Voter approval for property tax increases topic of debate in Texas legislature


The House Ways and Means Committee hearing Monday morning was a near flashback to two years ago when property taxes were the Texas legislature’s focus. Two bills that faced copious testimony were Rep. Mayes Middleton’s (R-Wallisville) House Bill (HB) 1391 that requires localities whose property tax increase is rejected by voters to adopt the no-new revenue rate and Rep. Dustin Burrows’ (R-Lubbock) HB 1869 that ties certificates of obligation (CO) to the voter-approval tax rate.

HB 1869 was the first considered, and it classifies “debt” in the tax code as a “bond, warrant, certificate of obligation, or other evidence of indebtedness” that has been voter-approved and is financed solely from property taxes.

The bill’s most notable feature is its classification of COs as voter-approved debt.

The debate featured pointed discussion between some members of the committee and those testifying.

A certificate of obligation, as currently structured, is debt issued without voters’ consent. Through 2019, there was $22.6 billion in outstanding CO debt. That figure dropped to $16 billion as of August 31, 2020 financials consolidated this year.

The practice has been used since the early 1970s and was originally intended to provide flexibility for emergency or other unforeseen expenses.

Drew Masterson, representing the municipal advisory firm Masterson Advisors, told the committee the legislation would “effectively eliminate” the use of COs for political subdivisions.

Masterson’s position, shared by many of the testifiers representing localities, is that because COs will count toward the 3.5 percent increase cap without voter-approval, cities will issue COs with less abandon.

That is the very purpose of the legislation according to Burrows. “Taxpayers deserve more control over rising property taxes. Making sure that debt, which they don’t vote for, is included under the 3.5 percent trigger is a strong protection against increasing property taxes without voter approval,” Burrows said.

According to Masterson, 54 percent of COs are issued for self-supporting expenses — meaning, not paid for on the back end by taxpayers.

Steve Williams, the Conroe assistant city manager, told the committee his community has saved taxpayers over $10 million by using COs to refinance debt and echoed Masterson’s statement that the bill will “effectively” preclude their issuance.

Rep. Morgan Meyer (R-Dallas) objected to that framing, stressing to multiple witnesses that the bill does not eliminate the ability to issue COs. He further pressed Williams, asking about Conroe’s debt situation. Williams’ rough estimate was that two-thirds of the city’s debt is non-voter-approved and Meyer later said his calculation places that figure closer to 80 percent.

A representative with the Texas Municipal League cited the City of Denton’s 2014 estimation of $18 million in savings from CO-refinanced debt. Back in December, Denton could not provide an update on the fulfillment of that prediction.

Asked about CO-based refinancing, Burrows said it should be categorized within the debt rate and not the voter-approval Maintenance and Operations (M&O) rate.

Rep. Sheryl Cole (D-Austin), meanwhile, expressed concerns that HB 1896 would undermine the flexibility COs provide in responding to unforeseen circumstances.

Supporters of the legislation, like Manvel City Councilman Dan Davis who testified on the bill, believe it will require more thought-out planning by localities.

He stated to the committee, “Instead of simply issuing debt to provide the finances for unfunded liabilities, this bill will mean that capital projects need to be better planned, all variables must be considered, and the taxpayers’ priorities will be put first at minimal to no practical impact to cities.”

“Localities need not be afraid of going to their voters when they have a need,” Sheryl Johnson, the Galveston County tax assessor-collector, told the committee in support of the bill. If passed, HB 1869 would become effective on September 1, 2021, and will only apply to debt issued thereafter. Everything up to that point would abide by current rules.

“The committee testimony was loaded up with taxpayer-funded lobbyists to oppose both [HB 1391 and HB 1869],” Middleton said after the hearing.

About his bill which serves as a punishment for localities who propose tax increases that fail the ballot test, Middleton added, “When the voters have spoken, they have spoken. It’s fundamentally wrong to leave them with a tax increase if they reject a political subdivision’s proposal.”

For a locality that proposes a tax increase above the Senate Bill 2 limits which is then rejected by its voters, that entity will be tied to the lower one between the no-new revenue rate and voter-approval rate. Most often, that will be the no-new revenue rate which, put simply, is a rate that does not bring in any more property tax revenues than the previous fiscal year.

Middleton’s bill faced significant opposition from representatives of school-based associations out of concern for its effects on the gold and copper pennies of school finance recapture.

Property tax rates are composed of two functions: 1) the M&O rate which comprises day-to-day processes and 2) the Interest & Sinking (I&S) rate which comprises bond debts issued to finance the construction of facilities.

With cities and counties, the source of funding is fairly straightforward: the taxpayers. But with independent school districts (ISD), the state finances a portion of the overall cost burden in tandem with individual schools themselves.

The best analogy is a seesaw: a certain amount of funding is budgeted by the state legislature and the portion paid by the state rises or falls relative to the portion paid by ISDs through property taxes on the other side. Last session, the state injected its own funds to give teachers a pay raise and compress ISD tax rates — which account for the largest portion of overall property tax bills.

The state side of the metaphorical seesaw rose while the local side lowered, proportionally.

That, coupled with recapture, also known as “Robin Hood,” which takes funding from wealthier districts and redistributes it to poorer ones, creates an amalgamated mess of finance compared with cities and counties.

All that said, the school district representatives voiced concern that HB 1391 could throw a wrench into that complicated equation — creating a situation in which schools actually lost funding from one year to the next should their voter-approval rate (2.5 percent for schools) fail at the ballot box.

Middleton told the committee that none of the school-focused representatives contacted him about their concerns before the hearing.

He concluded, pointing to the philosophical origin of his bill, “The voters are the ultimate form of local control. So, when they say no to a tax increase but they’re going to get one anyway, is that really fair?”

Both bills may go through some revision during the committee process but seemed to be sufficiently supported by the committee which is responsible for pushing it to the floor for the body writ large.

This session, property tax issues are not even playing second fiddle with the triple threat of coronavirus, redistricting, and the winter storm absorbing most of the capitol’s oxygen. But whether overshadowed politically or on center stage, property taxes will always come due and their fundamental impact on Texans remains — virus or not.

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