WebCogito

Stop. Stay. Think.

So a quick followup to the story we had yesterday, about Republican candidate for Texas Governor Debra Medina stating that Houston is technically bankrupt.  Turns out that a few months ago, a group of CPAs sent an open letter to the members of Houston’s City Government, as well as to major US newspapers.

In it, they don’t beat around the bush on their take of the city of Houston’s finances: Turns out, Houston is broke; it just hasn’t acknowledged it yet:

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.

Emphasis mine.