Pearland City Council to consider hiring independent auditor in wake of budgeting snafu

Leaders in the suburb south of Houston are trying to make up for a $10 million budgeting shortfall as the result of a miscalculation in property tax values.

Pearland City Hall
Lucio Vasquez/Houston Public Media
Pearland City Hall

Figuring out how to compensate for a $10 million budgeting shortfall is the most pressing issue facing city leaders in Pearland, a town south of Houston that is coping with a billion-dollar miscalculation in its taxable property values for the fiscal year 2023.

But first, they need to sufficiently diagnose what went wrong.

The Pearland City Council will consider Monday night whether to enlist an independent firm to audit its processes for budgeting and setting a tax rate, according to Pearland Mayor Kevin Cole, who said city officials discovered earlier this month that Pearland's taxable property value during the new fiscal year was erroneously inflated by more than $1.3 billion. The city used that figure when setting its tax rate and budget in late September, since learning it will receive about $10.3 million less than expected in tax revenue.

"We really need to understand from an independent set of eyes looking at this, what happened and how do we put best practices in place that could catch something moving forward, so we don't end up in a position where this ends up happening again," Cole said.

While the tax calculation and budgeting mistakes have upset residents and created a financial emergency for Pearland's municipal government – the city council is expected to finalize budget amendments over the next few weeks, according to Cole – the mayor said he does not expect them to cause a disruption or reduction in key city services. He also said the city is in otherwise good shape financially and can help make up for the budgeting shortfall through a variety of funding sources.

In a Nov. 15 issuer comment about the situation from Moody's Investors Service, which Pearland posted to a city webpage dedicated to the snafu, Moody's noted that "the city's strong liquidity will be able to support any short-term budget imbalances."

"Our goal is to make sure that services don't get cut in the process – sidewalks, street repair, parks, certainly all of our public safety side of things," Cole said. "None of that needs to be cut in the wake of this."

Pearland sits at the convergence of three counties – Brazoria, Fort Bend and Harris – and Cole said the miscalculation was related to taxable property value information provided by Harris County, which includes Houston and is the most populous county in Texas. The information from the Harris County Appraisal District was incorrectly inputted on a tax rate calculation worksheet by the Brazoria County Tax Assessor-Collector's office, and Pearland city officials used the worksheet to create a budget and set a tax rate, according to Cole.

Pearland city officials noticed a mistake in early November, after they had requested the same worksheet information from the tax assessor-collector while exploring the creation of a Tax Increment Reinvestment Zone, according to Cole. Essentially, he said, the taxable value of Pearland property within Harris County had been "double-booked" on the first worksheet.

Cole said he thinks "there's culpability on three different agencies" – on the Brazoria County tax office for erroneously completing the worksheet, on the Harris County Appraisal District for not providing clearer instructions on how to use the numbers it provided and on Pearland leaders for not catching the mistake before they approved a tax rate and adopted a budget. Cole added that the tax calculations are "very, very complicated" and that the Brazoria County tax office has a "very difficult job putting all that together."

Kristin Bulanek, the tax assessor-collector for Brazoria County, did not immediately respond to a message seeking comment Monday.

The Harris County Appraisal District said in a statement that the information it provided for Pearland "was correct."

"HCAD provides value information to all – over 600 – the taxing jurisdictions in the county and that information is required by the Tax Code and done in accordance with state law," the agency added. "However, the Truth-In-Taxation calculation the jurisdictions must do is very complex."

In addition to mulling the hiring of an independent auditor, Cole said the Pearland City Council also will consider a change to its debt service fund, where there is expected to be a $5.6 million shortfall in revenue. The rest of the aforementioned budget shortfall, $4.7 million, will be felt in Pearland's general fund.

Cole said Pearland has some excess fund balances from which it can draw, including federal funding through the American Rescue Plan, and expects to have carryover revenue from fiscal year 2022.

Pearland officials also are engaging with their representatives in the Texas Legislature with the hopes of implementing safeguards for the future, in addition to helping them deal with their present problem. Cole said existing state law requires Pearland to start next year's budgeting process with the same tax rate calculation worksheet it used this year – even though that worksheet has proven erroneous.

"There needs to be some kind of remedy in the law when a mistake like this is made," Cole said. "At the end of the day, it's citizens and taxpayers that pay all of this bill. We need to make sure it's right moving forward."