DALLAS - Texas lawmakers are making another attempt to put limits on or bar capital appreciation bonds as their 2015 session enters its final month.
Senate Bill 573 by Sen. Donna Campbell, R-New Braunfels, and Senate Bill 103 by Sen. Juan "Chuy" Hinojosa, D-McAllen got their first hearing in the Senate Intergovernmental Affairs Committee May 4.
SB 573 would limit the total amount of CABs to 25% of a political subdivision's bonded indebtedness, and prohibit school districts and other local jurisdictions from issuing CABs backed by property taxes. Hinojosa's bill would not apply to refunding bonds or transportation projects.
Hinojosa introduced a similar measure in the Legislature's previous session in 2013, but the bill failed to win final passage.
Capital appreciation bonds, sometimes referred to as "zero-coupon" bonds, do not require interest payments until the bonds have matured, often after 25 to 40 years. The debt is most frequently used by school districts experiencing rapid growth from a small population base.
Local governments had about $476.7 million of CABs outstanding in 2014, according to the Texas Bond Review Board.
"It's incredibly irresponsible to saddle future taxpayers with this type of debt," Campbell said. "We need to build in some guardrails to limit the amount of outstanding debt to no more than 25% of an entity's total outstanding debt."
Sen. Sylvia Garcia, D-Palito Blanco, said the reason districts resort to CABs is because the legislature has failed to provide adequate funding for school facilities.
"There hasn't been any facility funding for I think 10 years," Garcia said. "Because we're not fully funding schools, because we're not fully funding their facilities, they sometimes have no other choice."
Johnny Hill, chief financial officer for Lake Travis Independent School District near Austin, said that about 40% of Texas school districts use CABS.
"The majority are on the short end," Hill said. "The reason there have been so many CABs issued is because of the lower interest rates. Like homeowners, the districts have refinanced to get those lower rates."
California passed a law that limits CABs to a fourth of a school district's total issuance, as does Campbell's bill. Michigan has banned CABs altogether, according to testimony.
