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On March 18, the House Committee on Investments and Financial Services Subcommittee on Bond Indebtedness met to take up several bills relating to capital appreciation bonds, the use of proceeds of bonds sold, the annual reporting of debt information, and the procedures and requirements for the issuance of certificates of obligation.

HB 144 (Flynn) – relating to the issuance of certain capital appreciation bonds by political subdivisions
Rep. Flynn laid out HB 144

  • Over 20 districts have over $1 billion in debt – the point of the legislation is not to outlaw CABs
  • CABs are a tool for schools to use, municipalities to use, and transportation to use
  • Transportation was removed from the bill because they have a revenue source
  • The committee substitute removes maturity date from 20 to 25 years in sub – originally it was out at 40 years, clarifies information on web to be provided

Johnny Hill, Fast Growth School Coalition and CFO from Lake Travis

  • 85 districts are eligible to participate in FGSC
  • Lake Travis have grown 35% over last 5 years
  • Opened two new campuses in last year
  • 80% of enrollment growth is in the Fast Growth districts
  • Almost 45% of outstanding debt is in the districts and the two most common debts issued is CAB and CIB
  • CABs are small percentage of portfolio – less than 10% of debt is in CAB
  • Lake Travis is well below 50 cent debt limit and 4% of debt portfolio
  • CABs – refinance debt with CABs and save over $10 million
  • Support 25 scheduled maturity
  • Would like to see reporting on annual basis – not quarterly (author can work with this) 
  • Do not support language that says what it is used for because already on ballot
  • Statute already explicit on how funds can be used so not in favor of the language
  • TEA is responsible for managing fund so not in favor of changing it to LBB (author can work with this)
  • Flynn was concerned about bond money going into administration but will work with witness
  • Flynn asked about bus life
    • About 15 years – they match useful life with payout of debt – author is happy to work with them
  • Flynn just wants to bring common sense to the issue

Keith Bryan, Lubbock Cooper ISD and Fast Growth School Coalition

  • District has doubled in size
  • Recently passed a bond which causes them to hit the 50 cent limit
  • Don’t like CABs or want to use them but since at limit may need them for a period of time
  • Real issue for them is the 50 cent debt limit and it may cause the need to use CABs when they don’t want to
  • Would like to have as much flexibility as possible
  • Support 25 year language
  • Already use 42 portables and may need more if cannot engage in facilities funding
  • State facility funding is not provided anymore so they don’t get that assistance from the state
  • The debt limit is a concern and know chair of Public Education will work on that
  • Flynn says there needs to be transparency and this bill is not an anti-school bill
    • Big issue is debt – federal, state and local government
  • Flynn – what are options without CABS?
    • CIBs is only option for long term debt right now but district was using CABs to keep under 50 cent
    • Other option is to save up on M&O side and try to fund projects but almost impossible in Fast Growth Districts
  • Flynn- What is total equity? How much surplus?
    • $5.4 million in surplus
  • District has 10% or less in CAB

Peggy Venable, Americans for Prosperity

  • Important issue when it comes to transparency
  • California passed legislation to restrict use of CABS
  • Districts will owe $4 in aggregate for every $1 borrowed
  • Some only included principle in totals and not interest in debt – so it needs to match bond review website
  • ISDs are not using bond monies for all purposes approved by taxpayers – Round Rock example
  • At one time DISD was paying monthly storage cost for obsolete computers and could not throw them away because bond debt was not paid off
  • She has spoken to groups in LISD and taxpayers were shocked and had no idea how much they owed in interest – per pupil debt is $28,700 and debt ratio is 6.94% and on the Comptroller website
  • CABs defer paying the interest – so taxpayers are told it is not going to cost any more right now
  • Feels there is a certain amount of disingenuous information being provided
  • Fast Growth school districts should allow children to go to other schools and school choice should be option to help alleviate growing concerns
  • Thinks greater transparency is needed for voters
  • School board members need to know how much we owe in debt – principle + interest
  • Is putting 50 cent cap on essential?
    • Need greater efficiencies in schools when spending grows five time faster than student population
    • There is nothing to constrain education spending
    • Districts build schools and then can’t afford staff and to maintain them

