DALLAS – Local government issuers increasingly relied on certificates of obligation in the past decade, bypassing voter approval to raise capital more quickly, according to Texas Comptroller Glenn Hegar.
Between 2005 and 2016, use of certificates grew by 85% compared to a 50% increase in other forms of debt, Hegar said.
In a fast-growing state like Texas, certificates allow cities, counties and other jurisdictions to raise funding more quickly than could be achieved by calling for a bond election. In Texas, bond elections can only be called in May or November.
However, increasing reliance on certificates led the Texas Legislature in 2015 to curb their use, said Hegar, who is scheduled for the keynote speech at The Bond Buyer's 2017 Texas Public Finance Conference in Austin on Feb. 8.
"Certificates of obligation allow governments to move quickly on projects when they need to, but concerns about the way in which they circumvent voter approval recently led the Legislature to put important limitations on their use," Hegar said.
Under House Bill 1378 approved in the 2015 Legislature, issuers cannot use COs if a bond proposal for similar use failed at the ballot box within the previous three years.
Some of the state's top financial advisors and bond counsel expected the measure to have little impact on their clients.
COs do not require voter approval unless 5% of qualified voters within the jurisdiction petition for an election on the spending in question.
COs were authorized by Texas' Certificate of Obligation Act of 1971. Cities, counties and health or hospital districts can use them to fund the construction, demolition or restoration of structures; purchase materials, supplies, equipment, machinery, buildings, land and rights of way. The certificates can also pay for related professional services. COs are issued for terms of up to 40 years and usually are supported by property taxes or other local revenues, according to the Comptroller's report.
Commissioners courts, city councils and health or hospital district boards opting to issue COs must post a description of the projects to be financed in local newspapers at least twice, first more than 30 days before the governing body's vote on the CO issuance and again a week after the initial posting.
