Article originally appeared in Forbes on Spetember 2, 2014
Cities, counties, school districts, and special districts in Texas are drowning in debt. The latest information from the Texas Bond Review Board suggests that total local debt, including principal plus interest, in the Lone Star State grew by $5 billion in fiscal year 2013 to roughly $328 billion. In only the last five years, local debt has increased by a staggering $30 billion.
Texas’ local debt per person—ranked as the 2nd highest among the top 10 most populous states in a September 2012 Texas Comptroller report—is more than $12,400 per Texan. Yet even with such large obligations, past trends suggest this local debt will likely get much, much bigger on its own. From 2001 to 2011, the compounded growth rate of population and inflation increased by just 53 percent. By comparison, local government debt outstanding (principal only) rose by 122 percent over the same period, meaning that local debt growth is outpacing population and inflation by a factor of almost 2.5-to-1.
The evidence is clear when it comes to local debt: we have a Texas-sized debt problem, and it’s unlikely to get better without key reforms. If there is no meaningful change to the status quo, then Texans can expect that local property taxes will continue to rise—necessarily so in order to pay for higher debt service. These higher taxes will be a strain on family budgets and slow future economic growth.
How should state and local policymakers provide reasonable solutions to slow the growth of local debt? There are a few possible answers, and it all starts with education.
Right now, ballot propositions worth millions or billions of taxpayer dollars must include only two pieces of information—a very general description of the project and the principal amount that the local entity wants to borrow. That’s simply not enough information to make an intelligent decision about something that could have long-lasting fiscal and economic consequences.
The Legislature, or local officials acting on their own, should begin offering voters basic financial information at the ballot. Not so much that they overwhelm voters, but enough so that Texans know the amount of the entity’s current debt level, the effects on their taxes, and the expected total payment of principal and interest payment.
Education shouldn’t be limited to only the ballot box. Voters should also be provided with this basic financial information online. That, of course, means that a local government seeking to borrow money should have a website. Surprisingly, despite the fact that they have the power to tax and borrow, not all local governments do.
Education means little if local governments are just finding creative—and costly—ways to get what they want. That’s why policymakers should consider banning the use of exotic public financing devices that enable local governments, and particularly school districts, to get around existing debt limits. One such instrument that is very common in Texas is what’s known as a capital appreciation bond (CAB).
CABs allow local governments an opportunity to borrow now and push payments off for decades. This causes future taxpayers to bear the burden, many of whom aren’t even born yet. The Legislative Budget Board, the state’s main budget authority, criticized this buy-now, pay-later approach for its “crippling repayment obligations” that can result in as much as $10 being owed for every $1 borrowed. This style of borrowing is making a bad situation even worse.
Another effective way to control the growth of local government debt is to activate Texans in “home-rule” cities. These Texans, along with their local officials, have the ability through the petition process to amend their city’s charter to include things like spending limits, debt limitations, and other fiscally sensible reforms. Considering that as much as one-third of all local debt is held by cities, this is an effective way for interested, local parties to directly resolve the debt issue.
Texas’ local debt problem didn’t appear overnight and it will probably take quite some time before it can dig itself out of the hole. But with these reforms in place, local governments in the Lone Star State can begin to dig themselves out.