Outstanding certificates of obligation debt in Texas totals $22.6 billion

Local governments find themselves in choppy fiscal waters in the wake of the pandemic, and the self-imposed shutdowns thereof. But fiscal impropriety by governments at all levels predates the coronavirus. One example comes in non-voter-approved debt. Certain political subdivisions in Texas — namely cities, counties, and hospital districts — can issue debt for expenses without having to take the request before voters. These are called “certificates of obligation” (CO).

First approved in the Certificate of Obligation Act of 1971, the provision allows certain political subdivisions to issue debt for construction projects, materials and supplies therein, and associated professional services.

But those guidelines can be, and have been, stretched — like in the case of Bexar County’s CO bond-financed purchase of an aluminum statue or Amarillo’s motion this year to build a water park.

As of 2019 in Texas, $22.6 billion in CO debt is outstanding.

The CO debt held by cities as of 2019 amounts to $17 billion while counties have $4.4 billion and hospital districts hold $1.1 billion.

Cities collectively account for much of the outstanding debt as there are thousands of cities in Texas compared with the 254 counties and far fewer hospital districts. However, individual cities are some of the biggest single issuers of CO debt.

Six of the top 10 political subdivisions in outstanding CO debt are cities. They are joined by three counties and one hospital district.

While the ability to issue CO debt dates back 50 years, the dataset kept by the state only tracks back a decade.

The sharp 2012 city increase notwithstanding, the year-to-year changes of CO debt remained relatively flat during the previous decade.

Spending under COs differs from that of more typical budgetary routes which require voter-approval above a certain threshold.

Intended to provide flexibility in response to unforeseen situations, COs are not explicitly tied to elections and avoid compounding costs wrought by multiple bond issuances as one can be applied to multiple projects at once.

While juxtaposed as a “break in case of emergency” measure, COs are not solely used for emergency spending.

Potter County approved $54 million in CO's to help pay for a new district courts building. 

“The local government code allows us to do COs it is the quickest and easiest way to do this. 

"If we do a bond election it could fail, I’m not trying to hide anything from the taxpayer, I certainly am not, all I am asking for them to do is to walk through that building and they will know why we are in such a necessity for a new building,” said Potter County Judge Nancy Tanner.

The City of Princeton issued $20.5 million in COs this year to finance the construction of a new city hall.

For 2020, the City of Austin issued $109 million in COs for “various capital improvements and to pay costs of issuing the Certificates.”

Localities also use COs to refinance currently held debt, achieving a lower interest rate, just as one might refinance a mortgage. A March 2014 Texas Town & City Magazine article — a Texas Municipal League (TML) publication — dictates an expected $18 million in savings on interest by the City of Denton over a 20 year period using this strategy.

The City of Denton did not have an update on whether that estimate has borne out since it was made.

Bennett Sandlin, executive director of the TML, said, “Certificates of Obligation are sometimes used in lieu of more traditional bonds for two main reasons: 1) CO’s are appropriate for emergency expenditures when the city can’t wait until the next uniform election date (only two per year) to hold an election; and, often more importantly, 2) CO’s can often be issued at a lower interest rate than other types of debt, saving the taxpayers money.”

But like general bonds, COs are often issued for long periods of time.

Taxpayers have no formal say in the issuance of these bonds, such as through a referendum election, but the administrators issuing the bond must post two public notices of the measure explaining the purpose and fiscal note.

Such a measure would have to go before voters, however, if five percent of registered voters petition the political subdivision for a referendum. As populations increase, reaching that five percent becomes a more difficult logistical endeavor. “General obligation” bonds are also used similarly but must be approved by voters in the first place.

James Quintero, policy director for the conservative Texas Public Policy Foundation’s Government for the People campaign, said, “Greedy governments have borrowed billions without asking voters, forcing higher taxes, and flouting democratic norms. It’s time state lawmakers stopped this bad behavior by overhauling the use of certificates of obligation.”

Back in 2012, Montgomery County issued CO debt for a road project that was rejected less than a year earlier by voters — albeit for a much lower amount than the ballot proposal. This sparked a reform effort in the state legislature which resulted in the passing of House Bill 1378 in 2015 that prohibits a political subdivision from issuing CO debt for a project rejected by voters at any point in the previous three years.

One unintended consequence that bill may have is to dissuade local officials from first taking funding requests to voters and immediately opting for COs. State Rep. Dustin Burrows (R-Lubbock) voiced that concern back in August during his discussion of localities’ use of the disaster loophole in Senate Bill 2 — one of the marquee pieces of legislation from the 2019 legislative session.

Travis County did something similar in 2019 after voters rejected a bond to fund the building of a new courthouse back in 2015, but went even further issuing a larger bond than they had requested of voters. Due to Texas law, Travis County was required to wait three years before superseding the referendum outcome.

“In the next legislative session,” Quintero emphasized, “state lawmakers should take steps to improve CO transparency, accountability, and sensibility. Strong reforms are needed to give the public more time to weigh-in; make it easier for voters to appeal controversial issuances; and more tightly define what qualifies as a legitimate expense.”

The debt from COs is paid off incrementally, to varying degrees, by their respective political subdivisions with tax revenue raised from ad valorem property taxes.

According to the Bond Review Board’s 2019 Annual Report, Texas ranks second among the 10 most populous states in local government debt per citizen — also making up 82 percent of the state’s total debt burden.

School districts and cities, together, amount to 60 percent of the total public debt in Texas.

In the grand scheme of total debt, CO-issued debt is a small percentage but no drop in the bucket, especially to the cash-strapped localities scraping together post-pandemic budgets financed by the taxpayer purse.

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