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Kelly Dowe

Have I mentioned lately that the revenue cap is stupid public policy?

Because it is.

BagOfMoney

Sales taxes are Houston’s second-largest source of revenue for the general fund, which pays for most core services.

Just as concerning for city officials, however, was more news about the city’s largest general fund revenue source: property taxes.

Mayor Sylvester Turner, as he did in February, criticized what he said is an unjust and inequitable system that lets commercial property owners abuse legal loopholes to successfully challenge their property appraisals and pull millions out of local governments’ budgets.

As of February, the hole created by those tax lawsuits was to be a projected $16 million for the current fiscal year, which ends June 30. By Wednesday, Turner and his finance director, Kelly Dowe, said that projection had risen to more than $32 million.

Council cut the property tax rate last fall to ensure the city would not collect more property tax revenue than is allowed under the city’s decade-old, voter-approved revenue cap, which limits growth in property tax collections to 4.5 percent or the combined rates of population growth and inflation, whichever is lower.

Companies’ successful lawsuits are pushing tax collections below the cap, however, with no way to adjust the rate back up to fill that hole.

“It’s a double hit. Last year you all lowered the tax rate based on the revenue cap. Had we known then we were going to be down another $32 million, I don’t think you would have lowered it that low. You cannot budget that way,” Turner said. “I will again ask the Legislature to remedy this situation. Taxes from hard-working homeowners should not effectively subsidize wealthy commercial property owners.”

But hey, look on the bright side: The system is working exactly as designed.

Circling back to city finances

I have three things to say about this.

BagOfMoney

This time, [City Finance Director Kelly] Dowe insists, the $126 million deficit he projects for the budget year that starts next summer is not going to disappear, as past projected shortfalls have. There are no more payments to defer, he says, no more valuable city-owned land to sell.

As a result, the city could be facing layoffs and cuts to services within a year – perhaps pool closures, restricted library hours and parks going to seed, and perhaps worse.

“We have an unsustainable financial model,” Councilman Dave Martin said. “We cannot continue to do this. If we continue down this path, we’ll be belly up.”

Dowe and his boss, Mayor Annise Parker, know Houstonians are confused as to why their government would face layoffs and service cuts while the region’s economy booms.

There are several reasons for this, all a decade or more in the making.

The city has been spending more than it brings in for years, a structural gap driven chiefly by soaring pension costs and, in recent years, a spike in debt payments. Houston typically bridges this gap by budgeting conservatively, being happily surprised when tax revenues exceed projections during the year, then using those “extra” dollars to balance the next year’s budget.

To balance the current budget for the fiscal year that started last week, council approved taking $86 million from last year’s leftover savings, the largest such transfer in a decade.

“Obviously we carry the reserves over from year to year. That’s money that’s not generated or not expected to be generated in the next budget cycle,” said Controller Ronald Green, the city’s elected financial watchdog. “Clearly, if you want to be technical, it is not a structurally balanced budget.”

This history of disappearing deficits has made some council members skeptical of just how dire current projections are. Dowe acknowledged that he originally projected an enormous shortfall for the current budget, which wound up being balanced without layoffs or service cuts.

But he also ticked off a litany of reasons that he says will make another easy fix harder in the future.

First, the city has run into a cap on property tax revenues that voters imposed a decade ago. Houston can collect more property taxes each year than the year prior, but is limited to the combined rates of inflation and population growth.

The city now knows exactly what it will collect each year from its largest source of revenue, and no number of new skyscrapers or townhomes will change that. The typical way the city has wound up with “extra” money at the end of each year is thus gone. Without the cap, the city would have had another $53 million to spend this year.

[…]

Each of the next two years also will bring a $50 million payment to the police pension, triggered under the pension board’s contract with the city because sluggish investment returns have eroded its funding level.

Without an increase in revenue, Dowe said, the only option is to cut services.

“Debt is what it is, pensions are what they are,” he said. “We will continue to get more efficient, we will continue to cut costs where we can, but in the long term it would be hard to say you wouldn’t affect services with the outlook we have.”

Debt payments for past public projects have risen by more than half over the last five years, to $346 million this year, and are projected to reach $411 million by 2020. Pensions are devouring $308 million of the city’s main operating fund this year, nearly three times what is spent on parks and libraries combined.

1. There’s no serious solution to this problem that doesn’t include repealing the revenue cap. Every candidate running for office runs on a promise of promoting economic growth and prosperity. Houston has had that these past few years, but thanks to the cap we’re being penalized for it. Fifty-three million dollars is a lot of money and would do a lot to reduce the scope of the problem we’re facing, and that’s just for this year. You want to argue that we don’t have a revenue problem in Houston I’ll be sympathetic, but that doesn’t mean that throwing away extra revenue like this makes any sense. There is no good reason not to use all available resources.

