S&P restores stable outlook to Houston amid budget moves

Bloomberg News

S&P Global Ratings on Thursday revised its outlook on Houston's AA general obligation rating to stable from negative, citing the city's "substantial progress in materially reducing" its fiscal 2027 budget gap. 

The rating agency said structural changes, which pared an initial $209 million shortfall to $25 million, along with tax revenue growth, "are likely to almost, if not fully, absorb the rising general fund expenditures" propelled by sharply increasing public safety costs and help sustain consistent reserves that have been shrinking. 

"We expect these improvements, combined with the city's robust and expanding economy, to stabilize reserves beginning in fiscal 2027," S&P said in a report. 

S&P revised its outlook to negative from stable in 2024 ahead of a GO bond sale, which raised $650 million for a lump sum payment for current and retired Houston firefighters as part of a court-approved five-year collective bargaining agreement that also boosted firefighter pay.

The negative outlook was spurred by budget pressures and fund balance declines due to rising debt service and salaries, according to S&P.

Mayor John Whitmire called the return to a stable outlook "an indication that Houston is meeting its challenges and moving in the right direction."

"Today's announcement shows that the FY 2027 budget recently approved by the city council and the work my administration does every day are making a difference," he said in a statement on Thursday. "While we have more work ahead, this change demonstrates that the difficult decisions we have made are producing results and strengthening Houston's financial foundation."

The nation's fourth-largest city adopted a $7.5 billion budget with "$220 million in structural improvements" for the fiscal year that begins July 1.  

The budget, which includes $3.157 billion in general fund spending, was largely balanced by tapping excess revenue from the combined utility system enterprise system fund through a right-of-way fee for its use of public property.

In addition, trash collection will move from the general fund to the utility system. Residential customers for the first time will pay a $5 monthly "administration fee" supplemented by a subsidy from the system. Subject to city council approval, the solid waste fee would go up in $5 increments between fiscal 2029 and 2032, when it would reach $25 and would more fully cover administrative expenses.  

Changes to the system's master bond ordinance "to provide additional transparency to the market" about the revenue-raising moves would be part of a debt refunding this fall, according to Houston Finance Director Melissa Dubowski. The system, which supports water and wastewater services, had nearly $6 billion of debt outstanding at the end of fiscal 2025. 

Houston has had a negative outlook since September 2024 for its AA GO rating from Fitch Ratings. The city's GO debt is rated Aa3 with a stable outlook by Moody's Ratings.