Royhillo Rodriguez, FT and Financial

  • CABs are used for 2 reasons: to re-finance debt and match a debt payment with a revenue flow
  • Interest rates have been favorable for bonds so there is a definite desire to want to use low interest rates
  • Recommend TEA commissioner to be in contact with districts
  • Thinks it’s a good idea to match use of debt with an asset
  • What do districts do if CABs are restricted?
    • Once district at 50 cent test, there are very few recourses
  • Flynn – his district does an outstanding job of bringing people together
  • Flynn – we need transparency

James Quintero, Texas Public Policy Foundation

  • Debt is plaguing the state of Texas
  • $12,500 per capita to cover local debt
  • A contributing factor in this debt growth is CABs
  • There are some legitimate purpose but biggest issuer is school districts
  • From 2003-2012 about 1600 CABs were issued and 1400 were ISDs
  • Many are doing that to get around the 50 cent debt limit – the problem is the appetite for debt
  • When was last time they looked for efficiencies?
  • Using CABs for buses – school districts using INS revenue to fund M&O expenses such as buses and technology
  • Putting a massive burden on taxpayers
  • Would like to see strict prohibitions on CAB like repayment ratio of 4-1

Cobby Caputo, Resident of LISD

  • Ways to find efficiencies and accommodate growth
  • Says per pupil debt is actually $95k in LISD and $1.1 billion in principle
  • My districts reaction to trying to pass legislation was to double down on debt
  • Money was refunded with 100% CABS and large re-payment option
  • District has grown quickly and does not think they can re-finance without significant use of CABs
  • They are planning to re-fund debt and CABs are not callable for next 10 years
  • Not getting ahead of the game but kicking can down the road
  • Running for school board
  • Poster child for problem and “not a lot of good answers for district and what they are going to do”
  • Not up to 50 cent cap yet but there are a lot of solutions to look at besides looking at what they do year after year
  • LISD should not make it 50% of portfolio like they have
  • Flynn reiterates how CABs can be used a tool but need to have a handle on it

HB 114 left pending
 
HB 1378 (Flynn) – Relating to annual financial reporting of debt information.
Flynn laid out HB 1378

Thomas Camby, Associate Executive Director, Texas Association of School Business Officials

  • Neutral on HB 1378
  • There are four reasons schools finance
    • Facility needs for growth
    • Address aging facilities
    • Major repairs of facilities
    • Meet major equipment needs
  • Current enrollment growth of 70-80 thousand students each year
  • Population expected to double by 2050
  • State support of bond principal interest payments come from the debt service fund
    • In FY 04, state aid to subsidize principal interest payments was $745 million
    • In FY 13, it was down to $619 million
    • Districts are building out facilities for growth, but it is on the tax payers dime
    • State aid support went down from 32% to 11%
  • TEA and school districts both publish annual audit reports
    • School districts are very transparent
    • Over half the pages in the TEA report on debt

Johnny Hill, Fast Growth School Coalition and CFO from Lake Travis

  • Against HB 1378
  • Believes transparency is a good thing, but most of the requirements of HB 1378 are already required in the annual financial audit report and is on the TEA website
  • Most school district websites have transparency pages
  • Chair Capriglione says that there have been changes since the testimony in the committee substitute
  • Chair Capriglione also says that Lake Travis ISD does a great job, but not all school districts do, and the public has the right to know this information
  • Hill says the school districts have transparency as a priority already

David Edgar, CFO, Eanes ISD

  • Neutral on HB 1378
  • School districts already offer the same information in audited financial statements
  • Rep. Pickett says some school districts do this well, but not all do
  • Rep. Stephenson thinks that reports should use language that is easy to understand for the public
  • Chair Capriglione asks why there is pushback when legislature wants school districts to do anything with websites
    • Some districts have small or no IT departments
  • Hill wants to avoid redundancy for districts

