Houston Economic Update February 2011

February 2011 ©2011, Greater Houston Partnership Page 1 A publication of the Greater Houston Partnership Volume 20, Number 2 • February 2011 Recovery Underway, But Not for the Pub- lic Sector —Houston is well into the recovery, but the state, county and city are only now feeling the squeeze on their budgets. Historically, the public sector is always the last to enter a recession and the last to leave. The academic literature on the subject de- scribes an 18- to 24-month lag between the onset of a recession and the onset of govern- ment revenue shortfalls. That scenario fits Houston. Employment began to slip in Sep- tember’08. The media first took note of impending budget crises late last summer. Numerous factors contribute to the lag, but consumer confidence weighs heaviest. It impacts spending, which in turn impacts sales tax collections. The state’s 6.25 percent tax rate provides about two-thirds of its tax revenues. The City of Houston’s 1.0 percent tax rate provides one-fourth of its tax revenue. Harris County cannot levy a sales tax and relies primarily on property taxes. Optimism Gives Way to Pessimism—In the early stages of a recession, sales tax collections hold up well. The first workers to lose their jobs may remain optimistic about finding new employment. No one knows yet they are in a recession. They count on their severance packages, unemployment benefits and person- al savings to offset lost income while looking for new work. They may adjust their spending, but not dramatically at first. The impact of the initial layoffs on sales tax revenues is hardly noticeable. As the recession worsens, layoffs begin to mount. Optimism gives way to concern as prospects of finding new employment dimin- ish. Reductions in household spending follow. Sales tax revenues begin to slip. As the recession deepens, more workers lose their jobs. Severance packages are less gener- ous—if they’re available at all. Savings are depleted, mortgage payments missed, and concern gives way to pessimism. Households slash their spending. The impact on sales tax revenues grows. Near the bottom, employers cut back hours, impose pay cuts and eliminate bonuses. Many workers still employed but fearing they will soon lose their jobs boost savings and cut spending. The cumulative effect: sales plum- met―and with them, sales tax revenues. In Houston, the first signs of recession ap- peared September ’08 when employment be- Estimated Budget Gaps ‐ FY11 Agency As of . . . Amount City of Houston Dec ’10 $62.4 M Harris County Nov ’10 $42.3 M State of Texas* Jan ’11 $4.3 B *Projected shortfall for FY ’11. Gaps for FY ’12 and FY ’13 projected to total $28.4 billion. Sources: City of Houston December ’10 Monthly Financial and Op‐ erations Report; Harris County November ’10 Monthly Financial Report; Texas Comptroller of Public Accounts Biennial Revenue Estimate, January ’11.

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Houston Economic Update February 2011