Big Southwest cities chase fixes to ease financial woes

City of Houston

Armed with the results of an efficiency study, Houston Mayor John Whitmire is taking steps to reduce the city's workforce ahead of the fiscal 2026 budget, which faces an ongoing structural deficit, as well as shrinking reserves that led to negative bond rating outlooks.

Whitmire, who took office in January 2024 after serving decades as a state lawmaker, imposed a hiring freeze for vacant positions with some exceptions and offered a one-time voluntary retirement payout option to about 2,800 of the city's approximately 12,100 civilian workforce. 

Findings in the Ernst & Young efficiency study, which the mayor has said will make the city more transparent, efficient, and focused on delivering results, spurred the moves.

The nation's fourth-largest city generally has too many supervisors managing too few people, Chris Newport, the mayor's chief of staff, told The Bond Buyer.

"(The city's operating model) is heavily reliant on people, meaning that we cannot adjust or address the structural budget deficit without impacting people," he said, adding that departments must be reorganized using outcome-related performance measures, while an effort is also underway to better manage spending and contracting. 

The outcome of a 2019 court case concerning property tax revenue voters dedicated to drainage and roads will force Houston to allocate at least $100 million annually to a fund dedicated to those purposes.   

Under a worst-case scenario, the payment to that fund, which is due June 30, could push the structural deficit to $320 million, according to Houston Finance Director Melissa Dubowski, who said the administration is working with the plaintiff to mitigate the payment's timing and impact.

"We expect that to be resolved and have a plan in place for that before we propose the (fiscal 2026) budget at the beginning of May," she added. 

The projected fiscal 2025 ending balance fell from nearly $349 million in December to $245 million in January when accounting for the payment, according to Houston Controller Chris Hollins' latest report to the city council.

Houston tapped the balance to fill a structural gap in its $3.03 billion fiscal 2025 general fund budget. 

Shrinking reserves were a major factor cited by Fitch Ratings and S&P Global Ratings when they revised their outlooks on Houston's AA ratings to negative from stable last year. The city has a stable outlook on its Aa3 rating from Moody's Ratings.

The city's finances were already strained in the wake of last year's settlement with firefighters, which included a $650 million, bond-financed lump sum payment and a five-year collective bargaining agreement that increases pay by up to 34%. 

Hollins recently launched an expanded audit plan, telling the city council last week it aims to "enhance financial accountability work to optimize city resources and maximize taxpayer dollars."

"The plan prioritizes high-impact audits to identify cost savings, eliminate waste, and strengthen fiscal oversight and outcomes across the departments," he said. "The plan focuses on performance audits to assess efficiency and effectiveness in city operations, compliance audits to ensure financial policies and regulations are followed."

City of Phoenix

With Phoenix facing a projected $125 million shortfall over the next three fiscal years, including a $39 million deficit in its $2 billion fiscal 2026 general fund budget, the city council voted 8-1 last week to raise the Transaction Privilege Tax and Use Tax — effectively a sales tax — rate to 2.8% from 2.3% starting July 1.

"It's important to recognize that the general fund portion of the rate has remained at 1.2% since 1986 when the Phoenix population was under 800,000," Councilman Carlos Galindo-Elvira said. "Since then, the population has more than doubled and the cost of general fund services has surged by 486%, but we couldn't go to the taxpayer to ask for an increase without doing our part first." 

The city has forecast general fund revenue will decline by $86 million in fiscal 2025 due to state laws that lowered income tax rates and eliminated residential rental sales taxes effective as of Jan. 1. 

Phoenix Budget Director Amber Williamson said while $24 million in spending cuts have been identified in the city manager's trial budget for the fiscal year that begins July 1, the city needs more operating revenue to staff projects, including new fire stations, financed under a $500 million general obligation bond program approved by voters in 2023.

In July, the nation's fifth-largest city sold its first new money general obligation bonds in 12 years. The $233 million of tax-exempt and taxable bonds were rated Aa1 by Moody's Ratings, AAA by Fitch Ratings, and AA-plus by S&P Global Ratings — all with stable outlooks. 

Ahead of the tax rate vote, the conservative Goldwater Institute warned city officials the move was unconstitutional.

"The Arizona Constitution does not allow any new taxes or tax increases on 'services' – a broad term that encompasses many types of businesses that do not produce tangible goods, including hospitality, advertising, photography, utilities, and construction, among others," according to institute staff attorney Stacy Skankey.

In the wake of the council's action, the institute, which has challenged other Arizona cities' tax and bond measures in court, is evaluating options to protect Phoenix taxpayers' rights, according to a spokesman.

Phoenix spokesman Matt Hamada said the city acted within its authority in raising the tax rate.

In April, the city council is scheduled to vote on issuing $150 million of excise tax bonds for public safety and other capital projects.

In fiscal 2024, the excise tax, which consists primarily of city sales taxes, raised nearly $1.5 billion, up from $1.44 billion in fiscal 2023, according to Phoenix's latest annual comprehensive financial report.

Moody's Ratings last year upgraded the rating on about $1 billion of outstanding subordinated excise tax revenue bonds issued through the Phoenix Civic Improvement Corporation to Aa1 from Aa2, citing "a decade-long history of steadily increasing tax collections that provide very healthy debt service coverage." The debt is rated AAA by S&P Global Ratings and AA-plus by Fitch Ratings.

Dallas is facing financial pressure related to its public safety employees. 

A bill advanced out of the Texas Senate Finance Committee last week that attempts to resolve an ongoing battle between Dallas and its Police and Fire Pension System over how quickly actuarially determined contribution levels by the city are reached.

In September, the city council adopted a five-year ramp up in contributions, while the retirement system's board approved a more expensive plan that calls for a three-year ramp up along with a partial cost-of-living adjustment. The aim of both plans is to get the system, which was just 32% funded as of Jan. 1, 2024, fully funded over 30 years. 

The state bill calls for a five-year ramp up, which would cost Dallas nearly $11 billion over 30 years.

A charter amendment narrowly approved by Dallas voters in November requires the city 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 police officers compared to about 3,100 currently.

Passage of the measure led to a negative outlook from Moody's Ratings, which rates Dallas' general obligation bonds A1, due to expectations of reduced fiscal flexibility and an increase in the public safety pension system's liability.

Last month, the city council adopted a goal to hire 300 officers in the current fiscal year at an estimated cost of $10 million.