City Controller Annise Parker told the Fiscal Affairs Committee this week she stands by her earlier projection that the city could have $18.2 million less to spend next fiscal year than the administration projects.

Responding to a rare invitation to formally comment on the FY05 budget, Parker expanded on the controller's annual Trends Report, which provides five year’s of data on revenues and expenditures. The report is prepared to assist City Council as it moves through the budget process.

"Although the city controller is the city's fiscal watchdog, I don't believe a city controller has been invited to discuss the new budget since Lance Lalor in the 1980s," she commented later.

People always ask why the Controller's Office projections are different than the Finance and Administration Department or the mayor’s, Parker noted.   "There’s no magic about either set of numbers. All are educated guesses. The Controller's Office, however, takes a slightly different approach to crunching the numbers: Our goal is to be conservative, but reasonable."

By law, the Controller’s Office is ultimately responsible for certifying revenues the city will receive in a given year. The controller has an obligation to taxpayers to project as accurately as possible so the Controller's Office does not underestimate to the point the city unnecessarily cuts spending, nor does it over estimate and cause windfall surpluses.  

Each year the Controller’s Office compiles its own analysis of the major income categories. For FY05, the controller projects general fund revenues of $1.432 billion, up $39.2 million from last year. The number is $18.2 million less than the mayor’s revenue projection. Because the administration controls spending, the Controller's Office does not make projections about expenditures, although the controller shows the trend graphs for City Council’s information.

Pension warnings

Council members have been questioning the amount of the pension contribution the administration plans to make in FY05.

"We have the same questions," Parker said.

It has been estimated the city will need to make a 14.4% contribution just to cover the fund’s normal costs in FY05.  The controller noted the administration plans a 12% contribution, with just 5% of this going toward meeting normal costs. The rest of the payment, including pension obligation bonds, will go toward reducing the $2 billion unfunded liability.

Parker said these additional payments, coupled with any changes the administration is able to negotiate through meet and confer, would likely reduce – but by no means eliminate – the unfunded liability. "But if we fail to meet the fund’s normal costs of operation, any benefits gained from reducing the unfunded liability will likely be shortlived," she said.

"It’s like making only the minimum payment on your credit card and continuing to charge more each month. Your balance and interest costs continue to rise and you make no progress toward eliminating the debt."

Major revenue categories          

Property taxes are the city’s largest revenue source.  The Controller's Office projects property tax revenues of $673.8 million, or a 2.25% increase over FY05. Over the past few years, actual collections have tended toward the low end of the range of taxable values provided by the Harris County Appraisal District. As a result, the Controller's Office based its projection on the low end of HCAD’s original estimate.

The number assumes no change in the 65.5-cent tax rate and takes into account payments the city will have to make to the various Tax Increment Reinvestment Zones. The estimate of the amount the city will pay to the TIRZs came from the Planning Department.

The Controller's Office also allotted $34.8 million in delinquent collections. Since the controller released her projections, HCAD has updated its estimate of taxable values for Tax Year 2004. The new estimate is somewhat higher than the original estimate on which Controller's Office projections are based.

Sales tax

The controller said her office projects a 6.27% increase over FY04, or a total of $367.6 million. Five percent of this growth represents the year- over-year increase. The rest is new money from limited purpose annexations. Projections are based on actual collections, historical trends, limited purpose annexations and Dr. Barton Smith’s predictions.

     Franchise fees

Franchise fees are expected to decline by about $1.6 million.  

Electric franchise fees.  "It’s interesting to note we are not seeing the sort of rise in kilowatt hours we believe the city should be experiencing, given our increasing population. Perhaps it’s time for the city to pursue its audit authority in this area," the controller told committee members.

Telephone franchise fees. Due to the public’s increased reliance on cell phones and companies becoming more efficient in their use of telephone lines, this revenue source continues to trend downward. In the past, council members have raised concerns about the impact this trend is having on 9-1-1 payments. Parker said she shares those concerns and believes this may may require further scrutiny.

     Municipal Courts

The controller acknowledged that these revenues continue to be difficult to predict. However, given the planned changes in technology, including a new case management system, the Controller's Office expects this revenue category to increase $2.5 million, or $5.7% over FY04.

Ambulance collections should also increase. This is also based on technology improvements.

     METRO

"We have not seen anything that would back up the administration’s projection for an extra $10 million in METRO money. In recent years, the city has been weaning itself away from reliance on METRO money. I am hopeful that this proposal does not signal a reversal of that trend," Parker said.

If any budget surplus can be achieved, Parker said, it should go toward increasing the size of the Rainy Day Fund and overall cash reserves. An independent review indicated the city should have cash reserves of at least $50 million.

     Tax cut?

Responding to proposals for a tax cut, Parker explained that every penny of the tax rate is equal to about $10.3 million. "If you cut one penny, you’ll have to cut the budget by $10.3 million. If you cut half a penny, you’ll need to find about $5 million in savings. The cut would save the owner of a $100,000 home $4 a year."

The controller also reminded committee members the tax rate isn’t set until September. "If the consensus were to cut the tax rate, it would be wise to make the corresponding budget cuts now as opposed to waiting until September, when we will be three months into the fiscal year," she cautioned.

The 20% homestead exemption is set by state law and can only be raised by legislative action. However, council does have the power to change the over-65 exemption. In 2002, council did just that, agreeing to increase the senior exemption by 10% annually for five years. FY05 will mark the third year of that agreement. Accordingly, the administration’s proposed FY05 budget includes another 10% increase, raising the exemption from $44,000 to $48,400. Council could agree to a larger increase.

Any changes would impact the amount of property tax revenue available for next fiscal year.