AFPF testifies on Local Government Debt
Senate Finance Committee Hearing
Testimony on Local Governments/Taxpayers in Texas
By Peggy Venable, Texas Director, Americans for Prosperity Foundation
September 25, 2012
Local government debt totals over $322 billion in Texas; We are mortgaging our children’s future
While the nation’s eyes are focused on the federal debt clock rolling over $16 trillion, local governments are accumulating debt too.
Few people are following local government debt nationwide which at the end of 2012 is expected to be $1.713 trillion…which is the principal only, not counting interest. (http://www.usgovernmentdebt.us/)
In Texas, local governments are $192,740,000,000 in debt, and a whopping $322,331,957,000 when interest is added. (See attachment #1)
We are leaving our children and grandchildren a legacy of debt. That is not the legacy most of us want to leave future generations.
Americans for Prosperity activists are concerned about the growth in government, particularly local government spending and debt in Texas. I have traveled the state educating citizens on the importance of economic freedom and the alarming drop in the US economic freedom rankings. The U.S. has fallen from #3 in 2000, to #10 in 2009, and as of the latest report from the Fraser Institute issued just this month, the US has dropped to # 18.
One of the key measures of economic freedom is the size of government (other factors are regulation, sound money practices, rule of law and free trade).
When looking at state competitiveness and the state rankings (done by ALEC in the publication Rich State, Poor State), Texas performance ranking is rated #2 in the country and # 16 in economic outlook. (http://www.alec.org/docs/RSPS_5th_Edition.pdf) (See attachments #2, 3 & 4)
One might ask why Texas – the top state for job creation and the #1 state for business relocation – is not rated #1. One factor which is hurting Texas is local government debt. Texas’ debt service as a share of tax revenue is 11.5%, ranking us #45 in the country. That is the lowest ranking Texas received on any of the variables. And we are headed in the wrong direction. (See attachment #5)
Local debt is much greater than state debt in the Lone Star State as we see in the graph below:
In the Lone Star State, debt per capita has increased by 72.2 percent ($3,148) since 2002; the state’s population has increased by 17.9 percent (3.9 million) over the past 10 years.
There are 4,017 property tax entities in Texas. The Texas population has grown by more than 40 percent since 1992. In contrast, local property tax levies jumped by 188 percent between calendar years 1992 and 2010, to $40.28 billion.
There are 1,470 sales tax entities in Texas. Whereas the number of Texas cities, counties and transit authorities that levy sales tax has not increased much in the past two decades. In contrast, special purpose districts that levy sales tax have increased by more than 1,900 percent since 1993. Special purpose districts have accounted for 67 percent of the growth in local entities levying sales tax since 1993, comprising 6 percent of these entities in 2002 and 13.1 percent in 2011.
Local Government Debt Outstanding
As of fiscal-year end 2011 Texas local governments had $192.74 billion in outstanding debt, an increase of $51.35 billion (36.3%) since fiscal 2007. Of that amount 60.7 percent ($116.92 billion) is GO debt to be repaid from local tax collections while the remaining 39.3 percent ($75.82 billion) will be repaid from revenues generated by various projects such as water, sewer and electric utility fees. Since fiscal 2007, tax-supported debt outstanding increased 34.6 percent ($30.05 billion) and revenue debt outstanding increased 39.1 percent ($21.31 billion).
According to the Texas Bond Review Board (BRB), rating agencies consider an overall debt per capita for counties less than $600 to be low and over $1,800 as high; however, many other factors are involved in assessing credit risk, such as population, taxpayer concentration and various economic, administrative and financial factors. Texas has 34 counties with a tax debt per capita greater than $600. (see attachment #6)
According to the BRB, over the past five fiscal years debt outstanding for the 20 largest school districts with debt outstanding grew by an average of 47.2 percent, and daily ADA grew by an average of 12.2 percent. Over that time the ADA for all school districts increased 6.2 percent (Figure 3.4). Debt outstanding for Dallas ISD and San Antonio ISD continued to increase despite average daily attendance (ADA) decreases due to population shifts to the suburbs.
According to the BRB, ten Texas Cities utilize general obligation (GO) and/or revenue CP programs to provide interim financing for infrastructure improvements, additions and extensions. As of August 31, 2011, eight Cities had $1.20 billion in CP outstanding (See attachment #7)
Certificates of Obligation
According to the BRB, during fiscal 2011 local governments issued $1.56 billion in Certificates of Obligation (CO) or approximately 6.3 percent of the total debt issued (Table 1.6). Debt service for COs is paid from ad-valorem taxes and/or revenues and do not require an election unless a valid petition requesting an election is presented.
COs are authorized by the Certificate of Obligation Act of 1971, Subchapter C of Chapter 271 of the Texas Local Government Code and are issued to pay for the construction of a public work; purchase of materials, supplies, equipment, machinery, buildings, land, and rights-of-way; and to pay for professional services such as engineers, architects, attorneys and financial advisors. (see attachment #8)
What is driving local government debt? Here is my opinion – after having studied this issue for a number of years:
- First, local officials can count on having left office, often moving to greener pastures in state or federal offices, before the bill comes due. There is little accountability as local governments can buy now and taxpayers pay later;
- Second, 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”; and
- Third, most taxpayers are unaware of how much debt local taxing entities are carrying.
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 $322 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, one dollar 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 health coverage. (See attachment #9)
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. Government-debt is a burden on future taxpayers. So children in grade school will graduate with part of that tax burden on their shoulders. It diminishes their opportunity to pursue the American Dream.
According to the Texas Bond Review Board, Texas ranks only behind California in local debt and only behind New York in per capita local government debt.
The trend is troubling, as today’s debt becomes tomorrow’s tax burden, a burden our children and grandchildren will inherit.
- Include current debt plus interest in all material regarding proposed bond initiatives.
- Estimated interest should also be calculated and provided in all of the bond material
- Require a threshold of voter participation for bond initiative elections.
- Businesses and individuals who provide financial support to pro-bond initiative committees and campaigns should not be allowed to bid on the project should the bond package pass.
- All bond elections should be on uniform election dates.
- ISD’s should not be allowed to open polling places for PTA meetings, football games or school functions.
- Bond money should not be used for purposes other than those stated in the bond election in which voters approved the bond.
This is a local control issue and the local control needs to be put back in the hands of the citizens and the taxpayers. Armed with more information, voters can make better informed decisions.