Houston must provide a plan to stabilize its finances or risk increased borrowing costs from a lower credit rating, City Controller Chris Hollins told City Council Wednesday. 

S&P Global and Fitch Ratings, two of the country’s Big Three credit rating agencies, revised the city’s rating outlook from “stable” to “negative” in recent months, in part because the city has increased debt service costs without a plan to raise revenue. 

Hollins’ warning comes a week before the city’s finance director is scheduled to propose a property tax rate, which several council members have advocated to raise to cover a projected deficit in 2026.

Mayor John Whitmire has refused to publicly commit on an increase, saying he first would look to cut spending and duplication. 

Hollins urged city leaders Wednesday to act to avoid an official downgrade, which could have lasting impacts on city finances and increase the city’s borrowing costs. 

“Continuing inaction poses real risks to our future prosperity,” Hollins said. “It is a real challenge that’s knocking on our door, and all eyes are on Houston to see how we answer the call.”

RELATED: Harris County boosts tax rate. Will Houston follow suit to shore up deficit, disaster costs?

The negative outlook does not guarantee a downgrade. An S&P Global Rating credit analyst said in July that it reflected a one-in-three chance the agency would lower the rating during the two-year outlook period. 

The outlook stems from the city’s ongoing challenge of balancing increased debt service and salary increases with state and local revenue caps, said credit analyst Katy Vazquez. 

Under a 2004 voter-imposed revenue cap, the city cannot increase its property tax collections more than 4.5 percent a year. A 2019 state law imposed a cap of 3.5 percent; the city would have to get voter approval to go beyond that.

The state cap, however, does not apply during periods of declared disasters, giving the city the ability to increase its property tax revenue up to 8 percent without voter approval.

The city has to cover the unexpected recovery costs of the May derecho and Hurricane Beryl, as well as the $1.5 billion contract and backpay settlement with the Houston firefighters union and recently-released municipal workers contract. 

Finance Director Melissa Dubowski told a City Council committee in September that the city would have to raise its property tax rate by at least 3.2 cents per $100 of assessed value to cover the disaster costs without cutting further from the budget.

RELATED: Will your property taxes go up next year? Use this simple calculator to find out.

Paying for essential services, especially past salaries as required in the fire union agreement, is similar to paying for groceries with a credit card, said Steven Craig, economics professor at University of Houston.

Craig said he was not surprised by the credit outlook. The city’s tax base has decreased in recent years with more residents choosing to live in the suburbs where taxes may be higher, but services are more reliable, Craig said. 

Raising taxes could put a bandage on the problem in the short term, but residents and prospective Houstonians will avoid the city in the long term, further decreasing the tax base, if services do not match the price, Craig said. 

Cutting expenses is a more sustainable solution, but officials likely will argue they are essential, Craig said.

“You tell the current residents a sob story about how you’ve had bad luck, they might not even vote you out of office,” Craig said. “But what happens is that these hypothetical new people are comparing you to the other places, and they see that you’re a bad deal. They move to these other places.”

EARLIER: Harris County raises property tax rates, OKs $2.67 billion budget over Ogg’s objections.

Some council members have argued the current tax rate is out of proportion to the city’s needs because it has decreased in nine of the past 10 years. Increasing the rate, they say, could help provide more reliable services, such as trash collection, that residents want.

District F Councilmember Tiffany Thomas said Wednesday that an increase should have been announced earlier, potentially at the mayor’s State of the City address Sept. 17. If it’s necessary then the council also should be considering broader ways of raising money, including increasing the revenue cap, she said.

“I do believe that Houstonians would have an appetite for a property tax increase if we were presenting and communicating early and often about our plan,” Thomas said. “But to just ask people to arbitrarily trust us … We don’t present as a united, clear front that we have a vision for where our spending is, and it’s kind of just haphazardly done.”

The mayor’s office currently is awaiting a third-party, citywide audit to highlight possible cuts, spokesperson Mary Benton said. Benton said the administration did not have an exact date when the audit would be completed. 

“The assessment will result in a report outlining recommendations for elimination of duplication, efficiencies, and consolidations, which will result in cost savings for the city,” Benton said. “At the same time, the administration is engaged with our partners at the county, state, and federal levels to identify additional recurring revenues.”

The council has to approve its property tax rate by Oct. 28 to meet a state deadline. The finance director is scheduled to present a rate Oct. 9, with a public hearing to soon follow. 

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