REPORT TO CITY COUNCIL

TIGHTENING THE BELT

CITYS BUDGETS FOR FY2010 AND FY2011
February 4, 2009

Over the last five years the City of Houston has experienced the greatest job
growth of any urban area in America. We have provided more services to meet
the needs of a growing population.

The City of Houston has shown discipline in our budgets. We cut tax rates and
reserved some of the funds in excess of our revenue and growth projections. We
also have substantially increased our investment in a wide variety of services for
our citizens. For example, from fiscal year 2004 the budget that was adopted
prior to this Administration until the current year, our Police budget has
increased from $495,765,983 to $720,800,539. Our expenditures on Fire and
EMS have increased from $283,849,621 to $423,805,628.

Our budget has had to deal with the reality that the cost of the services that cities
provide has gone up faster than the overall inflation rate. The consumer price
index is prepared by the federal government to account for the increase in the cost
of consumer goods and services. In the last five years, the CPI has gone up by
16%. The federal government keeps a separate account to measure the increase in
the cost of providing local government services. That index has gone up by 29.6%
in the same time period.

According to the Congressional Budget Office, national income is forecasted to

decline in the United States by 2.2%. The CBO projects a recession that will
probably be the longest and deepest since World War II.

Houston will not be exempt from the forces that have cut personal savings,
reduced the availability of credit for expansion of businesses, and which have
caused most businesses to cut back on their capital expenditures and start
examining their payrolls, so they do not live beyond their means.

As I noted in the State of the City Address, the national and local economies will
recover. But in the meantime we must help each other and give thanks that most
among us enjoy a higher standard of living than did prior generations of
Americans and Texans.

The families and businesses of this community are tightening their belts. They
expect those who serve them to do so as well. There will be layoffs among the
private businesses in this community and a slowdown in consumer spending and
construction. Inevitably that will affect the revenues of government, including
local government.

Local governments, including the City of Houston, simply do not have the option
to borrow money to pay for operating expenses, as does the federal government.

Meanwhile, we are fighting for a fair share of any stimulus package for our region
and for our state.

We should also remember that the financial flexibility of our community has been
affected by Hurricane Ike. Although most of the storm loss expenses will be
covered by the federal government and private insurance, it takes time to collect
these bills and there are some levels of expenses which neither FEMA nor private
insurance covers. The Rainy Day Fund has helped us plug this hole, but it is
unrealistic to believe that we will be able to immediately replenish this fund
without cutting vital services needed today. We will do so over time as the
economy recovers and as we seek reimbursement for hurricane damage.

Last October we scaled back on some of our capital spending plans. We will
continue to reconsider those plans in light of our budget. We should remember
that there are other sources of funding for capital projects through legislation now
pending in Congress.

Mass transit and thoroughfare improvements can be better funded in this region if
the State of Texas and the City of Houston receive our fair share of federal
funding under the stimulus package. To give you an example, if Houston received
its fair share of some $40 billion in federal funding for transportation
infrastructure under the stimulus package, based on our relative population, that
would be a quarter of a billion dollars.

We should also receive substantial funding if we are treated fairly in the allocation
of CDBG funds, which have been allocated to Texas and to our region. We
submitted detailed plans for use of these funds to rehab apartment complexes,
create regional detention to reduce flooding risks, and to provide some relief in
dealing with the crisis of the uninsured. Those funds will not be contained in
either the general fund or enterprise budgets that we submit, but should be kept in
mind.

We will also be pressing hard for other sources of federal funding, such as the
direct assistance available in the 1990s in support of more local police officers.
But we are in no position in our general funds to advance these amounts of money
in hopes that Washington will fund these programs or that we will be allocated a
fair portion of the funds allocated to the State.

We will have a special Mayors report, probably in early March, in which we will
brief all members of this Council on new federal programs and funding sources
which should be available to urban areas, including Houston.

Michelle Mitchell and I have asked all departments to make even more
conservative or lower budget assumptions than in the 5-year plan presented to the
Finance Committee just several weeks ago. For one thing, the 5-year forecast is
only a planning scenario and did show that we needed to cut the growth in
spending to be more in line with revenues. In addition, over the last few months I
have talked to business leaders throughout this region to gather their opinions
about issues such as employment, retail sales, real estate and construction related
activity, and other indicators of our local economy. I have concluded from these
discussions that our local economic circumstances will get worse before they get
better and that we must prepare for the balance of this fiscal year and for the next
two fiscal years for little growth in expenditures within our major funds.

I feel confident that if our elected officials and all City employees work as a team
we will be able to continue with our existing level of services and find ways to
enhance these services even with budgets which show no growth, unless provided
by additional federal funding. However, this will take work.

I will conclude this report with a special message first for my colleagues on City
Council, second for the citizens of this community who pay our municipal bills,
and third for all City employees.

For City Council Members, we must have discipline in this budgeting process
and realize that we are all responsible for hard choices. Each of us is aware of the
many unmet needs within the City of Houston. I have begun meeting with each of
you individually concerning your perspectives on budget priorities. We take notes
and make decisions based on your input. Council Member Clutterbuck will also
hold hearings on the budgets of various departments.

I am aware that there will be a new Administration at the beginning of next year
and some new Council Members. Each of us knows that elections are
democracys tool for engaging in public debate and we respect that those who
follow us may have different approaches and we pray that they have the wisdom to
find ways to improve the governance of this great City. But it will do no good to
make promises which cannot be kept. And we would do best to remind all
candidates for municipal office that in times like these, those who advocate
significant increases in spending must also advocate either increased levels of
taxation or cuts in other programs.

For the citizens of this community, I assure you that we understand our
obligation as public servants to work harder and more effectively within tight
budgets. We understand that our citizens have often seen savings vanish and some
employed citizens could be out of work as a result of a recession which will get
worse before it gets better. We will work hard to build a consensus within the
diverse group of individuals who sit around the Council table to meet those needs
based on realities and not empty sound bytes.

Finally, to the employees of this City, we will strive to ensure that those
currently employed by the City, who are performing at a high level, have security
in their employment. We need your help in making sure that we meet the needs of
our community and deserve their confidence even though we cannot have net
additions to our workforce. We need your ideas on how to work smarter. As a
matter of math, not of some good faith or a lack of respect for public service, we
must find a way of working more efficiently if we are to absorb costs such as
increases in health benefits and staffing new facilities at the same time our
expenditures and revenues do not grow.

As a team we have increased the confidence people have in City government. We

have dealt with the unexpected, including natural disasters. Now, too, we must
deal with an economic situation far different than we did just one year ago. If we
keep our focus on this big picture, and work as a team, we can take even greater
pride in our efforts to make Houstons City Hall the most efficient and responsive
in the Nation.