Texas bond issuers keep a wary eye on legislative session

A barrage of bills introduced in the Texas Legislature this session that would constrain debt issuance could impede the ability of issuers to address an increasing need to fund infrastructure for the state's growing population, according to speakers at last week's Bond Buyer Texas Public Finance Conference.

Numerous bond-related measures are among a record 8,153 bills and joint resolutions introduced in the Republican-controlled legislature by a March 10 filing deadline. Lawmakers are also pushing legislation to tap the state's record $32.7 billion budget surplus for targeted spending and tax relief via a massive property tax cut.

Michael Dorman

Texas Comptroller Glenn Hegar hinted the legislature might tweak a controversial 2021 law impacting financial companies deemed to be "boycotting" the fossil fuel industry.

Conference speakers parsed through some of the measures, highlighting their unintended consequences.

"There's not a lot of thought to the practical impact of a lot of these bills," said Samantha Rachlin, an associate at law firm Hunton Andrews Kurth LLP. "I'd like to see a trend towards thinking through how we're going to implement a lot of these bills rather than just getting them passed."

Jonathan Frels, a partner at law firm Bracewell LLP, said current state law governing bond elections combined with new bills this session would make it increasingly difficult to get debt issues passed by voters.

"You're reducing the number of days on which you can have an election, you're adding significantly more hoops you have to jump through to have an election, you're adding a lot more information that has to be provided in connection with an election, and then you're putting together ballot language that makes it really difficult to pass an election," he said. "So all of a sudden it looks like you're not really trying to encourage an election, you're trying to discourage debt for infrastructure."

Bond elections, which are already restricted to May and November dates, would only take place in November when voter turnout is typically higher under House Bill 187 and Senate Bill 946.  

SB 2337 also calls for November bond elections, while requiring two-thirds voter approval for passage.

That mandate could change the result of some votes. Fort Worth Independent School District Chief Financial Officer Carmen Arrieta-Candelaria pointed out a November 2021 $1.2 billion bond proposition for middle school construction and renovation passed by only 57 votes.

Others warned forcing all bond propositions onto the November ballot would result in a flood of Texas debt in the municipal market and higher construction costs.

"The unintended effect is that if you have a bunch of school districts and cities and counties all approving in November elections, then they're all going out to issue the debt at the same time," Frels said. "You're all going out to contract for services at the same time and you see an inflationary pressure that goes along with that."

SB 1814 would make it harder to pay off debt early, according to Amanda Brownson, associate executive director of research and policy at the Texas Association of School Business Officials, which is tracking nearly 1,700 bills this session. The measure would amend the definition of current debt for the purpose of calculating a debt service property tax rate by including only the minimum amount required by a bond issue's schedule.

"That may lower that debt rate in the short term, but in the long term increases borrowing costs and increases that tax liability for the taxpayer," Brownson said. 

School districts are keeping a close eye on dueling legislation to cut property taxes by $16.5 billion to more than $17 billion. 

The Senate in March advanced an increase in the homestead exemption for school district taxation to $70,000 from $40,000 and the House last week approved a bill to lower the cap on appraisal increases for all property to 5% from 10%. The enactment of either method would depend on voter approval of a respective constitutional amendment.

"If the House version were to move forward, this idea would drastically minimize the bonding capacity that is available to school districts," said Austin Independent School District Chief Financial Officer Eduardo Ramos.

Arrieta-Candelaria said the Senate bill has a hold-harmless provision that goes into effect if a district's revenue for debt service is reduced, "which helps soften some of that blow," but it only applies to bonds authorized as of Sept. 1, 2022. 

At a press conference last week, Lt. Gov. Dan Patrick, who runs the Senate, made it clear his chamber, which unanimously approved SB 3, will not accept an appraisal cap.

"Just on math, their plan gives far less, their plan disrupts the market, their plan isn't needed," he said. "We can negotiate on just about everything, but I do not negotiate on bad math."

The two legislative chambers are split on school vouchers, which are also of concern to public schools. Earlier this month the Senate passed SB 8, which would create $8,000 education savings accounts for students leaving public schools for private alternatives. The House amended its version of the budget bill to prohibit state funding for vouchers.

The fallout from two 2021 laws prohibiting state and local government contracts with companies that "boycott" fossil fuel businesses or "discriminate" against the firearm industry is being felt by issuers, with Arrieta-Candelaria saying the laws restrict underwriter competition.

So far, UBS and Citigroup have been ousted as underwriters, while a few other big investment banks have left or decreased their presence in the Texas muni market. Frels said the ranks of liquidity and credit providers for commercial paper and other programs have thinned. 

Hegar told The Bond Buyer there has been some discussion over potential changes to the fossil fuel boycott statute.

"Is there some strengthening or loosening? This is just kind of vague discussion overall," he said, adding it was unclear if anything will emerge from the legislative session.

The comptroller in August released a list of 10 financial companies determined to be "boycotting" the fossil fuel industry under the 2021 law aimed at protecting the state's oil and natural gas businesses.  UBS, the only municipal bond underwriter on the list, was subsequently dropped from deals.

The comptroller said conversations were ongoing with companies concerning the list, which grew to 11 in March with the addition of HSBC Holdings Plc.

In a keynote speech at the conference, Hegar defended the law as a way to stand up for the state's oil and natural gas businesses, which generated record severance tax revenue in fiscal 2022 that topped $10 billion.

"When financial companies publicly slam the fossil fuel industry, yet they privately come tell me that 'oh, by the way, we're continuing to invest in them,' frankly, I'm a little offended," he said.