2026-09-01 Budget and Fiscal Affairs Committee Meeting: Financial Reports, Woodlands Agreement, and Audit Plan
2026-09-01 Budget and Fiscal Affairs Committee Meeting
The Budget and Fiscal Affairs Committee, chaired by Sally Alcorn, convened on September 1, 2026, to discuss the monthly financial report, a proposed third amendment to the Regional Participation Agreement with The Woodlands, the transition of the city's 457B deferred compensation plan, a deep dive on sales tax volatility, and the fiscal year 2027 audit plan. The meeting included public comment and detailed presentations from city financial officers and external partners.
Consent Calendar
- No consent calendar items were noted.
Public Comments & Testimony
- Doug Smith (regular public speaker) commented on the monthly financial report, noting the $31 million variance in fund balance was better than the $100 million variance last year, and requested a discussion on the $37 million variance between the controller and finance department on property taxes. Later, he suggested the audit division examine airport concessionaires to ensure they are not overcharging beyond permitted limits.
- Brad Bailey, Chairman of The Woodlands Township, spoke in support of the proposed third amendment to the Regional Participation Agreement. He stated the current fund has $22.6 million that has had zero project requests since 2018, and the amendment would free up that money plus an additional $27 million in accelerated deposits over three years, totaling $50 million in unrestricted funds for the city. He described the deal as a "win-win" enabling the city to address immediate needs without matching funds, while the township gains a long-term end date on required sales tax deposits.
Discussion Items
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Monthly Financial Report (Period Ending July 31, 2026)
- Will Jones (Controller's Office) presented the general fund projections. The ending fund balance is projected at $259 million (9.9% of expenditures), $45.5 million lower than the Finance Department's projection due to lower revenue estimates. The fund balance is $62.5 million above the city's 7.5% reserve target. He noted the FY27 projection assumes $104 million from the proposed right-of-way fee; without it, the fund balance would drop to $155 million (5.9%), below the target. Jones also discussed the proposed third amendment to the Woodlands RPA, stating Houston would receive $50 million through 2030 ($20.2 million from existing fund balance and $29.8 million from future deposits). He noted that sales tax revenue from the fund from its inception through FY27 at 5.5% growth would have reached about $201 million, but cautioned about volatility.
- Melissa Dabowski (Finance Department) presented the "one plus eleven" financial report, showing a preliminary undesignated fund balance of $332 million for FY26, $6.7 million higher than the June projection. FY27 revenue and expenditure projections remain at budget. June sales tax receipts were $90.9 million, $6.6 million above last year and $12.5 million above budget. The FY27 ending fund balance is projected at $304.5 million (11.6% of expenditures), $108 million above the 7.5% target. She noted the sales tax budget of $942 million is conservative.
- Councilmembers asked about the slowdown in Woodlands fund spending since 2020; Dabowski attributed it to difficulties agreeing on projects and a matching fund requirement. Will Jones could not recall why spending stopped after 2020.
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Proposed Third Amendment to the Regional Participation Agreement with The Woodlands
- Dabowski provided an overview: the original 2007 RPA established a fund from 1/16th of the township's sales tax in exchange for a 50-year no-annexation agreement. Projects required city matching funds and mutual agreement. The third amendment would free up the existing $22.6 million (restricted) and provide additional payments of $22 million in 2026, then $9 million each in 2027, 2028, and 2029, totaling $50 million unrestricted for the general fund. The no-annexation clause would become perpetual.
- Councilmember Castillo noted the $22 million would reduce the FY27 budget gap from $25 million to $3 million. Councilmember Panzarella asked about the matching fund requirement and past project attempts; Dabowski confirmed no projects had been submitted recently. Councilmember Pollard expressed surprise at the broad project list (e.g., Hermann Park Clubhouse) and asked how projects related to The Woodlands. Dabowski explained projects serve areas Woodlands residents frequent (medical center, parks). Councilmember Mayor Pro Tem Castex Tatum asked who would submit projects; Dabowski said past requests came from Parks or Public Works, but under the amendment, the money goes directly to the general fund, removing the need for project approvals.