You may argue that the people won’t go for it, and you may be right. What evidence we have from limited polling certainly suggests that’s a strong possibility. To that I say, how about a little leadership from those who want to be Mayor? Politicians love to talk about “making the tough choices”, yet somehow choices like this never seem to be on the table. To be fair, at least some Mayoral candidates have mentioned this – I know Chris Bell has, I’ll have to check on some others – and Mayor Parker has brought it up as well. Any candidate who says they want to make “tough choices” but doesn’t consider this is to my mind not to be taken seriously.

2. Similarly, I don’t know how anyone can look at the debt figures and not support ReBuild Houston. One of the defining purposes of ReBuild Houston was to pay down existing debt and reduce the amount of future debt needed to pay for infrastructure. Put aside the extra revenue stream that ReBuild Houston represents, why would you want to add to the debt burden at this time? I’m not against using debt to invest in the city’s infrastructure, but now is not a very good time for it. What exactly is the case for going back to a bond-based system of paying for street and drainage improvements?

3. Finally, the pension issue. The choices are the same as they’ve always been – try to convince the Legislature to grant the city the authority to make changes to the pension plan; try to negotiate a different agreement with the firefighters; suck it up and figure out how to pay what we owe. I’m not sure why anyone thinks they’d be more successful at #1 than Mayor Parker has been, and I can’t imagine anyone advocating for #3. Maybe I’m missing something, I don’t know. I don’t know what else there is to say on this.

City deficit not as big as feared

This is a nice surprise.

BagOfMoney

A huge budget deficit looming at City Hall – which has spurred talk of layoffs, service cuts, new fees and higher taxes – has been cut in half, relieving some pressure to scramble together a budget patch but doing little for Houston’s long-term financial health.

The unexpected boost of good news came from city Finance Director Kelly Dowe, who told a City Council committee Tuesday that what recently had been an estimated $144 million gap for the budget year that starts next summer has shrunk to about $63 million.

“That’s no small amount of change,” Dowe said, “but definitely a better picture than $144 million.”

The improvement is thanks mainly to a change in the police pension board’s funding formula that means Houston no longer must pay $50 million into the pension in each of the next two years on top of the $123 million and then $133 million, respectively, the city already is scheduled to pay. Savings in city operations and the city’s health care costs leveling off also helped narrow the budget gap.

Dowe still projects deficits in each of the next four fiscal years, driven largely by a spike in the cost of servicing city debt, rising payments into all three city pension funds and a cap voters imposed a decade ago that limits the property tax revenues Houston can collect to the combined rates of inflation and population increase. Though these coming budget gaps have narrowed, the numbers remain sobering, reaching a projected $112 million deficit in the fiscal year that starts July 1, 2017.

[…]

Rice University political scientist Mark Jones said narrower budget gaps lessen the problem’s urgency and make items like changes to the revenue cap, which would require a public vote, less plausible.

“The strongest case for lifting the revenue cap would be this cataclysmic effect if those revenues were not available for core city services like police and fire,” he said. “As that number gets lower and lower, a doomsday scenario is a much tougher sell.”

Other observers said the new numbers better enable Parker to argue she is pushing the ideas because they are sound policy, not as part of a scramble to close a budget gap.

Needless to say, I agree with that view. Repealing the cap is still the right thing to do. The immediate deficit may be smaller now, but it’s still substantial, and it gets bigger a couple of years out. We can use all available resources to deal with it, or we can be forced to cut taxes and make more cuts than we otherwise would have in years where revenues grew faster than expected. That should be good news in a scenario like this, but only if we repeal the cap first. Let’s not lose sight of that.

Searching the couch cushions for loose change

That’s basically what this is.

BagOfMoney

To say the city of Houston is working to cut a looming $120 million budget deficit one color copy at a time would not be accurate. It’s more like millions of color copies.

Cellphones no one is using, old cars no one is driving, a 50-step process for approving fire alarm permits no one can explain – these are the targets and triumphs of a small team of efficiency experts tasked with burrowing into mounds of data and analyzing city operations to find savings.

While city leaders are looking at some painful ways to close next year’s massive deficit – pension reform, layoffs, cuts in service – the six members of the Lean Six Sigma squad have generated $25 million in savings and better processes in three years, showing there are easier ways to cut.

Next on the list? Perhaps an email to the sixth floor of the Houston Fire Department headquarters at 600 Jefferson. The shared printer there spit out 32,519 color pages in September, the most of any of the city’s networked printers. About 81 percent of the machines’ pages printed in color, nine times the citywide average.

