Is Houston Bankrupt?

[Subdude]

This rather distressing post from today's FT Alphaville (the Financial Times blog).

Houston, we have a problem

Posted by Izabella Kaminska on Oct 28 10:01.

Michael Shedlock of Mish’s Global Trend Analysis flags up a rather worrisome review by some concerned retired auditor folk on the situation facing the City of Houston in Texas, USA.

Indeed, according to 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, Houston may be bankrupt.

Here’s a portion of the letter they sent on October 22 to the City of Houston’s incumbent mayor, city controller, and city council members — among others:

October 22, 2009

Name, Title and Address

Subject: Finances of the City of Houston

Dear :

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 boblemer@sbcglobal.net.

You can view the whole correspondence here.

According to the retired accounting sleuths the City faces major financial troubles because its two principal sources of fund revenues — sales taxes and property taxes — are choking up. The state, meanwhile, continues to overspend at an unsustainable rate, as it has done since 2004. Forcing the balance on the backs of taxpayers, however, will not be tenable, according to the writers.

The problem has remained undetected because the City does not use the full accrual basis of accounting, say the writers.

Full post here..

[Yankee_in_TX]

Until the news appears some where other than blogs and message boards, well.......

[Subdude]

Until the news appears some where other than blogs and message boards, well.......

Fair point, although the Financial Times would be considered about as respectable as one gets in these things.

[musicman]

Until the news appears some where other than blogs and message boards, well.......

Bob Lemer usually does his research. He was the one who was behind the spending cap that bill white weaseled out of by putting another cap on the ballot a few yrs ago. then bill stated that because his got more votes, it was the one that would be enacted.

[gto250us]

Houston's Next Mayor

[TheNiche]

I feel the need to come out of hiatus just temporarily to point out the existence of numerous red flags about the letter that was posted in the FT blog that subdude linked to.

The letter includes many paragraphs that are overtly political, including at least one paragraph that does nothing except to stir the pot. And that the letter's timing leading up to such a key mayoral election is EXTREMELY suspect; the authors promote the fact to their intended media recipients that the election is nearing, so the authors are clearly aware of and fully leveraging its potential impact. However given that much of the data that they present has been availalble for so long, their intent is most likely not to fulfill a fiduciary duty to the City of Houston, but to try and knock a mayoral candidate out of the running, namely Annise Parker.

To be clear, I have not yet reviewed any evidence that would corroborate with the claims put forth in this letter, however I strongly suspect that there mostly likely are numerous specific truths coupled with conclusions are obfuscated to varying degrees. I have read enough of the letter to say that its stated goals are not being dealt with in good faith. It certainly would not surprise me if it turned out later on that there is some connection between these individuals and either the Brown or Locke campaigns.

[musicman]

To be clear, I have not yet reviewed any evidence that would corroborate with the claims put forth in this letter, however I strongly suspect that there mostly likely are numerous specific truths coupled with conclusions are obfuscated to varying degrees.

Annise has even agreed with the claim that houston has been in the red for yrs. This is the person who supplied the info to bill king, former mayoral candidate, who wrote the chronicle editorial in may on the same subject.

[TheNiche]

Annise has even agreed with the claim that houston has been in the red for yrs. This is the person who supplied the info to bill king, former mayoral candidate, who wrote the chronicle editorial in may on the same subject.

As I pointed out, there probably are numerous specific truths in the document. However, given the number of red flags that I came across while reviewing it, I am highly suspect of the findings as they are presented.

[AtticaFlinch]

I feel the need to come out of hiatus just temporarily to point out the existence of numerous red flags about the letter that was posted in the FT blog that subdude linked to.

The letter includes many paragraphs that are overtly political, including at least one paragraph that does nothing except to stir the pot. And that the letter's timing leading up to such a key mayoral election is EXTREMELY suspect; the authors promote the fact to their intended media recipients that the election is nearing, so the authors are clearly aware of and fully leveraging its potential impact. However given that much of the data that they present has been availalble for so long, their intent is most likely not to fulfill a fiduciary duty to the City of Houston, but to try and knock a mayoral candidate out of the running, namely Annise Parker.

