DALLAS — A ban on capital appreciation bonds backed by property taxes is under consideration in the Texas House of Representatives after passage in the Senate.
Senate Bill 449 by state Sen. Juan Hinojosa, D-McAllen, carves out exceptions for refunding bonds and tollway and transportation projects that are self-supporting.
CABs, which pay no interest until final maturity — sometimes as long as 40 years — are typically used by issuers where population is growing rapidly. Local officials who use CABs assume that deferring interest costs until the tax base has grown makes sense, ultimately reducing the per capita debt load.
Critics of the bonds say that leaving a large debt load for another generation of taxpayers can backfire if projections do not work out.
"The buy-now, pay-later approach often results in crippling repayment obligations, with the repayment costs being greater than the benefits derived from the bond," according to Sen. Hinojosa.
With more than $4 billion in capital appreciation bonds issued in Texas from 2003 to 2012, about 85% came from school districts, according to the Legislative Budget Board.
Between 2007 and 2011, Texas municipalities issued over 700 CABs, receiving $2.3 billion in immediate funding, but committing future repayment obligation of over $20 billion, according to the statement on the Senate legislation.
State senators from fast-growing urban districts, Sen. Wendy Davis, D-Fort Worth, and Leticia Van de Putte, D-San Antonio, challenged the bill, saying it might limit financing options for school districts that can't keep pace with the needs. Davis was one of the 28 senators voting in favor of the bill, while Van de Putte was among the three "no" votes.
CABs are often used by school districts where immediate development is needed due to a fast growing population, but where there are limited financing options. The bonds are increasingly used in districts in California and Texas, where the school-aged population is expanding faster than the current tax base.
Most bond issues for local school districts in Texas are backed by the Texas Permanent School Fund, which provides triple-A ratings. That transfers the long-term risk to the state.
Gwen Santiago, executive director of the Texas Association of School Business Officials, said that school districts need the flexibility to use CABs, though the finance mechanism does need review.