City’s Deceptive and Unfair Go-It-Alone Approach to the Drainage Problem

---Executive Summary---

The City of Houston is contemplating thrusting upon Houstonians a new drainage fee and a 15% increase in water and sewer rates, with mandatory annual increases thereafter, and all of this without a regional drainage plan involving the physical and financial commitment by those counties upstream and downstream in the City’s watersheds.

Houstonians instead should receive a reduction in water and sewer rates, by returning the drainage costs to their rightful place, the General Fund, and cutting the fat out of the City budget. Failing that, the City should obtain the perceived necessary funds by using one or more of the following options:

  • Utilize the excessive current water and sewer net revenues to the extent they exceed the legally required debt coverage.
  • Utilize the existing excess in water and sewer cash reserves.
  • Obtain the financial assistance of cash-flush Harris County.
  • Obtain the proper proportional financial cooperation of the upstream Fort Bend and Montgomery Counties.

If the City refinances its water and sewer bonds, the resulting savings should be set aside for debt service and not be used to underwrite drainage or any other operations.

Mayor Bill White campaigned on a promise of fiscal prudence. Proper resolution of the drainage “crisis” furnishes him a golden opportunity to deliver on that promise.

The City of Houston is engaged in a drainage financial shell game reminiscent of carnival hucksters, while apparently totally ignoring the absolutely necessary involvement of those governmental entities and developers upstream in the City’s watersheds and Harris County downstream.

The financial shell game began in the 1990s. Until that time, the City had paid for drainage costs out of the tax-supported General Fund, similar to other US cities. Then the City set up a separate Special Revenue Fund for such expenditures and commenced funding them via excess revenues (“Any Lawful Purpose Funds”) transferred from the Water & Sewer Fund. This reduced the pressure on the General Fund and allowed the City to tap into the tremendous water and sewer revenues resulting from the incredible increases in the 1980s in water (119%) and sewer (161%) rates. Predictably, the City has not needed to increase water and sewer rates since. The 1980s explosion in rates leaves the City with still some of the highest rates in the US.

Last year, the City abandoned that shell game and directly merged the drainage Special Revenue Fund into the Water & Sewer Fund. The City then entered into the next shell game, playing off 2001 Tropical Storm Allison fears. This shell game version involves creating the illusion of the need for a new drainage fee and a 15% increase in water and sewer rates at this time and mandated annual increases thereafter.

Allison was the costliest tropical storm in US history, from a property damage standpoint, and dumped about 80% of the annual rainfall on some parts of Houston. There is not a flatland city in the world that would not have seriously flooded under those conditions, regardless of how up to date its drainage facilities. That said, certainly the City still needs to significantly improve its drainage facilities. But let’s remove the overblown fear factor and rationally think this through.

The real driving force in this drainage “crisis” is the fact that the City has spent itself into a financial hole, in spite of backbreaking increases in residential property tax valuations, already high water and sewer rates, and exploding rates for various permits, fees and fines. The cost of operating the City has grown over the last two decades at twice the combined growth rate of population and inflation.

The City refuses to solve the problem by attacking the considerable fat in the City budget. Our group will be glad to show City Council where much of it is, if only they will answer our numerous requests to help. Our December 10, 2003 offer letter to then-candidate Mayor Bill White has gone unanswered, although on February 7 he announced the City faces a $150 million operating deficit for next fiscal year.

As a partial solution, the City instead is prepared to: (a) institute a drainage fee and immediately increase water and sewer rates 15%, with large annual increases thereafter; and/or (b) draw down on Water & Sewer Fund reserves; and/or (c) refinance the massive water and sewer debt. Unfortunately, the contemplated refinancing would do away with the City’s reserve sinking funds and use the savings for current expenditures rather than for debt service. That is like you discontinuing maintaining a balance in your bank account and extending your credit card payout period, and spending the resulting temporary funds now.

So what are the real facts regarding the City’s water and sewer finances?

  • The City’s water & sewer debt-per-capita is more than twice the entire debt-per-capita of the financially-devastated California state government.
  • Even so, the City’s water & sewer net revenues are greatly in excess of the legal debt coverage requirements. Thus, there exists a substantial reserve from which to at least partially fund needed drainage improvements.
  • Water & sewer revenues are more than double cash operating expenditures.
  • Therefore, a reduction in water & sewer rates is in order, not an increase.

After basically sitting on its hands since well before and even after 2001 Allison (in 1999 the City had already completed but not started implementing a “Comprehensive Drainage Plan”), the City suddenly said late last year that drainage funds are no longer available and now a solution must be found within two months. But what is the truth?

