Local Governments Racking up Debt

May 07, 2012 JBudget & Spending

House Ways & Means Committee Hearing April 3, 2012 Testimony by Peggy Venable, May 3, 2012

Thank you for the opportunity to provide some input from Americans for Prosperity Foundation on the Texas tax system.

In January of this year, I began traveling the state talking about Economic Freedom – what it is, how it is determined, the US and Texas rankings and why it matters.

In short, economic freedom is determined at the federal level by the size of government, regulations, free trade, the rule of law and valuation of currency. For the states, it is largely determined by the size and scope of government, the regulatory environment, and tort reform.

While the US has dropped from 3rd to 10th and is anticipated to fall to between 20th and 15th unless federal policies change, Texas is rated #18 out of the 50 states.

Since it has been determined that economic freedom leads to greater prosperity, and Texas is the top state for businesses relocating here, the top state for job creation, the top state for tort reform, the most transparent state government, and the nation’s biggest exporting state, what would it take to make Texas #1 in economic freedom?

We know that the US is falling in the economic freedom rating in part because government is growing and federal debt will hit $16 trillion by November.

Yet few people are following local government debt which has hit $1.785 trillion nationwide.
Texas is second in the country in local debt, behind only California.
Texas local government debt is larger than all local revenue, which is at $1.169 trillion. That’s not counting the interest payments.

While local government spending grew at a rate of two times the increase in population plus inflation from 1992-2008, according to the Texas Bond Review Board, Texas local governments are $192.7 billion in debt and a whopping $322,331,957,000 when interest is added.

Local debt has grown 72% in Texas in the past 10 years.

We are leaving our children and grandchildren a legacy of debt. That is not the legacy most of us want to leave future generations.

One thing the BRB does well is quantify the current debt load and in recent years, the website has calculated the interest payments to provide greater transparency so taxpayers can see the total amount owed.

While some debt is self-supporting, much debt is not. It relies on future taxes. And much of those are property taxes.

What is driving local government debt?

I might be cynical and assume that local officials can count on having left office, often moving to greener pastures in state or federal offices, before the bill comes due.

But the truth is that much of the local debt is taxpayer-approved. Taxpayers have a propensity to approve bond initiatives which are often described by local officials as being necessary. School district bond initiatives are often touted as being “for the children.”

AFP launched The Red Apple Project (www.RedAppleProject.com) two years ago to better inform the public on how their own independent school district (ISD) is performing – from a financial and student performance perspective.

It may be a municipal swimming pool, a state-of-the-art stadium, or a Taj Mahal school facility in their community. The trick is in the salesmanship. Local governments often claim the cost to be just a few pennies here, a few dollars there.

Texas taxpayers have bought over $300 billion in local debt in increments, having been told it’s just “one bag of M&M’s a day” or “a cup of Starbuck’s coffee a week.”

Those pennies add up to dollars, and we’ve built ourselves a monster of a debt, a penny at a time. Local debt does not include the public pension unfunded liabilities which are in the billions in Texas, nor does it include the other post-employment benefits promised government employees which includes rapidly-increasing health coverage.

Texas’ local debt totals are headed in the wrong direction. Taxpayers would likely be surprised to learn that Texas ranked third among the most populous states in per-capital local government in 2008 before taking our dubious second place standing.

In the final analysis, it is our children who are being left holding the bag. The government-debt is a burden on future taxpayers, as the bond initiatives are often for a 30-year debt. So children in grade school will graduate with part of that tax burden on their shoulders. High school students inherit the debt often without having the benefit of the project those dollars were funding.

Take for instance Midland Independent School District (MISD) which has a current debt load of $180 billion ($121 billion plus almost $59 billion in interest) but the Superintendent there is advocating for another bond initiative.

Superintendent Ryan Warren is quoted in the Midland Reporter-Telegram as saying, “I got really fired up the first semester and in my opinion, looking at the needs of our children, I wanted a May 2012 election,” Warren told the board. However, after talking with community groups, Warren said he realized the community will have to be “extensively educated” and it cannot be accomplished by May.

The Superintendent has recruited a community advocate in a local pastor, Patrick Payton, from Stonegate Fellowship. Pastor Payton must have left his bible at home when assuming the title MISD Improvement Initiative Chairman. Payton – in the school board meeting – made an interesting statement:

“If it means breaking rules and getting in trouble, let’s break rules,” Payton said.

