Regional News

Economy Starts to Pinch Largest Texas Cities

DALLAS - Texas weathered the downturn of late 2007 in far better shape than most regions of the country. But as 2008 nears its halfway point, the state's largest cities are beginning to tighten their belts.

In the Dallas-Fort Worth area, cities, counties, school districts, and other jurisdictions are looking for ways to cut budgets in advance of the 2009 fiscal year that begins Oct. 1.

Because of the diversity of its economy, DFW is considered a better bellwether of broad trends than, for example, the energy hub of Houston, the military strongholds of San Antonio and El Paso, or the government bastion of Austin.

Not that those cities aren't having problems, too.

Houston, despite being an epicenter of the oil boom, may limit the growth of its police force as officials try to pare costs under a proposed $4 billion budget.

Austin, facing a $21 million shortfall, is considering grounding its police helicopter, among other cost-cutting measures.

San Antonio needs to cut $13 million from its $900 million general spending plan. And the shortfall could grow to $59 million next year, city officials say.

As the city of Dallas faces a $50 million shortfall, Dallas County, which includes several suburbs, is trying to slash $17 million.

After winning voter approval of a $1.35 billion bond proposal last month, the Dallas Independent School District expects to trim spending by $4 million due to declining enrollment. District officials were grateful for the 54% approval of the bonds, but election analysts noted that the margin of victory was down from previous votes and that support in the reliable north Dallas neighborhoods appeared to be eroding.

In nearby Fort Worth, a $14 million shortfall is forcing the city to contemplate layoffs or hiring freezes, despite a recent boom in oil and gas production in the area. The city, which suffered a downgrade in March from Moody's Investors Service to Aa2 from Aa1, is still playing catch-up on its annual financial report due to software problems from three years ago. That forces the city to use private placements for its debt.

"I am convinced that these budget cuts will require us to reduce the workforce by several hundred positions," city manager Dale Fisseler wrote in a letter to city employees.

Even the affluent Dallas suburb of Plano is hurting, as city officials brace for a $17 million funding gap next year and a $100 million shortfall over the next three.

"Cities are seeing a flattening out of their revenues from property taxes and certainly seeing a flattening or decline in their sales taxes," said Terry Clower, associate director of the Center for Economic Development and Research at the University of North Texas. "We're also starting to see the impact of commodities inflation."

In Texas, large urban areas are simultaneously coping with population growth that adds demands on infrastructure and services as those costs continue to rise, Clower said. And the major sources of revenue - property and sales taxes - are vulnerable to economic cycles.

"We are not immune from the national slowdown," Clower said, "But we are still going to see growth."

The economic forecasting firm Global Insight predicts that, of the 10 largest metro areas, Phoenix, San Antonio, Houston, and Dallas will have the largest growth in population, employment, and income over the next five years.

The comparatively low cost of living in Texas, low debt burden, lack of income tax and mild winters will help the state recruit businesses from California and other high-cost areas, Clower said.

"We're still very competitive in terms of the cost of doing business," he said.

In its upcoming edition, Kiplinger's Personal Finance ranks Houston as the "Best City" in the nation.

"Not only does the Houston metro area lead the nation in job growth, but also its cost of living stands well below the national average," the magazine noted. "Housing prices run half those of other metro areas its size."

Because Texas did not experience much of a housing bubble since the last recession, prices don't have very far to fall, according to state Comptroller Susan Combs.

Still, what is unusual in this economic downturn, according to Standard & Poor's, is the fact that property values are declining at all. That didn't happen in the recession of 2001-02, analysts observed.

"Unfortunately for the cities, today's slowdown is showing an entirely different face," analysts wrote in a Feb. 26 report on the 10 largest U.S. cities. "The steep housing slump, cutbacks in construction, rising foreclosures, and depressed consumer spending have already begun to affect many revenue lines in city budgets. In addition, other spending needs, including rising health care costs, pensions, and other post-employment benefits (OPEB) are weighing on budgets."

"While it's too early to gauge the total effect, if any, on credit quality, Standard & Poor's Ratings Services is closely monitoring these issues," the report said. "One of our key interests will be to measure revenue effects versus management actions in adjusting to the slowdown."

Dallas, which lost its triple-A rating in 2003, is rated AA-plus by Standard & Poor's and Fitch Ratings on general obligation debt and Aa1 by Moody's.

The city enjoyed strong demand in the competitive market last week as it sold $158.7 million of waterworks and sewer system revenue refunding bonds to Citi with a true interest cost of 4.57%. Yields range from 2.32% with a 4% coupon in 2010 to 4.60% with a 5% coupon in 2033.

In reviewing their stable outlook for the city, Standard & Poor's analysts James Breeding and Alex Fraser noted, "While financial pressure might continue, management will balance its budgets with little or no use of operating reserves and that property tax revenues will continue to provide a firm foundation for the city's financial condition, allowing for some sales tax revenue stream volatility. Management's and the city council's willingness to aggressively address Dallas' capital needs while closely monitoring the city's financial position is key to the maintenance of the rating."

In the Dallas-Fort Worth area, appreciation of home values, though slower in the past five years than, for example, Arizona's, has clearly crested.

With major U.S. metropolitan area home prices down in March by a record 14.4%, Dallas home prices fell 3.3%, according to a national survey by Standard & Poor's/Case-Shiller.

For 2007, the increase in net appraised property value in Dallas County is expected to be about 5% after protests in which owners get a chance to challenge their assessments. That would be about half of last year's increase, according to the Dallas County Appraisal District. Neighboring Collin and Denton counties, home to the fastest growth in recent years, also are expecting little rise in assessed values after several years of strong increases.

In Tarrant County, which includes Fort Worth, preliminary appraised value is up 9.4% over last year, but that doesn't include additional mineral values from the geological formation known as the Barnett Shale. The new mineral values could add $800 million to the rolls. But residential growth is down sharply, to 9,000 single-home permits in the current year from 14,000 in the previous year.

Some Texas cities are bucking the downward housing spiral entirely. El Paso's 8.5% home price increase to $134,600 in March ranked among the highest in the South, thanks in large part to the influx of soldiers and their families to Fort Bliss under the Base Realignment and Closure process.

Other cities showing home price increases were the Amarillo area in the Texas Panhandle with an 8.2% gain to $122,200, and Beaumont-Port Arthur on the Gulf coast, at $122,900, up 6.1%.

For Dallas, the challenge will be continuing bond-funded projects that will generate new jobs as citizens worry about tax increases. Among the key economic projects is a planned convention center hotel that could cost as much as $450 million. The City Council has approved the land purchase but not the financing for the actual hotel.

Mayor Tom Leppert said the city needs the hotel to make its $1 billion convention center competitive with those of other "Tier 1" cities, such as Orlando, Denver, Phoenix, and Las Vegas. Even in-state rivals Houston and Fort Worth are building attached convention-center hotels.

Such sales pitches grow more difficult in a weakening economy, Standard & Poor's analysts acknowledged. But cities like Dallas can still draw new residents from the surrounding region because they serve as social and economic magnets, they said.

"The economic slowdown now confronting cities promises to be tougher on them than the previous downturn," analysts wrote. "But that doesn't mean Americans are about to abandon their cities and head for the hills."



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