To be clear, I have not yet reviewed any evidence that would corroborate with the claims put forth in this letter, however I strongly suspect that there mostly likely are numerous specific truths coupled with conclusions are obfuscated to varying degrees. I have read enough of the letter to say that its stated goals are not being dealt with in good faith. It certainly would not surprise me if it turned out later on that there is some connection between these individuals and either the Brown or Locke campaigns.

Bob Lemer (first named author of the letter) wasn't a big fan of Lee Brown and was more blatant in his efforts to sway election results in the past:

http://www.citizensforpublicaccountability.com/

He's a Republican, so I doubt he's stumping for Locke or Brown:

http://www.texasgopvote.com/users/bob-lemer

More likely, he's on the stump for Roy Morales:

http://kingwoodtps.wordpress.com/2009/10/21/1-conservative-choice-for-houston-mayor/

[Subdude]

It hardly strikes me as a political screed. Regardless, even if it does have political statements, that doesn't necessarily make it untrue. Judge for yourself - here's the more detailed extract (longer than usually allowed because I am assuming this was intended for public distribution). The little smiley faces in the body aren't in the original text; the editor reads certain character combinations as smileys.

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.

Cover Letter

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 boblemer@sbcglobal.net.

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

Houston Press-Editor

Municipal Bond Rating Agencies---CEOs

Wall Street Journal---Editor

Barron’s-Editor

Investor’s Business Daily-Editor

USA Today-Editor

Texas Monthly---Executive Editor

Deloitte & Touche LLP---Houston and New York

Executive Summary

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 Plans and Government Salaries To Blame

According to the report, pension plans and government salaries are at the heart of the matter. Here are a few select details.

Detailed Findings and Observations

1. The City incurred operating losses (“Change In Net Assets”) totaling approximately $1.5 billion for the five fiscal years ended 6/30/08--- per the latest (fiscal year 2008) publicly available audited Comprehensive Annual Financial Report (CAFR), page 199:

In Thousands

a. (312,790)

b. (531,465)

c. (131,893)

d. (221,452)

e. (281,556)

TOTAL (1,479,156) ---or--- $1.5 BILLION

2. The City’s deficiency in unrestricted assets [“Unrestricted (deficit)”] was $1.2 BILLION ($1,174,429 thousands) at June 30, 2008--- per 2008 CAFR, page 15. In other words, the City’s unrestricted assets were approximately $1.2 billion less than the already recorded liabilities that they will be required to satisfy.

3. The $1.2 billion deficiency in unrestricted assets as of June 30, 2008 (which was created essentially during fiscal years 2004-2008-see item 1) was basically financed, per page 15 of the 2008 CAFR, by:

(a) the $347,728,000 collateralized note payable to the municipal employees’

pension trust;

( the $643,413,000 combined accrued liabilities to the employees’ pension

trusts (municipal-$285,462,000, police officers’-$318,567,000, and firefighters’-$39,384,000);

© the $219,755,000 pension obligation bonds payable;

(d) the $272,941,000 accrued liability for other post employment benefits-----less, per pages 17 and 74 of the 2003 CAFR,

(d) the $54,395,000 net accrued liabilities to the employees’ pension trusts at June 30, 2003 (municipal-$92,386,000, police officers’-$19,221,000, and firefighters’-asset of $57,212,000).

4. Thus, as of June 30, 2008, the City’s elected officials essentially had transferred financial ownership of the City from the taxpayers to the City’s employees, about 43.7% of who do not live in the City, according to documentation we have received from the City’s human resources department. Very troubling, 63.3% of first responders (police officers and firefighters) do not live in the City, versus just 30.0% of civilian employees, according to the City’s human resources department.

5. The City’s deficiency in unrestricted assets is so severe that in their yet to be completed audit for fiscal year 2009 the City’s independent auditors apparently will have to address the audit reporting issue as to whether the City was a “going concern” as of June 30, 2009.

6. Apparently the City has no idea yet as to what its operating loss (“change in net assets”) was for the fiscal year just ended June 30, 2009 or what its deficiency in unrestricted assets was at June 30, 2009, and has no idea as to what is in store fiscally for fiscal year 2010. That is because the City does not keep its books on the full accrual basis of accounting (fully accruing its assets and liabilities) but once a year, via the audited Comprehensive Annual Financial Report (CAFR). And the CAFR cannot be completed until the (nearly always very substantial) annual audit adjustments are booked.

