Texas' Local Debt Needs Transparency and Accountability
by State Senator Juan 'Chuy' Hinojosa
Local control is a sacred Texas tradition. But what happens when that control is just a few local officials promoting large bond elections with low voter turnout and even lower voter education and citizen awareness? While Texas' per capita state debt ranks one of the lowest in the nation at 45th, that number soars to the 15th highest in the nation when local debt is added in. Local governments in Texas have more than doubled their debt load in the past decade -- that translates into $7,500 in debt for every man, woman and child in Texas. Examining local debt and bond elections is an important step in addressing this situation.
This past week, Lt. Governor David Dewhurst released interim charges for the Senate Committee on Intergovernmental Relations (IGR) to study issues related to government transparency, local debt and bond elections. As Chairman of the Senate IGR Committee, I am pleased with these charges because of the significant potential risks of not having local debt control, due mostly to a lack of transparency and accountability.
The Senate IGR Committee is responsible for local government issues statewide and oversees legislation that impacts our local economies. Our communities are facing challenging issues and our lawmakers have a responsibility to make government more efficient, save taxpayer's money and help earn trust in our government entities. Our Texas families need to be informed and understand their local government's fiscal state to make better decisions while voting, while our local elected officials need to be informed of assorted funding options with a commitment to educate and be transparent with their citizens.
Chances are, your local school district faces a rapidly growing student population with overcrowded facilities where immediate development is needed, but where there are limited financing options.
Unfortunately, this problem plagues local counties all over Texas because our growing populations are demanding new facilities and capital development that far outpace our local wealth and resources.
In recent years, Texas school districts and municipalities have increasingly turned to capital appreciation bonds, or CABs, as one solution. CABs are a type of municipal bond that delay principal and interest payments for 25 - 40 years. There are no installment payments to bring down the debt, so compound interest keeps piling on, causing the balance to balloon.
This financing tool is very attractive to school districts and municipalities as a way to enjoy the fruits of borrowed money today, while telling voters not to worry about the debt since these bonds won't raise taxes -- today. However, these payments are pushed onto future taxpayers creating an expensive tab for our children and their children.
The buy-now, pay-later approach can result in paying up to $10 for every $1 borrowed now. These local districts assume that since the number of taxpayers is increasing, the anticipated larger tax base in the future will be able to repay the loan. In spite of the exorbitant cost to taxpayers, municipalities use long-term projections to conclude that CABs will work out in the long-run while the much needed capital expansion and facility projects can be enjoyed in the short run.
Between 2007-2011, Texas local governments issued over 700 CABs, receiving $2.3 billion in immediate funding, but committing future repayment obligation of over $20 billion. It is simply bad public policy, bad for our local communities, and unfair to our children to authorize CABs to districts and municipalities who don't fully understand them or their consequences and to not be upfront with taxpayers about the true long-term costs ultimately resulting in enormous local debt. More clarity and truth-telling is needed in explaining to taxpayers what some of these immediate solutions really mean so that we ensure our children's future is not compromised through bad or rushed decision-making.
This past Legislative Session, I authored Senate Bill 449 to prohibit Texas local governments from issuing CABs because these bonds place an undue burden on our future generations simply to pay for the immediate comfort of projects or developments that could be financed differently. While this bill passed in the Senate but not in the House, I intend to file this legislation again in the next session beginning January 2015.
Transparency and accountability are the best tools we have for decreasing our local debt problem and increasing public awareness and understanding. It is critical we study the authorization, issuance and appropriation of debt at the local level and examine the immediate and long-term fiscal impact that bonds and other types of obligations have on current and future generations of taxpayers so that we can rebuild trust in our local government. We must offer a better future to our younger generations in Texas and it must start at our local level.