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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.
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 firstname.lastname@example.org.
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
Municipal Bond Rating Agencies---CEOs
Wall Street Journal---Editor
Investor’s Business Daily-Editor
Texas Monthly---Executive Editor
Deloitte & Touche LLP---Houston and New York
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.
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.