....

17. For example, Exhibit B demonstrates how it was possible for the City to actually show an audited surplus of $19,891,000 from operations in the general fund (which is the focus of the annual budget and the MFOR) for fiscal year 2008 when, in reality, the City had an audited Citywide operations deficit of $281,556,000 for fiscal year 2008.

18. Exhibit B is difficult to comprehend for a person not trained in governmental accounting, even for a CPA. But the two most significant reasons for the difference between the $19,891,000 general fund surplus from 2008 operations and the $281,556,000 deficit from 2008 Citywide operations are: (a) the ever-growing accrued liabilities to employees for pension plans and other post retirement benefits; and ( the commenced practice of financing current pension plan expenses with backend loaded pension obligation long-term bonds.

19. Once one understands Exhibit B, or at least items 18(a) and 18(, it becomes obvious that the City’s fiscal 2010 general fund budget is an illusion, for two reasons. First, it is calculated on the modified accrual basis of accounting (essentially cash basis) and therefore ignores the ever-growing and enormous accrued liabilities for employee pensions and other post retirement benefits. Secondly, it is dependent upon continued payment of some of the pension expenses with issuance of long-term backend loaded pension obligation bonds.

23. At June 30, 2008 (date of the City’s last audited financial statements), the City’s total Citywide debt per capita of $5,338 was over twice the $2,528 debt per capita of the now bankrupt State of California.

Inquiring minds may wish to download the entire Lemer/Farb/Roberts assessment of City of Houston Finances document from Scribd.

Link to full post

Download the full report yourself here.

[TheNiche]

Bob Lemer (first named author of the letter) wasn't a big fan of Lee Brown and was more blatant in his efforts to sway election results in the past:

http://www.citizensforpublicaccountability.com/

He's a Republican, so I doubt he's stumping for Locke or Brown:

http://www.texasgopvote.com/users/bob-lemer

More likely, he's on the stump for Roy Morales:

http://kingwoodtps.wordpress.com/2009/10/21/1-conservative-choice-for-houston-mayor/

We've identified his MO, which is to conduct politically-motivated hit peices during election time. It's clear that if he actually cared about the City's solvency, he'd have gone public much sooner and with greater ferocity. And the guy seems smart enough than to know better than to sink any amount of his own time or resources into stumping for a loser 4th-place candidate like Morales.

If I had an agenda that went against my own party or that was motivated by some under-the-table deals, I can guarantee you that I'd attach myself to Morales like a tick following the release of this letter. Plausible deniability is important.

And again, to be perfectly clear...I'm not saying that the guy is necessarily wrong yet, because I haven't corroborated the facts, but it is clear that he is not acting in good faith towards his own stated goals.

[LTAWACS]

How would a retired CPA have access to all the City's financial documents? That's like some homelessperson hanging out in midtown issues a report that based on his analysis, the Texas medical center management district is bankrupt. No thanks. I call BS.

[musicman]

How would a retired CPA have access to all the City's financial documents?

we all have access to data if only we would bother to request it.

And again, to be perfectly clear...I'm not saying that the guy is necessarily wrong yet, because I haven't corroborated the facts

and if the controller does?

[AtticaFlinch]

we all have access to data if only we would bother to request it.

and if the controller does?

Lemer appears to have a very specific goal in mind when he writes these diatribes. And even if his numbers are accurate, you still have to wonder how he's the only person in the city who has the insight to reach these conclusions. The man wants mandatory taxpayer approval for any city revenue increases. He wants voters to be able to decide if they raise their own taxes. It's his subtle way of saying he doesn't want taxes to ever increase, ever. Citizens aren't typically likely to willingly raise their own taxes for any reason (unless it's to build a stadium), and he knows that. His letter is pure GOP anti-big government spin.

Read his website again. It's out of date by several years, so it makes for an interesting read, especially with the numerous bad economic predictions he made. He was Chicken Little then, and he's Chicken Little now. Houston's economy didn't implode in 2003, and I doubt we're broke now.