|
||||||||||
Wall Street may look like a luxury ocean liner floundering in high seas, but city finances are weathering both the nationwide storm and Hurricane Ike. What better proof than Standard & Poors' seal of approval?
"Overall, we are in much better financial shape than many other municipalities," Controller Annise Parker said. " We are taking advantage of opportunities as they arise to maximize our investments while, at the same time, closely watching for the best windows for issuing debt."
In a September 24 letter, S&P's rating service affirmed Houston's AAAf fund credit quality and its S1 fund volatility ratings for the general investment pool. The next day they issued a statement assigning the city a AA standard long-term bond rating for new bonds and affirming AA on existing bonds.
Eyes on Wall Street
While many people have focused on Hurricane Ike, the controller said her staff also has been watching Wall Street.
"If we can avoid borrowing money until the market calms, we will do so." The controller said the successful execution of upcoming city debt issuances for the airport system and public improvement bonds depend on a "marked improvement in credit markets.
"We have healthy cash balances in the General Fund and Aviation, and it would be two to three months before we could face 
any real difficulties. Hopefully, we'll see some overall improvement in the national economic climate by then," she said.
$7 million profit
As the stock market plummeted two weeks ago just before the feds announced their original $700 billion plan, Controller's Office staff returned to work the Monday after the hurricane struck. Treasury staff noted some very positive changes regarding the $250 million Combined Utility System SWAP, one of the city's four SWAPs.
"We quickly consulted with Public Works and Finance, and on Tuesday we pulled the trigger to terminate the SWAP, netting a $7 million cash profit for the city and further reducing the city's exposure to derivatives in a time of financial stress," Parker said. Derivatives are financial instruments whose values depend on the value of other underlying financial instruments, such as futures.
She said staff also noticed investment opportunities in high-paying municipal securities. For example, the city just purchased tax-exempt Variable Rate Demand Notes issued by a Broward County, FL, governmental entity with good credit yielding 8.3% and $12 million in Harris County Flood Control District securities paying 8%.
In May the controller asked City Council to amend the city's investment policy to increase the percentage of funds allotted to state and local tax-exempt bonds from 15% to 20% so the city could invest in high-yielding auction rate paper. "Now we can use that increased allotment to invest in other short-term tax-exempt paper (up to about $200 million) so we can partially alleviate the effects of higher interest rates that we'll have to pay." (Last week, the city paid 3% to 10% on its short-term debt, up from about 2%.)
Bank failures
Although the overall turmoil in the financial markets is impacting city debt and investments, " we are not, specifically, concerned with the recent bank failures," the controller said.
"We deal in millions of dollars daily. Our depository institutions are required by state law to provide collateral for our deposits. This is the reason we deal only with very large banks that are able to provide this collateral."
In terms of the general public, Parker said the banking system is working as it is structured to work. While investment banks, such as Lehmann Brothers, have been hit hard, they are firms th
at raise capital for an entity (issuer) that wants to borrow money. Technically, few retail banks have actually failed. Market forces have produced buyers that take them over before that happens.
The FDIC also intervenes when necessary, and account holders with deposits of up to $100,000 are not losing their money.
Fannie Mae and Freddie Mac
"The city is a senior debt holder in both Fannie Mae and Freddie Mac, (we lend them money), but we are not equity holders or stockholders (who have taken significant losses)," the controller said.
That puts the city first 
in line to be made whole if the agencies collapse, "an outcome that is now very unlikely due to the federal government's decision to intervene," she noted.
Monthly operations and financial report
Although the city budget appears headed for a $66 million shortfall, the city controller is quick to remind City Council that the adopted budget anticipated drawing down the fund balance by $51 million.
City Controller Annise Parker's monthly report for the period ending August 31 included mostly healthy local economic news despite the Wall Street credit crisis.
The projected shortfall actually dropped $4 million from last month's report mostly due to a $3 million increase in projected prop
erty taxes and a $1.2 million increase in sales tax estimates.
The report covers the period prior to Hurricane Ike so changes in departmental expenditure projections due to the storm will not be reflected until next month's report. This report does, however, reflect City Council's approval of a $20 million transfer from the Rainy Day Fund to the Hurricane Ike Aid and Recovery Fund. As an at-large council member, Parker pushed to establish the Rainy Day Fund and continues to advocate for a $50 million fund.
Mayor White has appointed City Controller Annise Parker to chair one of four committees focusing on Hurricane Ike recovery.
The controller's committee will assess Ike's costs, already roughly estimated at more than $200 million. That includes debris removal as well as police, fire and Solid Waste overtime. The city expects FEMA to reimburse the city for at least 70% of the expenses.
The committee will meet Wednesday to discuss direct and indirect expenses, state and federal involvement, income sources, long-term impact, FEMA reimbursement. The committee will also discuss replenishing the $20 million Rainy Daily Fund, which was tapped to pay for initial storm response.
Recommendations for long-term improvements in storm preparedness will be offered to council's Budget and Fiscal Affairs, and Transportation, Infrastructure and Aviation committees.
Council Member Anne Clutterbuck will co-chair. Other committees include city employees, debris removal and traffic signals/mobility.
The Controller's Office Operations Division recently executed a test of office emergency operations capabilities, successfully relocating to the Houston Emergency Center and printing a full cycle of payroll checks and completing daily banking transactions.
"We were not required to do this as City Hall remained fully functional during Ike. However, we wanted to take advantage of having the HEC in full emergency mode to activate a plan we had only performed on paper." Parker said she plans to repeat this test each May prior to the start of hurricane season.