Houston could face a $330 million deficit in the next fiscal year – up by approximately $100 million after the Texas Supreme Court denied the city’s motion to appeal a years-long court battle over street and drainage infrastructure costs.
The looming shortfall could force the city this summer to enact significant budget cuts, raise fees, boost its property tax rate or a combination of all three.
Projections for the city’s finances are somewhat in limbo as a number of factors are undecided: a potential federal freeze on municipal grants and aid, a timeline for when the $100 million for infrastructure must be allocated, the results of a series of third-party audits of city spending and a long-considered residential garbage fee.
Unless Houston leaders are able to secure new revenue or cut spending, Controller Chris Hollins on Wednesday said he may not be able to certify the 2026 budget.
“Despite our repeated message about kicking the can down the road, here we are,” Hollins told City Council during its weekly meeting. “We’re down the road. The can is at our feet.”
The swelling deficit projection follows a decision by the mayor and city council last year to not raise property tax rates or institute new fees despite awareness of the expected shortfall in the upcoming fiscal year.
City Council will examine the fiscal 2026 budget in the coming months, but the finance department already has begun meeting with department directors.
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The projected deficit increased after a Texas Supreme Court decision last week ended the city’s appeal of a 2019 lawsuit that alleged Houston did not put enough money toward water and drainage infrastructure projects. The lawsuit was predicated on a voter-approved charter amendment in 2010 requiring the city to switch to a pay-as-you-go system for street and drainage projects.
Officials estimate it will cost the city $100 million to comply with the court ruling, but the exact amount put toward projects could change depending on the amount brought in from property taxes.
The money will have to be allocated by June 30, the end of Houston’s fiscal year, unless the city can negotiate an extension with the plaintiffs.
The city already was facing a $230 million deficit before the ruling that stemmed from the end of pandemic-era federal relief funds, storm damage and a $650 million settlement with the firefighters’ union. Mayor John Whitmire has yet to announce a plan to pay for the firefighter contract and settlement
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Hollins on Wednesday proposed a joint task force between his office, the mayor and City Council budget committee chairs to find budget cuts. Neither council nor the mayor agreed to the idea.
Whitmire countered that none of the expenses have come as a surprise. Many city officials agree with the premise of the lawsuit because of the need for better city infrastructure, and he said he felt confident they would find solutions.
“It’s very easy to criticize or sound the alarm if you don’t have to offer up solutions,” he said.
The mayor repeatedly has leaned on the upcoming results of Ernst and Young financial audits of city departments and tax increment reinvestment zones to find excess dollars, as well as collaborations with Metro, Harris County and Texas Legislature.
Some of those collaborations have been realized, freeing up general funds for other projects: Metro has agreed to pay $50 million toward traffic enforcement and street lights, and the state agreed to fund some debris removal costs. Whitmire also has partnered with Harris County commissioners for park projects.
Other initiatives, such as Whitmire’s $70 million plan to address homelessness, remain largely unfunded.
Finance Director Melissa Dubowski said the department would present the results of the audit of city departments in the coming weeks.
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