Rising Local Debt Draws Attention of Legislature

While state coffers are so flush with cash that Texas lawmakers might leave billions unspent this year, local governments are continuing to borrow heavily to provide services in a fast-growing state.

Between September 2013 and August 2014, local governments in Texas borrowed more than $5 billion, bringing the total local debt statewide to $205 billion, according to the Texas Bond Review Board. (You can see the tax-supported debt held by your city, county and school district by downloading the data collected by the Texas Bond Review Board.)

Of the 10 most populous states, Texas has the second-highest amount of local debt per resident, at $8,627, according to the Bond Review Board. Only New York has a higher local debt per capita.

State legislators have noticed — and they’re taking action.

More than a dozen bills have been filed this legislative session aimed at restricting how counties, cities and school districts can borrow money.  

State Sen. Juan “Chuy” Hinojosa, D-McAllen, who has filed two bills this session addressing local debt issues, said he worries that few voters are aware of the money being borrowed locally on their behalf.

“The public is confused,” Hinojosa said. “In the meantime, you’re saddling future generations with tremendous debt.”

There are two main types of local debt issued in Texas: taxpayer-supported debt, which is backed by local property taxes, and revenue-supported debt, which is typically paid back through sales taxes or user fees. Critics have expressed more concern over taxpayer-supported debt, which can be tougher to pay off if projections for economic performance or population growth don’t pan out.

While some lawmakers have argued that local entities should do more to live within their means, cities, counties and school districts have countered that it’s the belt-tightening at the state level that pushes more costs further down the line.

“Cities are expected to be doing more of the state’s old jobs like building roads and reservoirs,” said Bennett Sandlin, executive director of the Texas Municipal League. “It is a bit hypocritical in that regard.”

Several bills aim to make voters more aware of when local entities are borrowing money, requiring that bond election ballots include detailed information about an entity’s existing debt obligations. 

The ballot box is too late to be educating voters on a proposal, Sandlin said.

“We totally support transparency, but to put all that information on a ballot itself can be misleading,” Sandlin said. “We don’t ask legislators to put their résumés on the ballot.”

More than two-thirds of the new taxpayer-supported debt issued in the last fiscal year came from school districts, many of which have used the money to build schools to handle a fast-growing student population. Much of the concern about school district debt has focused on the use of a controversial financing tool called capital appreciation bonds, or CABs.

Such bonds allow districts to borrow money at higher interest rates but avoid paying any of it back for years, or even decades. When the bond is due, the balloon payment can be as much as 10 times the amount borrowed. Some fast-growing school districts have used the bonds to borrow millions beyond what they would normally be allowed under state law.

“The only way some Texas school districts could ever hope to pay back these CABs is if their demographers are right about continued rapid growth and if there’s a corresponding increase in appraised property values,” said state Rep. Tony Dale, R-Cedar Park. “If the bets go wrong, the taxpayer and the Permanent School Fund are on the hook.”

Dale filed a bill this week aimed at restricting how school districts can issue capital appreciation bonds. But school officials at some of the state’s fastest-growing districts, like Leander, in Dale’s district, have countered that the state limits on borrowing have made those bonds their best option for raising the money necessary to stem overcrowding.

The Fast Growth School Coalition has called on lawmakers to give districts more flexibility in how much they can borrow. Currently, state law limits the amount of property taxes that districts can assess to cover debt service costs to 50 cents per $100 of assessed value. Many fast-growing districts are at or near that cap.

Michelle Smith, the coalition’s executive director, expressed hope for bills filed by Hinojosa and state Rep. Eddie Rodriguez, D-Austin, that would create a pathway for some fast-growing districts to increase their borrowing limit to 60 cents.

“To us, the 50-cent debt issue and the CAB issue go hand on hand,” Smith said.

Editor's note: The original version of this story included a link to the Local Debt Explorer. We have since shut this page down and will no longer be updating it. Download the city, county, and school district data previously available in this app.

Disclosure: The Texas Municipal League and the Fast Growth School Coalition are corporate sponsors of The Texas Tribune. A complete list of Tribune donors and sponsors can be viewed here.