How debt is outpacing valuation growth in Texas

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DALLAS – Voters across Texas have provided local governments with more than $138 billion of authority for bonds and other forms of finance over the past decade, showing little opposition to proposals meant to keep up with growth.

But Moody’s Investors Service cautions that growing obligations could constrain financial flexibility if not adequately managed.

“Despite the full valuation of cities that we rate increasing significantly from 2009-17, the median debt to full value increased to 2.6% from 2.4% during the same period, indicating the rate of debt issuance exceeded valuation growth,” wrote analyst Kenneth Surgenor in a June 5 report. “While the increase is not significant, it demonstrates cities consumed all of the capacity created by valuation growth.”

On May 5, local voters in Texas approved $7.2 billion in new general obligation debt, according to Moody’s.

“Bond propositions have traditionally received strong support in the state; voters have approved nearly 90% of all requests over the past decade providing local governments with more than $138 billion in financing for various needs,” Surgenor said.

Most of the debt approved at the polls was for rapidly growing school districts.

“Similar to cities, the growth of median debt to full value from 2009-17 outpaced significant valuation growth for school districts we rate, increasing to 4.0% from 3.6%,” Surgenor noted. “The median debt to full value increased 3.7% annually, and were that pace to continue over the next nine years (through fiscal 2026), school districts would require full valuation expansion of 38.1% to maintain the current median debt to full value.”

School districts are particularly exposed to the pressures of rapid growth because their needs tend to be more immediate, Surgenor wrote.

“Unlike other sectors in the state, most school district operating levies are currently at the allowable rate without voter approval: $10.40 per $1,000 of valuation for maintenance and operations (M&O), which can be increased to $11.70 with voter approval,” he said. “Of the more than 300 Texas school districts we rate, 46.9% levy the maximum allowed by law without voter approval and 51.9% have received voter approval to exceed the maximum.”

Although districts can levy an unlimited rate to pay for debt service, the state's attorney general does not typically approve the issuance of additional debt if the total debt service requires a levy that exceeds $5 per $1,000 of assessed value, Surgenor said.

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