DALLAS — Texas issuers will no longer be able to issuer certificates of obligation if voters have rejected bonds for the proposed project in the last three years under a law that goes into effect in Texas Sept. 1.
The law passed as House Bill 1378 takes a tool out of the finance toolkit for some municipalities, though local officials say the new restrictions are likely to have minimal impact.
"Issuers can still issue certificates of obligation," said McCall Parkhurst & Horton partner Carol Polumbo. "However, they will have to consider whether they have had a bond election for the same purpose within the last three years that failed. If so, they will be prohibited from issuing during that three-year window. Issuers will also have to consider this in planning for bond elections."
In rapidly growing Montgomery County north of Houston, county commissioners plan to call for another election in the fall for $280 million of road bonds a year after voters rejected a similar proposal. Despite the rejection in May 2014, commissioners didn't consider certificates that would not require voter approval.
"Thanks to our efforts in the current budget to set aside $13 million in funding for capital projects, we are able to fund some of our immediate needs without issuing certificates of obligation," said Montgomery County Judge Craig Doyal. "I don't see any issues with our ability to fully comply with HB 1378 either now or in the future."
In Conroe, the county seat of Montgomery County, the city is preparing to issue nearly $12 million of COs for road projects. But because the debt wasn't previously rejected in an election, the new law wouldn't come into play.
David Medanich, vice chairman for First Southwest Co., said his financial advisory clients in the Houston area would not be affected by the law. Replacing defeated bonds with COs would still leave the issuer vulnerable to a recall petition, said Medanich, who doesn't work for Conroe.
"I don't have any clients doing anything that," Medanich said. "In my 25 years, it's only happened one time and it hasn't happened since. If an election fails, they're not going to go back and issue COs for the same project."
COs, which don't require a reserve fund, are primarily used for self-supporting projects such as water and sewer projects, Medanich said. The issuer can back the certificates with a tax pledge to earn a lower interest rate, he said.
"The tax pledge is nothing but a backstop for the investor, which gives them a better interest rate," he said. "And the issuers don't have to have a reserve fund."
At least one local official opposed the new measure, which also requires local governments to post links to its certified annual financial reports and other disclosures related to debt.
The new requirements could be burdensome to sparsely populated rural counties that might have difficulty persuading voters to back certain projects, according to Oscar Ortiz, county commissioner for Nueces County.
"Sometimes you have infrastructure needs that are in the outlying areas that some of the people within the City of Corpus Christi are not going to be in favor of," he said in a televised interview on a Corpus Christi TV station.
In Montgomery County, commissioners stripped out one controversial road proposal that analysts believe caused the 2014 bond project to fail. The commissioners crafted the proposal in consultation with the Woodlands-based Texas Patriots Political Action Committee.
Another measure going into effect with the new fiscal year places restriction on use of capital appreciation bonds by local governments. House Bill 114 is expected to have its biggest impact on small but rapidly growing school districts in suburban areas.
The new law limits CABs to 25% of a political subdivision's bonded indebtedness, and prohibit school districts and other local jurisdictions from issuing CABs backed by property taxes.
Capital appreciation bonds, sometimes referred to as "zero-coupon" bonds, don't require interest payments until the bonds have matured, often after 25 to 40 years.
Local governments had about $476.7 million of CABs outstanding in 2014, according to the Texas Bond Review Board.
"It's incredibly irresponsible to saddle future taxpayers with this type of debt," state Sen. Donna Campbell said in a hearing on the bill. "We need to build in some guardrails to limit the amount of outstanding debt to no more than 25% of an entity's total outstanding debt."
Sen. Sylvia Garcia, D-Palito Blanco, said the reason districts resort to CABs is because the legislature has failed to provide adequate funding for school facilities.
"There hasn't been any facility funding for I think 10 years," Garcia said. "Because we're not fully funding schools, because we're not fully funding their facilities, they sometimes have no other choice."
Johnny Hill, chief financial officer for Lake Travis Independent School District near Austin, said that about 40% of Texas school districts use CABS.
"The majority are on the short end," Hill said. "The reason there have been so many CABs issued is because of the lower interest rates. Like homeowners, the districts have refinanced to get those lower rates."
California passed a law that limits CABs to a fourth of a school district's total issuance, as does Campbell's bill. Michigan has banned CABs altogether, according to testimony.
The new laws on public finance go into effect with a $209 billion biennial budget signed into law by Gov. Greg Abbott in June.
The budget leaves $6.4 billion unspent from available funds, including $2.9 billion under the state's constitutional spending cap, which limits the growth of some state funds.
Legislators provided $11 billion in the state's Rainy Day Fund, which is fed by oil and gas production taxes. That revenue stream appears in growing danger as the price of oil falls below $40 a barrel from the $106 per barrel peak in 2014.
The budget also includes funding to cover $3.8 billion in property tax relief and franchise tax cuts for Texas businesses.
Several House Democrats disapproved of allocating $800 million going to border security funding, citing lack of accounting for how effective the spending will be.
Local communities are expected to benefit if voters approve $3 billion for highway funding in a statewide vote in November.
Under a proposed constitutional amendment, the state would dedicate a portion of general sales tax revenue to the State Highway Fund. In a compromise with the Senate, the House also approved use of a portion of the sales tax revenue from the sale of vehicles beginning in 2020.
"SJR 5 will go a long way toward alleviating the continued shortfall in state highway funding," said state Rep. Ron Simmons, who served on the conference committee that worked out differences in the two versions of the bill. "SJR 5 also specifies that the additional funds may not be used for toll roads."
Opponents of toll roads in the state were disappointed that most of the measures restricting funding for turnpikes died in the session's last days. Only four of 78 anti-toll bills passed, according to Terri Hall, founder of Texans United for Reform and Freedom.
Among the measures that did pass, House Bill 2612 requires the Texas Department of Transportation to issue a report on the possible elimination of some toll roads but doesn't apply to those operated by the North Texas Tollway Authority in the Dallas-Fort Worth area or the Harris County Toll Road Authority in the Houston area.
