Under pressure from a new Texas law and state attorney general probes, Texas cities are stepping up their game when it comes to filing their annual financial audits by a statutory deadline.
A state law that took effect Sept. 1 authorizes anyone to submit a complaint to the Texas Attorney General alleging that a city failed to comply with a state Local Government Code requirement to file an annual financial audit within 180 days of the end of its fiscal year.
If verified by the attorney general, the city would be prohibited from adopting a property tax rate that exceeds its no-new-revenue tax rate for the tax year that begins on or after the date of the attorney general's determination.
Out of 93 cities with populations of 10,000 or more that exceeded the requirement for filing fiscal 2024 audits by two days to as many as 521 days, 46 so far filed fiscal 2025 audits in under 180 days, according to Merritt Research Services, an Investortools company that provides municipal finance industry data.
Texas is leading the way in pushing cities to produce timely audits, according to Richard Ciccarone, the company's president emeritus.
"It should be encouraging to everybody in the municipal professional field that when push comes to shove and when a state gets tough…the job gets done, these documents get done in a reasonable amount of time," he said.
He added that while the state's 180-day requirement is longer than it needs to be, the fact that fiscal 2025 audit filings for some cities came down from 300 or more days to under 180 days "is amazing."
The state's crackdown includes probes
"I will not allow any Texas city to unlawfully increase taxes. That is why my office is reviewing the actions of over 1,000 cities to ensure that they are complying with transparency requirements and not attempting to illegally raise property taxes," Paxton said in
His office has not responded to requests for information about the status of the probes.
Odessa is one of the four cities initially targeted in October and ordered to
Odessa had one of the worst track records in Merritt Research's database, taking 608 days for its fiscal 2023 audit and 492 days for fiscal 2024's.
Mayor Cal Hendrick, who took office in November 2024, said the lateness was due to city staff turnover and that
"Now I'm a lawyer, but I also have a city attorney, and when we read statutes, they're always prospective," he told The Bond Buyer. "So my position on the past-due audit that we received a lot of bad press from the AG was that he's flat out wrong. The statute did not apply until this calendar year."
Hendrick said Paxton's demand to halt the tax rate hike came Oct. 2, after the city's Sept. 30 deadline for setting the rate under Texas law.
"Why is that critical? Because after Sept. 30, we have no way of changing the tax. It's not legal. We can't do it," he said. "There's a statute preventing it. It has to be done by a certain date."
In letters sent to Paxton in October and December, Hendrick laid out the city's position on the law's application and asked for a meeting with his office, but received no reply.
"Just respond. Tell me I'm wrong. Or just tell me you'll look into it," he said. "But instead, nothing, not a word, not a phone call, not an email. And honestly, I think I'm 100% right. I think he knows he's wrong."
Odessa's previous late audits led Moody's Ratings to withdraw the city's Aa2 rating and S&P Global Ratings to withdraw its A-plus rating in June 2024 due to the lack of adequate and timely financial information. Odessa still has an AA rating and stable outlook from Fitch Ratings.
Like Odessa, La Marque, which was also targeted in October, filed its fiscal 2025 audit just within the 180-day requirement after taking nearly a year to produce a fiscal 2024 audit.
Shaky finances and weak management led to
Texas cities are facing other financial consequences for their actions. In April, Republican Gov. Greg Abbott threatened to pull millions of dollars in state public safety grants awarded to Houston, Dallas, and Austin unless they rescind or change recent policies regarding police interaction with federal immigration enforcement.
Houston had the most to lose at about $114 million with some of the money already spent on preparations for the 2026 FIFA World Cup. Calling it "a crisis situation," Mayor John Whitmire successfully
Policies in Dallas, which stood to lose $87.2 million in existing and future grants, and in Austin, which was reportedly facing a $2.5 million loss, were also changed.
State officials are trying to impose their will on these cities as they have in the past, although state scrutiny of local governments has intensified, according to Randall Erben, adjunct professor at the University of Texas at Austin Law School.
"Those grants have been given by the legislature to the governor's office for a long, long time, but I think Abbott's the first to really leverage them to gain compliance with things that he sees as an issue," he said.
The scrutiny comes as Texas experiences explosive population growth that will continue to strain its local infrastructure like water supplies, electric grid, stormwater management systems, housing affordability, and heat stress, according to Justin Marlowe, director of the Center for Municipal Finance at the University of Chicago's Harris School of Public Policy.
"If the state pulls or caps local revenues, or enacts new regulatory barriers, the difficult job of managing and adapting to that growth will become much harder," he said in an email. "At that point, (bond) investors will take notice."
Big Texas cities complied with Abbott's demand in October to get rid of their colorful or
