HOUSTON -- The deepening financial crisis has brought major banks, car companies and even insurance giants to their knees, leaving many to wonder: What’s next? The answer may be closer to home than you think.

Financial experts warn the City of Houston, itself, is at risk.

Accountant Bob Lemer, a former partner in the Houston office of Ernst & Young, said he’s seen the numbers and it doesn’t look good.

“It’s going to be a very jolting wakeup call,” Lemer said. “You’re just deferring the day of judgment. They could lose their pants along with their shirt.”

Experts like Lemer believe city governments may be the next economic bubble to burst because municipalities across America have quietly been piling up billions of dollars in debt in employee pensions for years.

Debt like that can put a city like Houston at risk.

“The city may go bankrupt as other cities have done,” said Dr. Michael Granof, a nationally-known expert in government accounting.

And that means big trouble for private citizens.

The 11 News Defenders provided Granof and other experts with Houston’s financial data.

His conclusion was ominous.

“The threat of under-funded pensions needs to be taken very seriously,” he said.

The program works like this: Each day a city employee works, he earns a certain amount of pension and healthcare money that will be given to him once he retires.

The problem is, the city has not been putting enough money away for those pensions.

They’re currently about $1.8 billion in debt.

What’s worse, they’re not saving any money at all for the employees’ healthcare benefits.

Houston owes a whopping $3.2 billion there.

Loose accounting guidelines at the federal level allowed cities like Houston to keep healthcare debt off its financial statements in previous years.

“That’s not small change by any standard,” Granof said. “It means we’re accumulating an obligation that’s gonna have to be paid in the future.”

What is Granof's advice? “You know, if you dig yourself into a hole, you better stop digging,” he said.

But that’s not the city’s only problem.

To cut the pension debt, the city borrowed from Wall Street.

They created a sort of IOU called a pension bond that Wall Street investors purchased.

Now the city has to pay Wall Street back with hundreds of millions of dollars more than they borrowed.

Granof said the bonds were a “terrible idea.”

“That’s like rolling over your credit card debt. There’s a day of reckoning that’s gonna come,” he said.

City Controller Annise Parker thinks the pension system is a big concern, too.

“The whole health of the pension system is a concern to me,” she said. “I’m the financial watchdog for the city.”

She said the city’s plan of borrowing money to pay pension debt was like using a credit card to pay a house note.

“I don’t think it’s very good,” she said.

There’s another way Houston borrowed money to pay its bills though. Houston reduced the pension debt on paper by handing over a promissory note to one of its three pension funds. 

The note said Houston will eventually pay $300 million to the municipal employees’ fund – a move that made the city look better financially to the outside world because it no longer owed as much money to the pension systems.   

But the city was planning on getting that money from the sale of a city-owned convention center hotel.

The problem is, they’re having a hard time finding a buyer.

“If you keep making wrong turns, you’re never going to get to your goal,” former acting New York Comptroller Tom Sanzillo said.

Sanzillo used to oversee finances for the entire state of New York.

He examined Houston’s finances for the Defenders.

“The city is at a crossroads right now, I would say. The pension bond and the hotel are indications of fiscal stress,” Sanzillo said. “What you see is (Houston’s leadership) inventing gimmicks to handle the fiscal problems.”

Parker shared Sanzillo’s concern with the hotel deal.

“I called it an accounting sleight of hand,” she said.

There’s another problem, too, with the money that has already paid into the city’s pensions.

More than $250 million of that money has been invested into – of all things – high-risk junk bonds and investments like the “Highland Crusader Fund,” which suffered an “unprecedented” failure according to Bloomberg.com.

Altogether, the fire, police and municipal pension funds have lost a cool $1.8 billion since June of 2007.

And guess what? Those losses become new pension debt now, because the city still owes the retired workers their money.

“We’ve seen other cities get in very, very serious trouble because they did not adequately fund their pensions,” Granof said.

San Diego was in trouble at one time. New York City was effectively bankrupt in the '70s because they didn’t adequately fund their pensions.

Mayor White said the city is doing its best.

“Do I think the pension liabilities will bankrupt the city? Absolutely not,” White said.

He said he’s been concerned about the debt, but points to how his administration has cut employee benefits to bring the liability down.

“I think that is prudent, what we have done,” White said.

Defenders: “They say using the hotel note, or pension bonds, is like just transferring debt on your credit card to another place where you’ll have to pay higher interest later. What do you say?”

White: “Well nobody, until this interview with you, none of these people that you say said this, has talked to me about it.”

Defenders: “Are they wrong?”

White: “Yes, they’re wrong.”

White added that he believes they are wrong, because he believes he would have had to raise taxes, if not sell the bonds.  

Granof said that’s not true, adding the city could have simply tightened its belt and reduced its expenses. He questions the city’s ability to pay for larger debts tomorrow, if they can’t find the money to pay them off today.

And for Houstonians like Lemer, the whole situation is something to be dealt with immediately.

“Who loses? Really, it’s the next generation,” Lemer said.

And there’s more about the hotel note that concerns Parker.

Turns out, the city also promised to pay interest on the note until it can sell the hotel.

But the city’s not even doing that. 

They’re deferring tens of millions of dollars of interest – once again – to future generations, with most of the bill not coming due until today’s elected leaders are long gone from office.

And if you want to get a sense of just how real the debt threat is, consider this: Just this month, Phoenix, Atlanta and Philadelphia all approached the federal government asking for a share of the bailout money. 

The reason? Large pension debts.