  • Mushrooming tax collections should have been sufficient to cover current drainage needs if drainage expenditures had remained in its former host, the General Fund, and the City had properly controlled its budget. As shown above, even its current host, the Water & Sewer Fund, still contains sufficient excess revenues to cover drainage costs, and there are substantial water and sewer reserve funds to draw upon. Don’t let the City tell you otherwise on any of these points.
  • Before the current suddenly urgent drainage flap, the City’s fiscal 2004-2008 Capital Improvement Program budget, adopted way back in spring 2003, contemplated drainage capital expenditures as follows (in millions):
    • Old funding process runoff---Funds from FEMA ($37.3), Texas Medical Center ($5.0), and existing Storm Sewer Construction Fund cash on hand ($95.1)---To be spent: 2004-$67.6; 2005-$21.7; 2006-$34.9; 2007-$13.1; and 2008-$-0-; plus
    • New funding process---Funds from the new Combined Utility Fund (water & sewer and drainage) ($250.0) and FEMA ($25.1)---To be spent: 2004-$-0-; 2005-$60.8; 2006-$100.3; 2007-$57.5; and 2008-$56.5. The “Comprehensive Drainage Plan” portion ($185.3) was not contemplated, even back in spring 2003, to really begin until fiscal 2006.
  • Based on the foregoing, in the spring of 2003 the City contemplated only the following total drainage capital expenditures: 2004-$67.6; 2005-$82.5; 2006-$135.2; 2007-$70.6; and 2008-$56.5. And funds for 2004’s planned expenditures were already in a set-aside bank account, and sufficient water and sewer reserve funds were available to fund fiscal 2005 drainage needs.

One can only conclude that the only real urgency is to try to cover the City’s profligate spending by instituting a drainage fee and exploding its already exorbitant water and sewer rates, with mandated annual increases thereafter. All of this, rather than simply trim the fat out of the City budget.

The deceit and deception are bad enough. But the City also is ignoring the need to involve the other governmental entities involved with its watersheds.

Two of the fastest growing counties in the US, Fort Bend County (15th), with around 400,000 population, and Montgomery County (30th), with around 330,000 population, are upstream from Houston. Yet Fort Bend County only spends in the range of a half-million dollars annually on flood control capital projects, and Montgomery County spends basically nothing.

Clearly, any Houston drainage plan is greatly incomplete if it does not integrate proportionate physical and financial involvement of these two counties.

The plan also is greatly incomplete if it does not fully integrate physical and financial involvement by the Flood Control District governed by Harris County. When the District was created by the state legislature in 1937, it was charged with overseeing rivers, streams, tributaries and flood waters “for domestic, MUNICIPAL (emphasis added), flood control, irrigation and other useful purposes”.

Regarding the District’s MUNICIPAL mandate, one should note that Houston comprises the vast majority of the population of Harris County and every one of the County’s watersheds impact Houston. Additionally, Houston siphoned off much of METRO’s once-flush treasury of about $750 million. Therefore, cannot a case be made for cash-flush Harris County funding a considerable portion of Houston’s flood control needs?

Indicative of the cash-flush position of the County and its fluctuating interest in flood control, the County budgeted $108.2 million for flood control in fiscal 2002, but spent only $42.9 million. Yet the County has budgeted these amounts for Flood Control District capital improvements for the following fiscal years (in millions): 2004-$162.7; 2005-$174.0; 2006-$182.9; 2007-$149.0; and 2008-$133.7. The District has very detailed plans and timetables to accomplish this. Only about one-fifth of this funding is contemplated to be from federal monies. The bulk (60.9%) of the funds will be spent over these five years on these bayous: Braes (23.6%); Hunting (13.8%); Greens (13.1%); and White Oak (10.4%).

On a side note, a very serious problem underlies the capital expenditure programs of not only the City of Houston and Harris County, but also Houston ISD and other local governments. That problem is the ethically-conflicted process by which capital construction and financing needs are determined and implemented and the local political campaign contribution system.

The consultants who determine the construction and financing needs are then allowed to participate in the administration, implementation and financing of those projects. In other words, determine if, when and the extent of the need for their own services. Worse, they are permitted to make significant contributions to the elected officials who decide on their services. Who looks out for the taxpayer?

It is encouraging to note that Mayor White has promised that the excessive “soft costs” (engineering, architectural and bond issuance fees, etc.) in capital projects will be reduced percentage-wise. And it appears that he will try to reduce the effectiveness of trying to affect City contractual decisions by contacting council members. Houstonians should hope so.

Summary: It is apparent that, instead of a new drainage fee and increased water and sewer rates, Houstonians actually should receive a reduction in water and sewer rates, by returning the drainage costs to their rightful place, the General Fund, and cutting the fat out of the City budget. Failing that, the City should obtain the perceived necessary funds by using one or more of the following options:

  • Utilize the excessive current water and sewer net revenues to the extent they exceed the legally required debt coverage.
  • Utilize the existing excess in water and sewer cash reserves.
  • Obtain the financial assistance of the cash-flush Harris County.
  • Obtain the proper proportional financial cooperation of the upstream Fort Bend and Montgomery Counties.

Mayor Bill White has pledged a fiscally responsible City government. Houstonians can only hope he can overcome the above described obstacles and deliver on his promise, commencing with resolution of the drainage “crisis”.


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