Submitted by Don Sumners
Houstonians must wake up, act to protect themselves from affects of the city’s impending financial storm, and demand the city confront its overwhelming financial crisis head-on before it’s too late. Harris County, although strong financially, is not immune from storm’s effects and should prepare accordingly.
What do Houstonians really know about the City of Houston’s worsening financial condition? Are they aware that within the very near future the city could find itself in a severe financial crisis, a perfect financial storm? Some mention of the problems was made in the recent mayoral run-off election, but fixing pot holes dominated the conversation. There is no question the financial storm is closing in. Regrettably, radar can’t predict the storm’s breath, strength or length, but we can expect that elements of the storm will last at least into 2017-18. The most important unanswered question is, will the city act decisively and in time to limit the storm’s full potential damage to its finances and the economy?
In business circles there has been much discussion about the city’s inability to deal with its unsustainable increases in pension costs and to a lesser extent its enormous ballooning debt payments peaking in 2017-2018. Much attention has also been paid to the city’s failure to provide needed infrastructure repairs and improvements. Until very recently, there has been almost no attention paid to the affect prolonged low oil prices and the resulting continued job losses will have on the city’s tax and fee revenues. Not yet discussed in public is the elephant in the storm; how the city’s financial difficulties, especially if unresolved, will affect the city’s ability to maintain the favorable business climate necessary to attract new and expanded business within the city limits?
If the City of Houston’s growing financial problems remain unresolved, the city could conceivably be forced into reorganization; an unpleasant situation for a city that just a few years before was boasting of its booming economy as the ‘energy capital of the world.’
The abrupt downslide in the price of oil beginning in 2014 has substantially added to the potential intensity of the upcoming perfect financial storm. Oil prices are now well below the breakeven point of most production, having dropped into the low-thirties. Pundits originally expecting low oil prices to last at least through 2016 are extending the expected recovery date. A recent institutional prediction is that the downturn will last into 2018. The drilling rig count has dropped sixty percent and continues to decline. Oil service companies, strapped for cash, are cannibalizing equipment to sustain operations. Oil producers are making large development budget cuts for 2016 and beyond. Mid stream companies with large amounts of debt are also suffering. Experts have sounded the warning: the longer oil prices remain low the larger the number of projects that will be delayed or cancelled and the greater the number of jobs that will be lost. Now, we are being told before oil prices can recover a price as low as $20 may be required to force enough producers out of business to bring oil’s supply and demand into equilibrium. Unfortunately, control of the price of oil is probably out of the hands of US producers. In the interim a protracted period of low oil prices will cause an ever widening setback to Houston’s economy.
What would the affect on the city if all its financial difficulties should reach crisis level more or less simultaneously with the loss of taxes from the downturn in its economy, which is very possible? Unless the city’s impending financial difficulties are addressed soon there is little doubt that the City will find itself facing an intense perfect financial storm. By now the new mayor and city council are undoubtedly becoming aware of the severity of these difficulties. Unlike the previous city administration which chose not to take action, kicking the can down the road is no longer feasible. With so little time left, city business and political leaders must step-up, batten down the hatches, and immediately begin to find workable solutions to these financial difficulties. They must also build consensus for the solutions implementation. No doubt, any workable solutions will negatively affect many Houstonians, some in a major way, but if the city’s financial problems are not addressed now, the result will only be worse.
What are Houstonians already facing from the economic affect of the collapse in oil prices? As could be expected, the first affect from the oil price collapse was the loss of jobs involving oil production, fabrication and supportive service workers. New employment in petro-chemical plant construction is somewhat offsetting these oil industry job losses, but, these facilities are scheduled to be substantially completed by 2017. Reports have indicated that continuing oil business job terminations are increasingly white collar office and supportive professional workers. Oil executives aren’t being spared from the effects of the downturn, either, and some are now losing their positions.
Unrelated service worker jobs should begin to decrease, or at the very least level off as the spending affect from oil related job losses works its way through the economy. The downside to this happening is service workers tend to earn much lower wages than those losing their jobs. The overall rate of job losses should decline over time, but a prolonged period of low oil prices would cause successive waves of job losses.
Homeowners should expect an extended downturn in the city’s economy will result in a loss in the salability and eventually the value of their homes. There are already signs Houston’s housing bubble may be in the process of bursting. Area home sales have fallen year-over-year for the last three months. December sales were down 9.7{997ab4c1e65fa660c64e6dfea23d436a73c89d6254ad3ae72f887cf583448986}, following November’s 10.5{997ab4c1e65fa660c64e6dfea23d436a73c89d6254ad3ae72f887cf583448986} drop, the worst decline in over four years. Homes selling for over $500,000 experienced a 17{997ab4c1e65fa660c64e6dfea23d436a73c89d6254ad3ae72f887cf583448986} sales drop. With job losses expected to continue into 2016, home sales can be expected to continue their recent decline. So far, median sales prices have held steady, but because of the dramatic increases in home values over the last few years, there is the possibility any sales price declines may be greater than otherwise. Also, there is little reason to believe that housing sales will strengthen until oil prices and jobs recover.
