon.
City Controller Chris Hollins had refused to certify the budget until the settlement was finalized, citing unresolved legal obligations, fiscal risks, and, in a new statement, what he calls “ten hard truths” about the administration’s assumptions.
The dispute stems from a 2010 voter-approved charter amendment requiring a dedicated drainage fee to fund street and drainage improvements. A 2018 measure further mandated that 11.8 cents of every $100 in property tax revenue be directed to the Dedicated Drainage and Street Renewal Fund.
However, beginning in 2016, the city allegedly diverted these funds to general operations to stay under a voter-imposed revenue cap. In 2019, engineers Bob Jones and Allen Watson sued the city, alleging it shortchanged the fund by up to 40 percent.
The Texas Supreme Court declined to hear the city’s appeal in early 2025, effectively upholding a lower court ruling that Houston must fully comply with the funding mandate.
Whitmire, who inherited the legal battle, negotiated a phased settlement: rather than a $100 million lump-sum payment, the city would contribute $16 million in 2026 and $48 million in 2027, reaching full compliance by 2028.
The proposed settlement utilizes a combination of drainage fees, property taxes, and Metropolitan Transit Authority funds, helping trim the city’s projected deficit from $320 million to $220 million.
Hollins cast doubt on the fiscal stability of the plan.
He warned that the proposed budget includes $183 million in savings tied to a settlement that had not yet been finalized. If the court rejects the phased approach, the general fund balance could fall to 1.5 percent of expenditures, well below the minimum required reserve.
Hollins also pointed out that:
- The budget addresses a $107 million gap by drawing from city reserves, instead of relying on sustainable revenue or implementing real cuts.
- Despite claims to the contrary, it relies on a likely property tax increase and includes a 6 percent hike in water rates.
- Assumptions about overtime spending repeat errors that led to a $70 million overage in the previous year.
- $17 million in savings have not been explained.
Hollins warned that the budget’s reliance on speculative savings and one-time fixes could trigger a credit rating downgrade, raising borrowing costs for taxpayers.
“Mayor Whitmire has presented a balanced budget for FY2026 that funds city services, includes more money for infrastructure and boosts public safety with no tax increase,” a spokesperson for the mayor told Texas Scorecard. “Controller Hollins does not seem to care about the facts.”
Not only did Mayor Whitmire present a strong budget, the mayor is committed to ensuring Houstonians that he has eliminated waste, fraud, duplication and corruption before having a discussion about additional revenue sources in the future.
Whitmire called his proposal a “balanced budget” even though the city would have to tap into its savings.
Houston’s financial policies define a balanced budget as one “in which revenues and other resources will be sufficient to support expenditures or uses within the fiscal year.” In other words, if the city government had to sell city assets or use reserves to support expenditures, the budget would still be considered balanced by city officials.
While the budget is not structurally balanced, city officials argue that recent steps, such as the mayor’s recent voluntary retirement offer, have improved the city’s long-term financial outlook.
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