- Councilmember Ramirez noted the limitations of matching funds and mutual agreement, and asked what happens to remaining funds at the end of the original term (2057). Dabowski said she would need to check with legal. Public speaker Brad Bailey provided additional context, stating the fund had no requests since 2018 and the amendment is a short-term win for the city.
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457B Deferred Compensation Plan Transition
- Arifa Sheed (Deputy Director of Finance) and Doug Poor and Van Adams (Fidelity Investments) presented on the transition from M Power to Fidelity effective June 1, 2026. The plan has about 16,250 participants and $1.4 billion in assets. Fidelity communications included multiple mailings and emails. The transition was completed in kind (investments unchanged). Resources include a dedicated workplace financial consultant (Gene), investor centers, and the NetBenefits mobile app with Spanish support. Councilmember Panzarella asked about availability for staff; Fidelity offered to schedule group sessions. Councilmember Flickinger reported positive feedback from a staff member who met with Fidelity.
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Sales Tax Deep Dive (Will Jones)
- Jones explained how sales tax is generated (8.25% total: 6.25% state, 1% city, 1% Metro), including limited purpose annexations (LPAs). Sales tax is the second-largest general fund revenue source after property tax, comprising 48% combined. Historical volatility was highlighted: dips of -7.5% during the Great Recession (2010), -5.5% during the energy collapse (2016), and -1% during the pandemic (2020), followed by a 16% surge. Jones cautioned that the $22 million credit in the FY27 budget is risky, similar to an earlier unsuccessful attempt. The city uses a conservative projection model (CPI, employment, oil prices) and has been accurate within 0.4% recently. The FY27 sales tax budget is $937.7 million. Councilmember Thomas linked the Woodlands fund inactivity post-2018 to Hurricane Harvey recovery stress on the CIP. Councilmember Flickinger asked about e-commerce sales tax; Jones confirmed Amazon and other marketplaces collect at the same rate.
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Enterprise Risk Assessment and FY27 Audit Plan (Jennifer Pierce, Controller's Audit Division)
- Pierce presented the first citywide enterprise risk assessment, using a standardized survey across 24 of 25 departments (Solid Waste did not participate), yielding 258 risks. The top finding is that the city's principal exposure is execution capacity—limited by aging systems, delayed refresh, weak cybersecurity, and slow procurement. The audit plan includes 38 engagements (15 already underway), targeting highest exposure first. Key new audits include AI governance, application portfolio management, facility maintenance, records retention, and procurement cycle time. Pierce noted only 11 staff, limiting throughput. Councilmember Vice Mayor Pro Tem Peck asked about expected completions; Pierce estimated 20-24 engagements (mix of audits and follow-ups). She discussed the SAP segregation of duties audit, which was on hold but moved to pre-planning to leverage concurrent payroll audits. On AI governance, Pierce recommended a consulting approach before the city finalizes its policy. Committee members requested the HR hiring audit be brought to a future meeting.
Key Outcomes
- No formal votes were recorded; the meeting served as a discussion and information session.
- The proposed Third Amendment to the Woodlands RPA is scheduled for City Council consideration the following day (September 2, 2026). Several councilmembers expressed support, noting it would improve the city's financial position by adding $50 million in unrestricted funds and reducing the budget gap.
- The 457B transition to Fidelity was completed; the committee acknowledged the smooth transition and new resources available to employees.
- The sales tax volatility presentation served as a warning to budget conservatively; no immediate action was taken.
- The FY27 audit plan was presented; the committee requested the HR hiring audit be brought forward for discussion at a future meeting.
- The next BFA committee meeting is scheduled for Tuesday, September 29, 2026, at 10 a.m.
