Houston budget passed as state pension bill sparks concern

Phillip Oettle

The Houston City Council signed off on a $7 billion fiscal 2026 budget Wednesday amid worries on how a bill passed by Texas lawmakers, unbeknownst to some city officials, would impact its public safety pension funds. 

Ahead of the spending plan's approval in a 14-3 vote, city Controller Chris Hollins raised a red flag over House Bill 2688, saying its existence was "shrouded in secrecy" and that the measure, if signed into law by Gov. Greg Abbott, could significantly impact Houston's long-term finances.  

Hollins said a third-party actuarial review of the bill is essential. 

"It must include rigorous stress testing for market volatility, demographic trends and inflation, so we understand the full risk and the impact to the city as well as our retirees," he said. 

Houston Finance Director Melissa Dubowski said the city's actuary is already analyzing the bill, which expands eligibility for a deferred retirement option plan to additional police officers and firefighters.

"They're still working on the analysis, but they believe that it's going to be cost neutral – no increase to the unfunded liability and no increase from a budgetary standpoint, as far as what we have to contribute to the pension systems," she said. 

Pension reforms passed by the Texas Legislature in 2017, along with Houston's $1 billion pension bond sale, reduced unfunded liabilities for the city's three retirement systems, which rose as high as $8.2 billion, to around $1.8 billion.

Spending pressures and shrinking budget reserves led to negative outlooks last year on Houston's AA bond ratings from Fitch Ratings and S&P Global Ratings. Both warned their ratings could be downgraded due to the continued depletion of reserves. The nation's fourth-largest city has a stable outlook on its Aa3 rating from Moody's Ratings. 

Hollins warned last week that one-time measures, deferred obligations, and questionable assumptions in the budget risked a bond rating downgrade. 

The spending plan for the fiscal year that begins July 1 taps about $100 million from the fiscal 2025 ending fund balance. That balance is projected to fall from an estimated $380.8 million on June 30 to $273.4 million at the end of fiscal 2026, according to a budget overview from Dubowski's office.

"We're still broke, but we managed to put a sound, balanced budget together," Mayor John Whitmire said, adding that an Ernst & Young efficiency report will continue to help the city save money that can be plowed back into services.   

The budget includes $122 million in spending cuts and accommodates pay raises from contracts reached with public safety unions in 2024 and this year, according to the mayor's office.

One potential budget sticking point was resolved after a court approved an agreement over $100 million in property tax revenue the city must allocate annually for drainage and roads. The deal allows the city to phase in the spending over three years.

The mayor's proposed budget did not include any money from Senate Bill 2722, which would have allocated 30% or $80 million in excess Harris County Toll Road Authority surplus revenue to the city, but failed to pass out of the legislature.