It may sound like small ball, but given the size of city operations – 55 million pages are printed each year – the potential savings can add up quickly.

Finance director Kelly Dowe, who formed the Lean Six Sigma team in May 2011, said the group – named for decades-old problem-solving methods that began in manufacturing – has a broad focus, targeting everything from shortening the time it takes to hire city workers to helping pollution and restaurant inspectors plan better daily routes.

I don’t want to denigrate or belittle this in any way. It’s a valiant and necessary effort, it will achieve real savings, and it will make government work better. These are all very good things. What I do want to do is disabuse anyone of the notion that there’s more of this that can be done to close the rest of the budget gap. In the best case scenario, Dowe’s efforts might shave five percent or so off that projected $120 million deficit. That’s real money, but it’s nowhere close to a solution. The rest of the way there is a lot harder, with the choices a lot less pleasant.

The other point that needs to be made is that we need this level of scrutiny on the whole budget, including the public safety budget. As far as I can tell, that part of the budget has been walled off and the only thing one can do with it is propose to spend more. That’s not something I will accept, certainly not until my questions about HPD’s operations are answered. I’ve said before and I’ll say again, I’m willing to accept the possibility that we really do need to spend more on public safety to get what we want out of it. (Body cameras, for example, I’d absolutely support spending on.) But I want to see the numbers first. I want to know what what we’re spending our money on now is the best and most efficient use of it. Show me we’re putting the same effort into critically examining the public safety budget, and then we can talk. Along the way, we might also make some more progress on that deficit.

Debt collection is harder than it looks

Last year around this time, the city announced it was “getting tough on users of its services who have racked up nearly $1 billion in unpaid fines and fees, unveiling an aggressive collection program that is expected to make frequent use of litigation.” The Chron has an update on how that is going.

A city analysis of delinquent bills revealed that nearly 70 percent of the debt is more than 2 years old. The older a debt gets, industry experts say, the less likely it is that it will be collected. People die, move or even forget about bills past due as time goes on.

“There’s no write-off of these older debts,” Bruce Haupt, the city’s deputy assistant finance director, told the City Council’s Budget and Fiscal Affairs Committee. “It’s just in terms of setting realistic expectations of what is potentially out there to really pursue, it’s really the last two years’ worth of debt.”

According to the Finance Department, that represents about $210 million.

[…]

[T]he $295 million the city is owed in unpaid ambulance rides alone will be difficult to collect because many of the debtors are uninsured, indigent people. The city’s leverage to collect $25 million in red-light camera fines has been limited in part by the county tax assessor’s refusal to deny vehicle registration renewals to red-light scofflaws.

Finance director Kelly Dowe said he expects collections to increase as the city changes the way it evaluates its debt collectors. Currently, the city evaluates its collectors largely on how many contacts they make with debtors. Several of those collections contracts are up for renewal this year, and Dowe said the city intends to shift toward evaluating its debt collectors on how much money they brought in. The city also intends to improve its data management, Dowe said.

The city uses at least five different firms to collect bills for 13 departments. The departments’ databases are not integrated. Currently, there is no way of knowing, for example, if a delinquent property owner also has applied for a restaurant permit. The city also has stopped short of reporting many kinds of debt to credit bureaus to increase pressure on debtors.

Kind of a different tone this time around. Still, even with the reduced numbers, it’s worth the effort. If $210 million is the new target, that’s still a lot of money, and collecting even ten percent of it would make a big difference. If you look at this detailed presentation given to the city’s Budget & Fiscal Affairs Committee, you’ll see this on the Executive Summary page:

The project team is now moving into the implementation phase of the project focused on building sustainable processes to more
effectively manage collection efforts including:
1. Implementing specific activities to collect against outstanding debt
2. Implementing citywide practices that will improve the collection processes going forward including:

  1. Collection enforcement mechanisms such as Credit Bureau Reporting, Scofflaw, and Legal Action
  2. Citywide skip tracing capabilities to obtain correct contact information on City debtors
  3. Metrics for reporting on internal collections’ operations and external vendors
  4. Developing the infrastructure to support the reporting process, customer master data, and skip tracing

Implementing the above recommendations is expected to yield an incremental FY13 Budget impact of $9.3 MM
($8.6MM to General Fund).

Not too shabby. The Fiscal Responsibility page has other presentations from August through January, and I can tell you because I was looking on that page early yesterday morning for this kind of information that it was all (except for the presentation from August ) added during the day yesterday. Because none of that was there when I looked, and because the Chron story didn’t address the issue, I sent an inquiry to Finance Director Dowe to ask for a total on debt collection since this initiative was announced. Now we can see what they project, but I still can’t tell how much they’ve already taken in. I will let you know when I hear back from him.