Article
Houston, we have a problem. We are bankrupt.
That is the finding of Bob Lemer, CPA, Retired Partner at Ernst & Young; Aubrey M. Farb, CPA, Retired Partner at Grant Thornton; and Tom Roberts, CPA,
Retired Partner at Fitts Roberts.
Cover Letter
October 22, 2009
Name, Title and Address [see list below]
Subject: Finances of the City of Houston
Dear : [see list below]
Enclosed is our partial analysis of the very serious financial situation at the City of Houston. We would be derelict if we failed to share this
financial analysis with you. This financial heads up will assist you in meeting your fiduciary responsibilities to Houston voters, taxpayers, readers,
viewers or investors---as the case may be.
We feel a public discussion of the City’s financial situation is necessary and firmly believe that addressing the City’s financial condition
is in the best interest of the Houston economy and Houston taxpayers. We believe the sooner the City of Houston addresses the financial shortfall the
better.
Please bear in mind that the Houston City elections are on November 3, 2009, with early voting having commenced on October 19, 2009. Recent
history has shown a large portion of voting occurs during early voting.
We trust that the attached article is of significant assistance to you.
We may be reached at boblemer@sbcglobal.net.
The above was sent to:
City of Houston---Incumbent Mayor, City Controller, and City Council Members
City of Houston—Non-Incumbent City Candidates
Greater Houston Partnership---Board Members
Houston Chronicle---Editorial Board Members
Houston TV Stations---CEOs
Houston Business Journal---Editor
Houston Community Newspapers-Editor
Houston Press-Editor
Municipal Bond Rating Agencies---CEOs
Wall Street Journal---Editor
Barron’s-Editor
Investor’s Business Daily-Editor
USA Today-Editor
Texas Monthly---Executive Editor
Deloitte & Touche LLP---Houston and New York
And Texas is supposed to be one of the best economies right now.
Executive Summary
City of Houston
Disturbing Financial Facts---October 2009
By: Bob Lemer, Aubrey M. Farb and Tom Roberts
The City of Houston is financially broke and it appears that the mayor who takes office in January 2010 may have to captain the City through
bankruptcy procedures.
The City’s unrestricted assets were $1.2 billion short of the already recorded
corresponding liabilities these assets were needed to pay as of fiscal year end June 30, 2008,according to the City’s latest publicly available
audited Comprehensive Annual Financial Report (CAFR). The $1.2 billion shortfall was a result of operating losses totaling $1.5 billion for fiscal
years 2004-2008, applying the full accrual basis of accounting used in the private sector.
Apparently the City has no idea as to what has transpired financially since June 30, 2008 or will transpire this fiscal year ending June 30, 2010,
on the full accrual basis of accounting. But even on the modified accrual basis of accounting (essentially cash basis) followed by the City and all
other municipalities, the $236.8 million fund balance in the City’s general fund as of July 1, 2009 (the beginning of this current fiscal year)
would not exist except for the City having deposited the proceeds of pension obligation bonds into the City’s general fund instead of depositing
them in their legally required immediate destination, the pension plans’ bank accounts.
The City is in this dangerous financial position because its total spending since fiscal year 2003 has greatly outstripped its total revenues in
that period. And the rate of growth in the City’s total revenues since 2003 has, in turn, greatly outstripped the City’s rate of growth in
population plus inflation.
Thus the City’s problems are a result of greatly overspending and not a result of
insufficient revenues. All of this occurred before the current severe recession. Now the City has the added burden of the recession.
The City is in a real financial dilemma, because now its two principal sources of general fund revenues are in trouble---sales taxes and property
taxes. Sales tax revenues already are dropping significantly and property tax revenues will commence dropping at an even more rapid rate after the
next annual appraisal and assessment process. And the City will have to go to the voters for any contemplated rate increases in either the sales tax
rate or the portion of the property tax rate allocable to operations.
It appears to us that there may be no viable alternative to bankruptcy proceedings and thereby positioning the City to regain control over its
overspending, through addressing structural spending problems such as overstaffing and overly generous employee benefits.
Fun times.
Pension System Busted Country Wide
It is highly likely that nearly every pension plan in the country is busted. The solution is for every city and municipality in a predicament to
"pull a Vallejo" and declare bankruptcy. Please see Judge Rules Vallejo Can Void Union Contracts for details.
Deficiencies cannot be met on the backs of taxpayers. Enough is enough. It's time to end every massively underfunded public defined benefit plan in
the country, by force if necessary (bankruptcy), unless unions agree to major concessions that would make the plans viable without raising taxes one
cent.
And the media keeps telling us everything is all right...
This is Tentickles with your ATS Economic punch in the face.
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Good post, I'm sure the clueless public will ignore the warning as they always do. What exactly happens when a city the size of Houston declares
bankruptcy?
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Houston has been on a downhill spiral for about a decade.
The City of Houston has been living on the tax like crazy and spend even more path for a long time. They tripled city employee levels and added
outrageous perks and benefits but provided poorer services at the same time. They destroyed the financial assets while increasing debt by an
outrageous amount. They wasted most of it on pet projects, useless programs and repayment for votes.
It's almost like a little model of the present federal administration but not quite as insane because the city council and mayor aren't allowed to
print money.
The areas around Houston are doing much better. The houston metro area is still densely populated, working and paying taxes.
It wasn't the financial downturn that did this. It has been coming a long time and shows what happens when a city tries to become a social services
clearing house and vote buying enterprise.
Don't let them lie to you. The City of Houston would have done this during a good economic situation. This was entirely the fault of the city
administration. They wasted money faster than a busload of lottery winners.
[edit on 29-10-2009 by badgerprints]
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reply to post by Tentickles
Thats the other bubble that is coming soon, the pension bubble. Almost all the states and municipalities haven't been funding their pensions because
as any addicted gambler knows, they will promise to pay it back next year or day when they win big at the tables/state investment. The states can't
stand seeing that load of money sitting on their books being used for the people and not for their benefit. Just wait when we see pension funds for
state's start to default and implode, employees will go crazy.
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