New fees are key to help balance Houston's FY 2027 budget

Houston Mayor John Whitmire unveiled a proposed fiscal 2027 budget last week that depends on new fee revenue generated from the city's bond-issuing combined utility system to dramatically shrink a structural deficit. 

With the nation's fourth-largest city facing a $209.3 million shortfall, the mayor's $7.5 billion all-funds budget proposal, which includes $3.15 billion in general fund spending, would tap the water and wastewater enterprise fund's excess revenue by charging a right-of-way fee for the use of public property, similar to a fee the city charges natural gas, electric, cable, and other utilities.

In another revenue-raising proposal, trash collection would be moved into the combined utility system and residential customers for the first time would pay a $5 monthly "administration fee" that would, along with a subsidy from the system, raise about $107 million in fiscal 2027. The fee would go up in $5 increments between fiscal 2029 and 2032, when it would reach $25 and would more fully cover administrative expenses for solid waste.

The combined utility system started fiscal 2026 on July 1 with a $1.35 billion balance.

A 5% of gross revenue right-of-way fee, which officials said is allowable under Texas law, is expected to raise $104 million in the coming fiscal year.

At the city council's Budget and Fiscal Affairs Committee meeting Wednesday, Council Member Edward Pollard asked how the move would impact the system's bonds and credit ratings.

"Bondholders are investing in the (combined utility system) based on specific language," he said. "That specific language at the moment, I don't think, contemplates right-of-way fees, because we have not done that as of yet." 

The system had $5 billion of first lien and $23.5 million of water and sewer junior lien revenue bonds, along with $950.2 million of debt sold through the Texas Water Development Board, outstanding as of June 30, according to the city's fiscal 2025 financial audit. The first lien bonds are rated AA by S&P Global Ratings and Fitch Ratings and Aa2 by Moody's Ratings.

"There is a general flow of funds for how you can spend (combined utility system) revenues that's contemplated under the (master bond) ordinance," Eric Nguyen, a senior assistant city attorney, told the committee. "You don't need to amend it, you don't need to get bondholder consent. You just do what the flow of funds says you can do."

System revenue flows to debt service payments and operations and maintenance expenses, leaving a general purpose fund "where the city is allowed to pay for any number of categories in there, and one of the categories is called any lawful purpose of the system as the city may determine at its own discretion," he added. 

Fiscal 2025 debt service coverage at 2.15 times is projected to dip to 1.98 times this fiscal year, while the ordinance's coverage ratio requirement is in the 1.1 to 1.2 times range, according to Houston Finance Director Melissa Dubowski's budget presentation.

Concerns were raised about the impact on funding for the combined system's ongoing capital needs.

Bill King, a fellow in public finance at Rice University's Baker Institute for Public Policy, said the system, "which is flush for now," faces significant challenges over the long term that could require investments in the $14 billion range.

"Our wastewater system leaks like a sieve, which means we regularly dump untreated sewage into our bayous and streams," he said in a commentary. "The city has been under a series of consent decrees with the (Environmental Protection Agency) since the 1980s for violating the Clean Water Act. And, of course, we have all heard reports that the freshwater system loses billions of gallons each year through leaks."

Administration officials said capital projects and operational needs will continue to move forward. 

As for the system's bond ratings, preliminary discussions with rating agencies "to explain to them our thought process for the proposed budget" have not produced "any negative feedback," Dubowski said.

 "So now the budget's released, we're going to have more deep-dive conversations with the rating agencies," she said.

Houston is at a turning point, according to Whitmire, who pointed to rising costs for services and infrastructure at the same time its property tax revenue is capped by both the state of Texas and the city's charter.

"Under my administration, we have tightened our belt, improved efficiency, and reduced year-over-year spending for the first time in decades," he said. "But efficiency alone is no longer enough. This year's budget introduces a modern, sustainable approach to funding core services, protecting the programs that Houstonians rely on without raising property taxes."

The mayor called last year's Ernst & Young efficiency report "the smartest thing I've done up to this point," adding it provided a road map on how to transform city government.

Houston's finances weakened as federal funding under the American Rescue Plan Act of 2021 waned and a court-approved settlement with firefighters in 2024 included pay raises, as well as a $650 million lump sum payment the city financed with GO bonds.

Spending pressures and shrinking budget reserves led S&P and Fitch in 2024 to revise their outlooks on Houston's AA general obligation bond ratings to negative from stable. The city has an Aa3 rating and stable outlook from Moody's.

A five-year forecast released last week showed the structural budget gap shrinking from $180.8 million in fiscal 2026 to about $25.3 million in fiscal 2027 based on the mayor's budget, which calls for using a like amount of reserves to plug the smaller hole. For fiscal 2028, the gap would increase to nearly $115 million.

Houston City Controller Chris Hollins, who in his financial watchdog role has been critical of relying on one-time fixes like raiding reserves, released a statement Monday saying that "the Controller's Office is evaluating how these changes may affect the City's credit rating and overall financial health. We will share additional insights as they develop."

He had already announced a series of "reality check" town halls on the budget starting this week. In last week's announcement he said the mayor's budget "shifts costs onto working families, hides the true price tag of city services, and puts Houston on a dangerous financial path."

The city's projected unassigned ending fund balances of nearly $300 million for fiscal 2026 and $273.8 million in fiscal 2027 would be down from fiscal 2025's $480.8 million. 

Houston is not the only big Texas city facing budget troubles. Dallas last month projected a $34 million shortfall in its current budget due to public safety pay and overtime, declining sales tax revenue, and increased employee healthcare costs. The city enacted a selective hiring freeze, restrictions on overtime and spending, and suspension of non-essential travel.

"We are committed to strengthening efficiency across all operations while ensuring that limited resources are focused on the city's most critical needs," Dallas City Manager Kimberly Bizor Tolbert said in a statement.  "These measures are necessary to maintain essential services and uphold our fiscal responsibility to Dallas residents." 

The $5.2 billion all-fund budget for the fiscal year that began Oct. 1 included a public safety spending boost with a plan to hire police recruits and retain existing officers to comply with a proposition approved by city voters in November 2024. It requires Dallas to appropriate at least 50% of annual revenue increases over the previous year to fund public safety pensions, boost police starting pay and maintain a police force of at least 4,000 full-time sworn officers.  

Shortly after the election,  Moody's Ratings revised its outlook on the city A1 GO bond rating to negative from stable, citing the measure's expected credit impact, including reducing the city's fiscal flexibility and boosting the Police and Fire Pension System's liability by increasing police starting salaries and the number of officers. 

A lawsuit brought by the Texas Attorney General's Office in February contended the city failed to comply with the measure by shortchanging the amount of the annual revenue increase.