Push for local debt limits expected to resume in Texas next year

University of Texas at Austin LBJ School of Public Affairs

Another round of legislation could be coming in the Texas Legislature next year seeking to limit local government and school district debt similar to an unsuccessful 2025 bill that would have significantly curtailed municipal bond issuance in the fast-growing state.

House Bill 19 sought to set a maximum annual debt service in an issuer's current fiscal year at not more than 20% of the average amount of property tax collections over three preceding fiscal years, along with other debt restrictions.

A 20% cap would cripple the ability of local governments to issue bonds, officials testified when HB 19 was active.

A recent policy briefing by the Center on Municipal Capital Markets at the University of Texas at Austin examined the bill's debt limit and found restricting revenue for debt service "can make local governments appear riskier to ratings agencies and investors, which manifests in higher interest rates and increased default risks." 

"Perhaps most importantly, such (debt limits) could have significant deleterious long-term effects on the state and local economies if much needed infrastructure investment is shelved as a result of state-imposed debt limitations on local governments," the report said. "This includes neglecting deferred maintenance of capital assets, an increasingly discussed financial problem for state and local governments with many public finance experts advocating for better disclosure in government financial statements of deferred capital investment."

Martin Luby, the center's faculty director and the report's lead author, said while it's wholly appropriate for the state to impose limitations, the question is what form should they take.

"If you place a restriction that is pretty stringent, potentially as a 20% cap, at worst you can have a shutdown of infrastructure investments, but more likely, local governments are just going to get creative in terms of how they're going to borrow and how they're going to get access to capital funds, and that may lead to more higher-cost forms of debt," he said.

The report found that if that cap were applied retroactively, all 15 of Texas' biggest cities would have exceeded the 20% ceiling upon the bill's enactment based on fiscal 2026 debt service for their general obligation bonds and certificates of obligation as a percentage of their average property tax revenue from fiscal 2023 to 2025. 

The median ratio was 35% with Fort Worth and Austin having the lowest debt service ceiling ratios at 26% and Garland the highest at 73%.

While the conservative Texas Public Policy Foundation plans to advocate for local debt limits in the 2027 session that begins in January, John Bonura, a policy analyst for its Taxpayer Protection Project, said the 20% cap might have to be tweaked given his research shows many cities, school districts, counties, are well over that limit.

"If we can agree that affordability is a problem and that local government is responsible for your tax bill, then placing reasonable limits on the way that they're able to spend or incur debt I think makes sense," he said.

Instead of the state imposing a debt cap, local governments could adopt debt policy guidelines or Texas could formally adopt a state fiscal monitoring system of local government through the state's Bond Review Board or Comptroller's Office, according to Luby. 

"Such a state fiscal monitoring system would broadly retain local fiscal autonomy and its associated benefits, while allowing the state to proactively keep a watchful eye on local government debt burden and the impact on citizen property taxes and utility rates to prevent the need for future state intervention," the center's briefing said.

In 2025, HB 19 stalled in the House Ways & Means Committee following a hearing that drew a slew of opposition and warnings about potential negative consequences.

"Establishing a 20% cap on the debt service rate would immediately prevent most local governments throughout the state from issuing any debt at all, and bring important capital programs to a halt," Austin Deputy Chief Financial Officer Kimberly Olivares said at the April 21, 2025, hearing. "Further, it could create an impairment that might trigger a default by existing bondholders."

The Texas Municipal League alerted its members about the bill.

"Once a city reaches the 20% threshold, it could no longer issue debt until the total amount of debt outstanding were reduced below the cap," the group said. "This provision would disproportionately impact small cities due to their lower property tax collections and fast-growth cities due to the need to debt finance critical infrastructure to keep up with population increases."  

HB 19's other provisions – allowing only November GO bond elections by eliminating an option for the May ballot and restricting the issuance of tax anticipation notes and certificates of obligation – will be the focus of future briefs by the center, according to Luby.

Republican State Rep. Morgan Meyer, HB 19's main author, did not respond to a request for comment about the center's report and prospects for a similar bill to be introduced next year. 

Republican Gov. Greg Abbott, who is seeking a fourth term in office, has a five-step Empower Texas Taxpayer plan that doesn't directly target local debt, but could impact tax revenue. The plan, which seeks to eliminate school property taxes for homeowners, also calls for spending limits on local governments, a two-thirds voter approval supermajority requirement for property tax hikes, and giving voters the ability to force an election to roll back tax rates.

Property appraisals for tax purposes would occur only once every five years and a current 10% cap on appraisal growth for homesteads would be lowered to 3% with the lower cap expanded to all properties. 

Outstanding debt for cities, counties, school districts, and other local Texas issuers hit nearly $369 billion in fiscal 2025, an increase of almost 40% over the past five years, according to the center's report. 

In Reason Foundation's analysis of U.S. state and local government debt and liquidity released in August, several local Texas issuers exceeded some "objective standards" for eight metrics, including debt ratios, liabilities per capita, and solvency ratio, earning them "red flags," indicating a concerning trend.

Among the 100 largest school systems, Fort Bend Independent School District received seven red flags, while Frisco schools had five and Cypress-Fairbanks had four. On the report's big cities list, Austin, El Paso, Houston, Laredo, Lubbock, and San Antonio each had four red flags. As for large counties, Denton had four red flags, followed by three each for Collin and Harris counties.