Read more: Campaign chairman: ‘We have to get a win’ – Mywesttexas.com: Top Stories http://www.mywesttexas.com/top_stories/article_6d066987-2ea2-501b-8473-8…

Though November 2012 is the board’s next opportunity to call an election, even that may be too early, Warren is quoted as saying, noting it will coincide with the presidential election. The Midland Reporter-Telegram found that over 46,000 Midlanders voted in the 2008 presidential election while only 6,450 voted in the 2007 special election for a $37 million bond, according to the Midland County Election Office.

That extensive education which the superintendent referred to is an example of education dollars at work outside the classroom. ISD’s employ public affairs staff who are trained on how to pass bond initiatives. Besides, they have Pastor Payton willing to pull all the stops to get the bond initiative passed.

Upcoming projects range from a fine arts center in Tuloso-Midway Independent School District to Eanes ISD’s projects which include using bond money for iPads for students.

Texas taxpayers are generous and approved about three out of four tax increases and bond initiatives put on the ballot.

But few taxpayers know how much local debt is carried by those very taxing entities working to pass more debt.

Conservative writer Christopher Chantrill (USGovernmentSpending.com) provides publicly available data on government finances and his estimates. As was quoted in a recent Fort Worth Star-Telegram article, measured as a percentage of state product, Chantrill ranks Texas among the lowest on state debt and among the highest on local debt. Combine state and local, and in 2010, he estimates that Texas had debt of $8,943 per person, $380 more than the average for all the states. In 2001, the Texas debt load was $4,608 per person — and $843 lower than the states’ average. (http://www.star-telegram.com/2011/07/12/3217429/texas-debt-growing-at-fa…)

So we know that low voter turn-out and the public’s relative ignorance to local government debt have paved the way for more spending using our children and grandchildren’s credit card.

We had hoped that H.B. 2291 would make it easier for property owners to know when a taxing unit is raising taxes. The bill requires that taxing units use particular wording in public meetings and on publications when a taxing unit increases taxes. Though we supported the measure sponsored by Rep. Dan Gattis and Sen. Steve Ogden, appraisal increases (which have been minimal in most geographic areas in the current economy) and debt provided avenues for increased spending by local entities.

The bill required a new phrase to the mandatory language required to be used in a motion to set a tax rate higher than the effective tax rate. The additional phrase states the percentage by which the proposed tax rate would exceed the effective tax rate. The bill did not set tax rates, affect the appraised values, or affect property tax exemptions.

Inserted the language:

“The tax rate will effectively be raised by (insert percentage by which the tax rate exceeds the effective maintenance and operations rate) percent and will raise taxes for maintenance and operations on a $100,000 home by approximately $ (insert amount)”

But to keep a check on local property taxes, more is needed. More voters need to participate in elections and more information needs to be provided to those voters.

Property tax relief/shift

We have concern that property taxes result in a property owner never really owning their own property. How? Just stop paying those property taxes and find out how – taxing entities can seize the property. The current system also increases taxes based on unrealized value. The property owner does not realize the value until the property is sold.

While AFP Foundation is still conducting a more thorough review of state tax systems, we suggest that we employ the “do no harm” approach to any changes in the tax system in Texas.

Before considering any shift from property taxes to sales taxes, it is imperative that taxpayer protections be put in place. Legislators should remember all too well what happened when state funds were allocated to lower property taxes. Property taxes were simply increased – either via rate increases or valuation increases – to “fill that void” and taxpayers realized no tangible property tax relief.

Whereas some plans to shift from property taxes may totally eliminate property taxes, others would eliminate the maintenance and operations tax (M&O) leave the debt taxes (I&S) in place.

Remedies

Texas needs to do several things:

Place a local spending limit on taxing entities
Increases should not exceed the growth in population and inflation
Voters could override the spending limit, but voter participation in that election must be 20-25% or a portion of the voters relative to participation in the last major election
Require minimum voter participation (20-25%) or a portion of the voters relative to participation in the last major election
for a tax increase
for a bond initiative
Provide information on all bond initiative and tax increase voter education material which discloses current taxing entities’ debt
Provides information on the cost of the initiative to a taxpayer over the course of the life of the bond.

Much of these bonds are guaranteed by the state. It is not simply a local issue – local entities were created by the state and legislators have some responsibility to oversee the tax system and the methods local taxing entities employ.

We look forward to working with you in the future as we further explore how to further improve the state tax system and how to keep Texas the Number One state for job creation, for businesses relocating to our state, the top exporting state, the top tort reform state, the state rated first in transparency, and more.