1. Finance Department Ad Hoc Charter Review Committee City of Houston Revenue Cap Finance Department Kelly Dowe, Chief Business Officer Presented By: Jennifer Olenick, CFA, Assistant Director Treasury and Capital Management February 26, 2015 1

2. Background: Revenue Cap Recap As previously presented to BFA: –Prop. 1 enacted by voters in 2004, limits the City’s property tax revenues to the lower of: The prior year’s cap plus population and inflation growth or The prior year’s revenues plus 4.5%. –Prop. H enacted by voters in 2006 permits for the addition of $90 million to any base used to calculate revenue limitations for public safety purposes. 2

3. Background: Revenue Cap Recap Fiscal Year 2015 is the first year that the City was impacted by this cap, resulting in a lower property tax rate. –FY09 - FY14 Tax Rate: 63.875 cents per $100 –FY15 Tax Rate: 63.108 cents per $100 –The loss of property tax revenue to the City due to this limitation was $12.7 million in FY15. Cushion from being below the cap in prior years allowed the revenues to grow by $77 million from $991 million in FY14 to $1.07 billion in FY15, or 7.7% The loss of revenue beginning in FY16 will be significantly larger. 3

4. Background: Calculating FY16 Cap FOR ILLUSTRATIVE PURPOSES ONLY: (thousands) The lesser of: –The prior year’s cap plus population and inflation growth FY15 Prop 1 Cap = $977,338 2014 Inflation (CPI) = 2.79% 7/1/2014 population estimate = 1.70% TOTAL = 4.49% CALC:$977,338 * (1 + 4.49%) = $1,021,220 Prop H:$1,021,220 + $90,000 = $1,111,220 –The prior year’s revenues plus 4.5% FY15 Projected Revenues = $1,072,173 CALC:$1,072,173 * (1 + 4.5%) = $1,120,421 Prop H:$1,120,421 + $8,482** = 1,128,903 * Actual figures differ due to rounding. ** The $90 million must be adjusted each year based on “usage” 4

5. Background: Impact of the FY16 Cap in Perspective Projected FY16 Revenue Cap = $1.11 billion –This is an increase of $39 million from FY15 projected revenues of $1.07 billion Major contractual obligations increase of $58 million –Projected pension cost increase = $17.4 million –Projected debt service cost increase = $31.5 million –Projected ReBuild Houston increase = $9.1 million 5

6. Background: State Revenue Limitations Rollback Tax Rate (RTR) –Splits the tax rate into two separate components - a maintenance and operations (M&O) rate and a debt service rate Debt Service Rate equals the rate necessary to make debt service payments M&O Rate equals the prior year’s M&O revenues plus 8% –FY15 RTR = 64.321 cents per $100 –If the City proposes a tax rate greater than the RTR then citizens can petition for a rollback election FYI – There is a proposed bill in Austin that would lower the 8% to 4% 6

7. Options to Explore THESE OPTIONS ARE NOT EXHAUSTIVE Option 1 – Modify Prop H –Increase the $90 million the City can collect and spend on public safety Option 2 – Modify Prop 1 Option 3 – Eliminate Revenue Cap –The City will still be subject to State limitations Option 4 – Do Nothing NOTE: Any change will not be effective until FY17. 7