Texas governor tees up special session to restrict certain debt issuance

A prohibition on the use of certain kinds of debt will be back before the Texas Legislature after Gov. Greg Abbott vetoed a bill, indicating the measure was not restrictive enough.

Senate Bill 2035 "has too many loopholes," the Republican governor said in his veto message Tuesday, adding the legislation can be considered during a future special session.

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Lawmakers targeted Texas issuers' use of tax anticipation notes and certificates of obligation in lieu of bonds that had been previously rejected by voters for the same purpose.

The bill, which was introduced by State Sen. Paul Bettencourt in the wake of a lawsuit challenging the city of Amarillo's debt plan, would prohibit this type of issuance for five years following a failed bond election, with certain exceptions.

Amarillo pursued the issuance of $260 million of TANs last year for a civic center project after voters in 2020 rejected bonds to fund various projects involving the complex. A local property owner's lawsuit led to a district court rejecting Amarillo's use of TANs due to insufficient notice of the subject of the city council's May 24, 2022, meeting. The judge also ruled a civic center was not a "public work" that could be financed with TANs.

The city appealed the ruling to the Texas Seventh Court of Appeals, which scheduled oral arguments for June 26.

A brief filed in the appeal by Texas Attorney General Ken Paxton said Amarillo "thwarted the will of the voters" by opting to sell TANs with the intent of refunding them with long-term, unvoted bonds. The city's latest brief, filed in May, contended there is no voter-approval requirement under Texas law for TANs or for refunding bonds.

SB 2035 lists exceptions for debt issuance, including financings related to disasters or to comply with a federal court order or to remedy noncompliance with a federal or state law.

The House passed the bill in a 102-42 vote May 24 after the Senate approved it in a 25-6 vote April 26. Abbott's veto message said a special session will have to wait until the legislature passes property tax cuts in an initial special session he ordered May 29 after the House and Senate passed dueling plans.

Lawmakers also sent the governor House Bill 4082, which lists permissible "public works" for the issuance of TANs or certificates of obligation by municipalities and counties, while forbidding their use for new stadiums, arenas, and convention and civic centers that would be leased by a single, for-profit tenant for more than 180 days a year. Hotels are also on the prohibited list. 

Permitted public works include the expansion, rehab, or maintenance of government-owned and operated civic centers.