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By Meghan Ashford-Grooms October 13, 2010

Rick Perry says Houston had a $1.7 billion operating loss under Bill White

In a recent television ad, Gov. Rick Perry says Democratic gubernatorial nominee Bill White was a poor financial manager as mayor of Houston

Perry's spot levels budget-related charges including this one: "Houston suffered $1.7 billion in operating losses under Mayor Bill White."

We dug into this figure, which also pops up in a Perry ad that refers to the total as 17 billion dimes.

In support of the number, Perry's campaign pointed us to a July report from Citizens for Public Accountability, which calls itself "a bipartisan group of retired partners of some of Houston's accounting firms." The report — written by Bob Lemer, a retired Ernst & Young accountant who often criticized city finances on White's watch — is titled "City of Houston Total Operating Losses Fiscal Years 2004-2009: $1.7 billion."

In an interview, Lemer told us that he reached the figure by adding up the "change in net assets" entry from the city's Comprehensive Annual Financial Report for each of the years White was mayor, 2004 through 2009. Because Houston's net assets declined every year, the cumulative change was a negative $1.69 billion.

That figure, Lemer said, is the amount by which the city's expenditures exceeded its income during White's tenure.

White spokeswoman Katy Bacon challenged the characterization of the $1.7 billion as an operating loss. "An operating loss is a business concept, not a government concept," she said. Lemer's report distorts "financial statements that are generated under government accounting standards," Bacon said.

Say what? We decided to hit the books — one book, anyway — for a crash course in municipal finance.

Our question: What are a city's "net assets" and what does it mean when they go up or down? According to "Financial Management in the Public Sector" by XiaoHu Wang, a public administration professor at the University of Central Florida, assets include land, building and equipment, as well cash and cash equivalents. Liabilities are what an organization owes to others.

Subtracting liabilities from assets yields net assets. Cities track their net assets from year to year in their financial reports. A positive change means net assets increased; a negative number means they declined. The change "can be seen as an organization-wide operating surplus (or deficit)," the book says.

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Next, we asked Wang if it's fair to equate "change in net assets" with "operating loss," as Lemer did. Yes, Wang said, because both terms indicate a deficit. However, he cautioned that no single indicator, including this one, is sufficient to gauge a city's overall financial health.

Other experts were critical of calling the $1.7 billion figure "operating losses."

Lewis McLain, former executive director of the Government Finance Officers Association of Texas, told us that the problem with applying "for-profit" accounting terms — like operating loss — to nonprofit public entities is that their enterprises serve different purposes. "You wouldn’t expect the accounting for church finances to be exactly the same as for an automobile corporation," he said. While a company "focuses on measuring its use of assets to return a profit," a city focuses on the funding of a variety of expensive services for its citizens, "from road repair to police and fire officers to libraries and mowed parks."

Diana Thomas, controller for the City of Austin, said the term "operating losses" is an unfair description; she noted that among the expenses subtracted from the city's net assets each year are long-term liabilities such as depreciation of assets and retiree benefits that will actually be paid out later. Cities only recently were required to account for some of those future costs on their current financial statements, Thomas said.

McLain said the changes in accounting rules are a reason that Houston's "change in net assets" report shows high negative numbers.

"The accounting profession has changed rules to recognize more of these (long-term) costs, since to not do so makes a huge liability less transparent," McLain said. "Houston is experiencing the same pressures as many cities across the state and nation. These liabilities have been accumulating for a number of years, mostly in the last three decades. It is not an overnight problem, and the solutions are going to be slow and painful."

When asked what changes in net assets say about a city's financial health, McLain said: "Virtually nothing. In fact, they can be misleading and misused." The central purpose of a city's annual financial report, McLain said, is to fully report the financial affairs of a city functioning as "a multi-business entity with legal constraints on various monies that are placed in standalone funds for the purpose of accountability, control and disclosure."

In fact, said McLain, "if you are going to talk about operating losses or gains," a more telling number is the balance in its general fund at the end of the year. The general fund, which is the government's largest kitty, helps supports most basic services, including police and fire protection. In Houston's case, the general fund balance increased every year that White was in office, except for 2009, McLain said, going from $136 million in 2004 to $332 million in 2008. The balance fell to $304 million in 2009.

"That means revenues had to be bigger than expenditures for operations" during those years, McLain said.

Summing up: The $1.7 billion figure for net operating losses in White's time as mayor has a basis in fact; the city's net assets did decline by that amount on his watch, though changes in accounting practices also drove up the number.

Problematically, using a single private-sector measure to gauge overall financial performance in the public sector doesn't necessarily produce conclusive results. Houston's accumulated "changes in net assets" by themselves are an incomplete reflection of the city's fiscal health while White was mayor; the $1.7 billion figure may even be meaningless in this regard.

We rate Perry's statement Half True.

Our Sources

Citizens for Public Accountability, "City of Houston Total Operating Losses Fiscal Years 2004-2009: $1.7 billion," by Bob Lemer, July 2010

City of Houston, 2009 Comprehensive Annual Financial Report, see pages 196 through 199

Interview with Bob Lemer, retired accountant, Sept. 30, 2010

from Katy Bacon, Oct. 1, 2010

"Financial Management in the Public Sector," by XiaoHu Wang, 2006

E-mail interview with XiaoHu Wang, professor, University of Central Florida, Sept. 24

Interview with Lewis McLain, former executive director, Government Finance Officers Association of Texas, Oct. 7 and 12

Interview with Diana Thomas, controller, City of Austin, Sept. 30, 2010

Interview with Michelle Mitchell, finance director, City of Houston, Sept. 30, 2010

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Rick Perry says Houston had a $1.7 billion operating loss under Bill White

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