4 things limiting Houston’s ability to generate more revenue


Houston lost $25 million in sales tax revenue in March alone because of COVID-19. But the city’s fiscal struggles existed before the coronavirus pandemic. A new Kinder Institute report compares the revenue sources and service levels among the three larg

City finance report comparing Houston, San Antonio and Dallas Kinder Institute

Houston lost $25 million in sales tax revenue in March alone because of COVID-19. But the city’s fiscal struggles existed before the coronavirus pandemic. A new Kinder Institute report compares the revenue sources and service levels among the three largest cities in Texas — Houston, Dallas and San Antonio — all of which are expected to see COVID-19-related revenue losses of between 10 and 15%. Of the three, Houston is the most constrained in its options for increasing revenue.

As the effects of the COVID-19 pandemic cut into its revenue, the City of Houston appears to be on the brink of yet another budget crisis. Recently, when Houston Mayor Sylvester Turner released his proposed 2020-2021 budget, he identified a $169 million budget deficit. He has proposed plugging the gap mostly with one-time funds that won’t be available until the year after next, likely setting the stage for another difficult set of budget decisions a year from now.

This post is part of our “COVID-19 and Cities” series, which features experts’ views on the global pandemic and its impact on our lives.

While Houston’s deficit is due in part to revenue drops related to COVID-19 — for example, the city lost $25 million in expected sales-tax revenue in March alone — part of it is what budget nerds call a “structural” problem. The city’s cost structure is almost guaranteed to generate a deficit each year. In fact, when the consulting firm PFM created a 10-year financial plan for the city in 2017, it predicted a structural deficit of more than $100 million every year for the next decade.

All of which once again raises a question that comes up often here in Houston: Is our city more financially constrained than other, similar cities?

The answer is yes.

In a new report, the Kinder Institute for Urban Research compared Houston’s revenue sources and service commitments to those of Dallas and San Antonio — the two other cities in Texas with populations of more than 1 million people. The three cities are not directly comparable in all respects. Dallas and San Antonio are much smaller than Houston in population, and San Antonio has a different “revenue mix” because the city owns its electric utility.

But there is no doubt that the other two cities both have more budget flexibility than Houston. Among the factors that contribute to this flexibility gap are the following:

1. Houston has a locally imposed property tax revenue cap, which, according to City Controller Chris Brown, has limited the city’s property tax collections by more than $100 million per year in each of the past few years. Neither Dallas nor San Antonio has such a limitation, though they may soon be affected by Texas’ property tax reform.

2. Unlike the other two cities, Houston does not charge its residents for solid waste collection. Dallas and San Antonio each charge fees in the $25–30 per month range, generating more than $100 million per year for each city.

3. Houston maintains its own health department at an annual cost of $60 million, though a large portion of that cost is offset by Medicaid reimbursements and grants. Dallas does not have its own health department, and San Antonio participates with Bexar County in a metropolitan health district.

4. Houston sequesters approximately 20% of its property tax revenue in the ReBuild Houston fund, which is intended to facilitate a gradual transition for public works projects from a debt-based approach to a pay-as-you-go approach. Both Dallas and San Antonio fund public works directly from the general fund, meaning they have more flexibility in difficult budget times. (A city’s general fund includes unrestricted tax revenue that can be used for any purpose.)

With COVID-19 cutting deeply into their revenue, all three cities face significant budget challenges in the coming year — and probably for the next several years. Inevitably, this will mean cuts in municipal services. But not all services are created equal.

All three cities spend from 50–55% of their general fund revenue on police and fire services. They all spend about the same amount of money per capita on police services, but with different outcomes: Houston has the best police response times. San Antonio spends the most money per capita on fire service and Dallas has the highest firefighter pay. Dallas has the best fire response times, while Houston ranks last.

In the past 30 years, all three cities have cut their parks budgets dramatically as other pressures — including pension costs and pressure to maintain police and fire service — have taken precedence. But Houston has been more heavily hit by this trend than other cities. Despite being 60% the size of Houston, Dallas spends more general fund money on parks ($90 million versus $78 million in fiscal year 2019–2020).

More than any other city in the nation besides New York and San Francisco, Houston plugs the parks revenue gap with private contributions. However, much of this revenue is devoted to capital improvements, not operations, and because many parks conservancies are devoted to a single park, the private funds are not equitably distributed across Houston’s park system.

The situation for parks likely will get worse. Drawing on data provided by the National Recreation and Parks Association, the Kinder Institute found that during the Great Recession, parks funding dropped by 5% nationwide, while funding for police and fire services went up. And indeed, in Mayor Turner’s proposed 2020-2021 budget, he has suggested cutting parks funding by more than 10%.

Regarding solid waste, all three cities provide regular weekly trash pickup. But unlike the other two cities, Houston does not charge residents a trash collection fee. The collection fees in Dallas and San Antonio raise $100 million for each city every year. The Houston City Council did recently pass a once-a-year trash bin fee of $1.14 per household that’s expected to generate $5 million annually. Dallas also provides more-frequent special pickups for brush and other large waste.

And for whatever reason, Houstonians generate far more trash than their counterparts in Dallas and San Antonio — about 1.6 tons per person each year, compared with about 1 ton per year for each resident in the other two cities. And this difference is not a result of Hurricane Harvey, it’s been a trend for the past several years. Could there be a relationship between Houstonians producing more trash and the fact that they don’t pay a trash fee? It’s impossible to say.

One bright spot in Houston is the city carries a lower unfunded pension liability on the books and is paying that liability down faster, compared to Dallas. (Both cities have undertaken major pension reforms in the past few years.) But it may be difficult for both cities to maintain their current level of pension payments during the coming budget crisis. During the 2008 recession, Houston cut back on its pension payments, which was a contributing factor to the pension crisis that emerged when Mayor Turner entered office.

People of different perspectives inevitably will have different views about Houston’s chronic budget problems. Some will say the city is unable to generate enough money to pay its bills, while others will say the city has been profligate in its spending, especially on pensions.

Whatever your viewpoint, however, one thing is clear: Houston has more constraints on its ability to raise and spend revenue than Dallas or San Antonio and that will make it very difficult for the city to navigate its way through the coming budget crisis.



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