John Dahill, General Council, Texas Conference of Urban Counties

  • Speaking on substitute for HB 1378
  • Counties are transparent and many already post the necessary information
  • Counties will post what they are asked, but they do not want to post it twice

Howard Cohen, Paige and Harding, LLP

  • Against HB 1378 and substitute
  • Water districts are unique and have three different levels of financial reporting
    • Districts with $250 thousand or more in investments or revenues file an annual audited report
    • Districts below $250 thousand file an unaudited report
    • Districts with no revenues prepare a financial dormancy affidavit
  • The proposed bill and substitute do not distinguish between districts with significant revenue and districts without them
  • Comptroller has robust website and transparency and a lot of the required information is found on this site
  • The cost of creating a website is not substantial, but there are costs associated with meeting regulations on a website for a water district
  • TECQ requires an audit which encompasses everything asked for in HB 1378
  • Chair Capriglione asks about regulations associated with having a website
    • Cohen will provide that information

James Hernandez, Harris County Toll Road Authority

  • Concerns with HB 1378
  • Wealth of financial reporting is already done and is available online
  • Would rather use existing financial statements and post them on whichever site they need to be posted on

Bill Longley, Texas Municipal League

  • Many small cities do not have a website and have limited staff – they need to be protected

Peggy Venable, Americans for Prosperity

  • In favor of bill and offended that local government opposes transparency

Jim Allison, Judges and Commissioners Association of Texas

  • Spoke on committee substitute
  • There are around 50 low or no growth counties without a website
  • Chair Capriglione says it seems like a small requirement to create a website
    • The budgets are very low – some municipalities are “On a shoe string”

Jeff Fields, Texas Public Policy Foundation

  • Supports HB 1378
  • Asks if it is similar to HB 1042 by Rep. Bettencourt
    • The subcommittee is working very closely with Rep. Bettencourt
  • In small cities, these financial reports are too difficult to find
  • Creating a website is cheap
  • With Fields understanding of the bill, the existing audits could be put online, which is not difficult

Rep. Flynn

  • Voters deserve to know this information
  • Exemptions exist for municipalities that do not have resources for websites and IT

HB 1378 is left pending

HB 156 (Larson) relating to the use of proceeds of bonds sold and delivered by a home-rule municipality for a specific purpose

  • Larson laid out the bill
  • When people vote on certain projects in bond elections, the funds are dedicated to the specific projects, but the surplus revenues can be used on other projects
  • Bill will codify that surplus must be spent on intended projects or hold money in debt capacity for future bond elections

Bill Bailey, Resident of San Antonio

  • In Favor of HB 156
  • Bailey keeps close eye on local government
  • In 2007, San Antonio passed a 550 million dollar bond issuance for 151 projects
  • By 2013, there were $59 million left over and all projects were completed
  • The mayor of San Antonio wanted to push a street car line in San Antonio, but this project was never voted on
    • In fact, in 2001 a light rail proposal was voted down
  • Voters should be in charge of where this money goes

Clayton Chandler, City Manager, City of Mansfield

  • Neutral on HB 156
  • Supports transparency but wants to make sure we can continue to use funds on projects similar to projects that were voted on or to retire existing debt

Bill Longley, Texas Municipal League

  • No serious concerns about bill but some confusion
  • Discusses current law relating to bond proceeds and is confused by the direction HB 156 would take
  • Will continue to work closely with Bill Larson

HB 156 left pending

HB 1399 (Goldman) relating to procedures and requirements for the issuance of certificates of obligation

