Truth about Local Government Debt in Texas

Over at City Journal, Steve Malanga has a fantastic primer on local government debt in Texas:

While Texas’s state government debt is relatively modest—just $40 billion, or $1,577 per resident—local government debt is more than four times higher: $192 billion. That’s $7,505 per capita, according to Combs’s report—the second-highest sum in the nation, behind only New York’s municipalities and far ahead of third-place California’s. Over the last decade, moreover, local debt has increased 144 percent, much faster than the rate of population increase plus inflation.

Some of this debt stems from voters’ willingness to spend their prosperity on municipal-finance baubles, bangles, and beads. In Texas, that means huge expenditures by local school districts on athletic facilities. When I attended a legislative conference in Texas last summer, the talk was all about the $60 million high school stadium just opening in Allen, a Dallas suburb of 83,000 residents. The 18,000-seat facility, which boasts a massive, high-definition TV screen, was built with funds from a $119 million bond offering in a state where high school football is a consuming passion.

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Not surprisingly, debt owed by public school districts constitutes the biggest chunk of the state’s soaring local obligations. Over the last decade, it has increased 155 percent, even as the state’s student population has grown just 21 percent. And the fastest-growing part of Texas school budgets is debt service, which has gone up by 126 percent in ten years, to $5.5 billion. Payments on debt now constitute 10 percent of school spending, up from 7 percent a decade ago.

Debt is also growing rapidly among the state’s 81 retirement systems for local-government workers. Not only are these systems poorly funded; it isn’t even clear how much some owe, since they haven’t disclosed the financial information necessary to verify their financial position, even to state oversight officials. After an extensive survey of municipal pension systems, Combs determined that none of the local plans was fully funded and that only 19 percent had 80 percent of the funds on hand to meet future obligations.

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Facing this growing debt load, some state officials are urging reform. Combs worries that residents don’t understand how much debt is piling up. She advocates greater transparency and has proposed that ballot initiatives seeking voter approval for new debt include comprehensive information about the obligations that government already owes. She has also pushed for laws limiting government uses of the types of debt that don’t require voter approval. [Emphasis Ours]

 In a separate piece, Malanga details common shenanigans:

As in Cook County, so many different levels of government in Texas can issue debt that taxpayers, bewildered by the complexity of it all, let overlapping districts keep on borrowing. As an example, Combs describes how the residents of a single Houston block must repay debt incurred by the county, the city, the city’s school district, and Houston Community College, among other entities. “I went to dozens of town hall meetings around the state, and when I asked, not a single member of the public knew just how much people in their towns were on the hook for,” she says.

Texas, like New York, amassed all this debt by pushing the limits of the law. Though taxpayers must approve most government borrowing, Texas provides an exception for localities that need to issue debt quickly: a “certificate of obligation,” borrowing that doesn’t require approval unless 5 percent or more of local voters petition to have a say on it (a rare occurrence, since most don’t even know that they have that power). Since 2005, Texas localities have issued nearly $13 billion worth of these certificates, often for dubious ends. In 2010, for instance, Fort Worth borrowed nearly $35 million through certificates of obligation to build a facility for horse shows.

Texas school districts have made use of another controversial financing technique: capital appreciation bonds. Used to finance construction, these bonds defer interest payments, often for decades. The extension saves the borrower from spending on repayment right now, but it burdens a future generation with significantly higher costs. Some capital appreciation bonds wind up costing a municipality ten times what it originally borrowed. From 2007 through 2011 alone, research by the Texas legislature shows, the state’s municipalities and school districts issued 700 of these bonds, raising $2.3 billion—but with a price tag of $23 billion in future interest payments. To build new schools, one fast-growing school district, Leander, has accumulated $773 million in outstanding debt through capital appreciation bonds. [Emphasis Ours]

 Both pieces are worth reading, here and here.

(h/t American Spectator)