Recently claims appeared that the downturn has already reached the intensity of the eighties. But to date, except for the depth of the drop in oil prices, the intensity of the current economic decline is not even close to that of the eighties. For those of you who were not in Houston at the time a severe downturn in the oil industry due to an abrupt drop in oil prices brought a crashing end to Houston’s booming economy. The recession, originally predicted to last a matter of months, came to more resemble a localized depression and lasted for three plus years before recovery began. There was a overwhelming number of jobs lost. This led to a significant out-migration, especially by ‘rust-belters’ in Houston for work returning home. In addition to the devastation of the oil business, real estate sales and values, both commercial and home, were particularly hard hit. Vacant commercial buildings and homes became the norm. In many neighborhoods the majority of home sales that did occur were repossessions. Texas banks, including the very largest, failed and the saving and loan business was wiped out. Business and personal bankruptcies produced a large legal specialty. Because of these failures the Federal Resolution Trust Corporation became the owner of massive amounts of Houston real estate which it disposed of at fire sale prices for cash, mostly to non Houstonians. For homeowners property taxes remained at pre-downturn levels for years because the appraisal district refused to recognize low foreclosure sales prices as representing real market value. When the economic recovery finally began, it was slow, taking many years.
Two important differences distinguish the current downturn from that of the eighties. The current economy is thought to be far more diversified and less dependent on the oil business than then, which will tend to moderate the intensity of the downturn. On the other hand, at the beginning of the eighties recession the City of Houston was in good financial condition; far more prepared to weather a financial storm than the city is today.
Turning to solving the city’s financial problems that threaten to bring the perfect storm, the immediate problem is finding the money to pay the city’s near term employees’ pension obligations. Then, the hard part of reforming the pension system to bring the rapidly increasing payment obligations under control must be accomplished.
The city’s pending pension obligations are unsustainable; by themselves, they are large enough to cripple the city’s finances. Coupled with the impending ballooning debt payments and possible tax revenue losses, the city will find itself underwater from the financial storms waves if corrective actions aren’t begun immediately
The only feasible solution to the city’s pending pension obligation crisis is to allow the city to negotiate new agreements with its employees and their pension plans. Property tax increases are not possible without voter approval and further borrowing to pay pension obligations is at best a short-term fix, but probably necessary. Additionally, the city’s employees and pension plans must be willing to compromise to reduce the city’s excessive pension benefits and costs, far above what private sector employees now have. There is no other plausible solution; the city can no longer afford the excessive pension payments.
To accomplish this Houston’s state representatives and senators who oppose local self control of pensions must forget their politics and resolve to remove the state’s shackles preventing the city’s negotiation of new pension agreements. Ironically, most of them represent the Houstonians that will be hurt most if the city cannot fix its pension obligation crisis. It’s as if the legislators have chosen to play a game of chicken with the city, not recognizing their position opposing city self control is a roadblock to the only feasible route the city has to limit the damage from this element of its financial storm.
The solution to the city’s ballooning debt repayment problem is most likely to refinance the debt (called a refunding) to lengthen the time to maturity. To accomplish this, along with borrowing to pay pension obligation, the city may well have to accept a lower credit rating (Moody’s has the city’s outlook as ‘negative‘) and would be required to pay higher interest rates. But, at least the city will have prevented some of the storm’s potential damage, the possibility of a default.
The expected reduction in city tax revenue as a result of the impending economic downturn will complicate the city’s efforts to resolve its difficulties. City sales tax revenue, which accounts for roughly one-half of Houston’s tax revenues, has declined for four straight months. December 2015 sales tax distributions from the state were down 6.8 percent from December 2014. It will be later in February before it is known if the downward trend continued for Christmas retail sales. A recent city estimate of current year property tax collections indicates a shortfall of $16 million from the amount budgeted. This projected reduction indicates next year’s collections are at a risk of a decline, further clouding the city’s future tax revenue picture.
The city must also adjust its spending habits. A must do for the city’s leadership is the strict setting of spending priorities, separating the absolutely needed from the wanted or wished for, and sticking to those set priorities. Let’s hope this action will end the city’s unneeded lavishing of tax giveaways and cash incentives to up-scale development and instead dedicate the city’s limited resources to those areas and persons really needing them.
Houstonians must wake up and protect themselves from the affects of the city’s impending financial storm. Left unresolved, the city’s escalating economic crisis will most likely negatively affect their homeownership and possibly their employment. They should hope for the best and plan for the worst. Fleeing a storm has proved unworkable and hunkering down can provide only limited protection from the storm’s intensity. Houstonians must put unwavering pressure on the city’s business leaders and its elected officials, not accustomed to confronting crisis, to address the city’s overwhelming financial problems head-on before it is too late. The next few years may test the tenacity of Houstonians.
Summing it all up, the City of Houston’s ability to continue to maintain a favorable business climate is dependent on a swift and effective resolution to its stormy financial problems. Otherwise, the city will be unable to attract and keep businesses and its problems will just be beginning. Although financially strong, Harris County is not immune from the storm’s effects and should prepare accordingly.
Don Sumners, CPA
Former Harris County Tax Assessor Collector
Former Harris County Treasurer