Moody’s, one of three major credit rating agencies, has revised their outlook on Houston to negative citing the growing debt and pension obligations that city officials have continually failed to address.

The report states, “Houston’s economy continues to benefit from other key sectors including healthcare, transportation, education, and downstream energy…The outlook revision to negative reflects challenges the city faces from growing pensions costs and liabilities.” The pension burden has long been an issue for those working to manage Houston’s finances.

In fact, the downgrade comes only days after a grim warning from Houston’s Finance Director, Kelly Dowe. While he has repeatedly raised concerns about the growing debt and deficit to council members, he’s also managed to kick the financial burden down the road at the behest of Mayor Parker. Now it appears as though the city may be forced to address the fiscal disaster they created.

Dowe predicts a $126 million deficit for Fiscal Year 2017’s budget, a number that he says “won’t disappear this time.” We are unsure if that is because all options are exhausted, or because he knows the newly elected mayor’s administration will have to pick up where he leaves off.

Mayor Parker issued a press release regarding the rating, citing tremendous “job growth” in Houston despite a disastrous 9% unemployment rate reported in Houston’s 2014 annual financial report. Parker has signaled that she aims to convince voters to undo the tax revenue cap they previously adopted. It’s likely she will use the rating downgrade as leverage to persuade members to support raising or removing the cap.

Parker’s disdain for the revenue cap is nothing more than an effort to deflect resident’s attention from the core problem—the city’s fiscal mismanagement. Even with the removal or revision of the revenue cap, pension obligations will still consume a large portion of the budget, and with automatic increases already in place, the pension problem will only worsen. Moody’s report suggested finding new revenue sources, or taxes, to begin to correct this problem. But the city has already taken that approach, as their revenue sources have increased despite the creation of that revenue cap.

The problem is Houston cannot tax its way out of this—they need to address the real problem by renegotiating pensions, prioritizing core services, and reducing discretionary spending.

Moody’s lists the current unfunded liability of Houston’s three pension systems at over $3.2 billion. As the rating agency keeps its eyes on Houston finances, city officials need to take the obvious steps in correcting the problem. As seen in most governmental entities, whenever a new tax is levied, public officials have no problem finding ways to spend it outside of their original purpose, much like we saw with the rain tax. The trouble that lies ahead for the Bayou City can only be averted through reducing spending and getting control of the pension system.

If city officials are unwilling to do it, then voters should find new candidates who will. In any case, residents should not pay the price for Houston’s fiscal mess.

Charles Blain

Charles Blain is the president of Urban Reform and Urban Reform Institute. A native of New Jersey, he is based in Houston and writes on municipal finance and other urban issues.


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