City of Houston to bond buyers: All is well despite lawsuit

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Houston City Hall
Houston City Hall

The city of Houston assures buyers of its new bond issuance that despite a lawsuit challenging the validity of the Nov. 7 election approving the sale of $1 billion in pension bonds, “the bonds are valid and incontestable under Texas law.”

The confident assurance to potential buyers is made as part of the official disclosure for the bond sale. Most important in terms of disclosure are that of the action filed earlier this month by former city housing department director James Noteware, alleging the city used misleading ballot language.

In responding to a request by Noteware for a restraining order to prevent the sale of the bonds, the city said he was engaging in a “thirteenth hour frivolous attempt to disrupt an essential part of a long-running process to address the serious funding shortfalls and rising costs…” of the city’s pension system.

Fifty-eight percent of voters approved the bonds in the contested election to address an $8 billion shortfall.

In refusing Noteware’s request to halt the bond sale, State District Judge Mark Morefield warned that the case has the potential to disrupt the city.

From a story by the Houston Chronicle:

Morefield said there were “substantial” concerns regarding the legality of the ballot measure, but that he ultimately agreed with the city’s argument that delaying the issuance would significantly damage Houston’s standing among creditors and bondholders.

“I think we’re just too far down the road at this point in time to stop this train,” Morefield said. “The mayor and City Council are heavily invested in this. And this thing is going to go forward.

“They may have to pay a heavy consequence for it going forward,” he added.

In an interview with The Texas Monitor, Noteware said both sides would likely move the action deep into the state’s judicial system, which ends at the state supreme court.

“The city was already very far down the road on selling these bonds, but this will not stop with that sale,” Noteware said.

He noted the potential $840 million in the drainage tax the city is on the hook for.

“The city has made this kind of mistake before, where it ends up taking an action that it later has to pay for,” he said. “[The city] has not indicated that it has learned from its mistakes.”

The bond disclosure outlines a series of misfortunes and troubles that have hit the city.

  • Hurricane Harvey resulted in $175 million in damages to city facilities, of which $100 million will be covered by insurance;
  • A lawsuit filed by a group of homeowners against the city and the Harris County Flood Control District, seeking class status;
  • Property tax exemptions totaling $63 billion for the tax year 2017;
  • A legal defeat over the 2010 drainage tax election that could cost the city $840 million in repayments to taxpayers; and
  • A legal challenge by owners of several apartment buildings to the city’s drainage utility fee.

The hardships, though, are not out of the ordinary for any booming city and the newly issued bonds carry an AAA rating from Moody’s, making them a low-risk purchase.

The city has struggled with pensions for over a decade. Annise Parker, mayor of Houston from 2010 and 2016, at one point, called the issue her most difficult.

The city sued the Houston Firefighters’ Relief and Retirement Fund in 2014, claiming its obligation to support the fund is unconstitutional. The city lost the case.

The fund this year sued the city to challenge a legislative bill that cut the city a break on the amount it had to contribute to the fund.

In the midst of the legal acrimony came the Nov. 7 election, which the city contends is the only way it will be able to make its pension obligation. The issuance is a “critical last step” to ensure the city can responsibly make its payments, City Controller Chris Brown writes in the bond filing.

While Houston grapples with its pension troubles, Dallas has, by most accounts, solved its pension shortfall.

Dallas Mayor Michael S. Rawlings last year told the state’s pension review board that the city was “walking into the fan blades” of municipal bankruptcy. Legislation similar to that addressing Houston’s woes was passed in the last session, allaying some of Rawlings’ alarming concerns.

If newshounds looking for something to fret over are disappointed over the apparent resolve in Dallas and Houston, they can look to Fort Worth.

According to a report last month from radio station KERA, Fort Worth’s pension fund “is not sustainable without changes,” said Paul Schrader, a consultant with the firm PFM Group Consulting, which Fort Worth hired to help sort the pension problems.

Steve Miller can be reached at [email protected].

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