Meeting Transcript
First 2026 Budget and Fiscal Affairs Committee. I am Sally Alcorn, Chair of this committee, and I officially call it to order. If there are members of the public that would like to speak, there's a sheet right at the front to sign up for public comment. And we have a full agenda, so we're going to get uh started, and we'll start with the monthly financial report and welcome Will Jones and Melissa Dabowski. And Mr. Jones, the floor is yours. Oh, wait, let me welcome everybody ahead. My Vice Chair Mario Castillo, Councilmember Twila Carter, staff from Councilmember Alejandra Salinas' office, staff from Councilmember Martinez's office, and Ed Pollard's office, Vice Mayor Pro Tem Amy Peck, Mayor Pro Tem Martha Castex Tatum, Councilmember Tiffany Thomas, Councilmember Julian Ramirez, Councilmember Joe Panzarella, and Councilmember Fred Flickinger. Okay. Good morning, Madam Chair, members of council and staff. I'm pleased to present the monthly financial report for the period ending July 31st, 2026. In the general fund, the controller's office is projecting an ending fund balance of 259 million or 9.9% of expenditures less debt service and pay as you go for FY27. This is 45.5 million lower than the projection of the Finance Department. The difference is due to a lower revenue projection than the Finance Department. Based on our current projections, the fund balance will be approximately $62.5 million above the city's target of holding, $7.5% of total expenditures, excluding debt service and pay-go in reserves. The FY27 beginning fund balance is $12.4 million higher than the FY26 ending fund balance reported in the June MOFAR. The increase is due to year-end adjustments to revenues and expenditures that will not be final until the FY26 annual comprehensive financial report is published. The FY27 general fund projection assumes approximately $104 million in revenue associated with the proposed right-of-way fee. Because of implementation of the fee remains uncertain, this revenue presents a significant risk to the projected ending fund balance. If the right-of-way fee is not implemented or the anticipated revenue is not realized, the projected ending fund balance will be reduced to approximately $155 million or 5.9% of expenditures less debt service and pay as you go. This would place a general fund below the city's 7.5% reserve target, requiring the city to identify an alternative revenue source or reduce FY27 expenditures, expenditure budget to restore reserves. As of July, all outstanding debt is within that threshold. In closing, I want to touch on the Third Amendment to the Regional Partnership Agreement that I know Director De Balsi is going to speak in a little more detail. So with this proposed agreement, Houston would receive a total of $50 million through 2030, with 20.2 million of which would come from money already in the fund balance and 29.8 million in the agreed amount of future deposits. And again, depending on when you look at the fund balance, I know based on the agreement, it's going to be 22.6 million that will be transferred by uh December, which is the plan, and then another 27 or so million by 2030. And also with that agreement that unrestricts the fund so that the city can use them as the city sees necessary, which it will be coming to the general fund that we see from the agreement, the RCA. So that will be revenue coming directly into the general fund, unrestricted. And just to give a little context, since we reviewing the fund structure, if the current RPA remained in place through FY27, uh projected sales tax would estimate around $75.6 million. Um and that assumes if there were no growth. So essentially we just received the same amount of sales tax that we received at the end of 26. Um, or if you do a range to where uh looking at the annual growth rate, it's been about 5.5 percent, close to 5.6 percent. So you look at where we started in 2009 to where we are in 2026. It's about a 5.5 percent. So if you were to assume through 2057, we could reach uh 5.5 percent, which is on the higher end, uh, that would be about 201 million of sales tax revenue that would have been uh collected. And again, you can do different scenarios. You do 2 percent, 3 percent. Um I'll talk later about sales tax. It is a volatile revenue source. Um, so you got to be careful with those projections. But I did want to give some context on you know if you were to look at it from that angle. Um and in addition, uh these amounts, the fund also holds about four million in interest that again on based on the agreement that would become unrestricted, so the city would have access to the interest portion as well. Um, also looking at the historical activity on the expenditures from the fund. It's been minimal in the past few years. Uh since 2021, there has been little, uh little to no spending. So total expenditure since 2009 amount to roughly 23 million. Um, can I stop you right there? I mean, I noticed that too. So the expenditures kind of stopped in 2020. You were finance director. Do you remember why they stopped?
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