  • Rep. Goldman lays out committee substitute
  • Certificates of Obligation (COs) are used by cities, counties, and hospital districts to issue low interest bonds to pay for capital projects without public elections
  • Some say COs should be used sparingly as they are a debt not approved by the public
  • Since 2005 OC debt has increased 107.4%
  • HB 1399 does not eliminate or substantially impair the issuance of COs, but it gives voters resources to maintain accountability within local government in 3 ways
    • Establishes moratorium on issuing COs for bond projects rejected by voters in the preceding three years
    • Requires issuers to publish intent to issue COs 45 days prior to the day of issuance on their website and in local newspapers (current law requires them to publish intent 30 days prior and only in the local newspaper)
    • Narrows current petition process by requiring current signatures from 4% of voters who voted in most recent gubernatorial election instead of 5% of qualified voters
  • Rep. Stephenson thinks it is too easy to get a CO

Steve Lindsey, Mansfield City Council

  • Opposes HB 1399
  • Places unnecessary limitation on executing city goals and objectives
  • Vague language on official financial governance, additional and unneeded notice provisions, punitive and excessive
  • COs are invaluable to remain competitive in the economy
  • This broad brush legislation will negatively impact cities that have good investment track records
  • Mansfield has A, AA, AA+ bond ratings across the city
  • Chair Capriglione asks if Lindsey would use COs to accomplish something that was voted down
    • If it was in the best interest of the city, he would
  • Chair Capriglione asks why Lindsey would even hold a vote if they will use the COs however they choose
    • Lindsey says it is out of respect for voters
  • At the end of the day, voters get to decide who they do and do not vote for

Brent Newsome, Mansfield City Council

  • Opposes HB 1399
  • The law has worked well and there is no need for change
  • COs keep the city’s credit rating higher
  • Chair Capriglione asks if a city should take on thousands or millions dollars of debt without voter approval
    • COs should be used specifically for purposes like necessary infrastructure, but Mansfield has not had a bond proposal voted down in recent history
  • Chair Capriglione notes that it seems like a way to incur significant debt without voter approval. How much debt has been issued in COs for the city of Mansfield?
    • Does not see the debt as “significant”
    • Not sure how much has been issued

Brian Langley, Assistant City Manager, City of Denton

  • Against HB 1399
  • Appreciates some of the changes made in the substitute
  • Denton provides general government activities as well as self-supporting operations such as electric utility, water utility, and solid waste
  • Self-supporting operations are capital intensive and debt is needed to build and maintain infrastructure
  • Before 2008, Revenue bonds were used, but now COs have smaller interest rates
  • The notice is substantial at 30 days and does not need to be increased
  • Concerned with new information required to be published in notice of intent because it does not distinguish between before mentioned government activities and self-supporting operations
  • Information would conflict with information already reported in official statements of bond issues and credit rating reports and could be confusing for voters
  • Rep. Flynn asks why 45 days is worse than 30
    • It is unnecessary and 30 days has worked well with no petitions
  • Rep. Stephenson asks if COs are ever used for utilities
    • This is primarily how COs are used in Denton
  • Chair Capriglione asks how many meetings the city council has each month – perhaps this is why it is necessary to add 15 days
    • From the time COs are thought of, they take many months to come to fruition

Peter Phyllis, Director of Business Services, City of Mansfield

  • Against HB 1399
  • Cities need efficient access to capital markets
  • Rapidly growing cities such as Mansfield need flexibility
  • Rep. Stephenson says that these cities should be restricted because if somebody makes a mistake without the tax payers consent, the tax payer still gets to pay

John Dahill, General Counsel, Texas Conference of Urban Cities

  • Testifying on Substitute for HB 1399
  • HB 1399 currently says that COs could be issued in response to federal or state court order, but this should be expanded to other state and federal mandates as well
  • COs are necessary for emergency projects

James Hernandez, Harris County Toll Road Authority

  • Supports HB 1399
  • Agrees with the testimony of the Texas Conference of Urban Cities
  • Wants to add distinction between ad valorem tax bonds and revenue bonds in the notice of intent because it could be misleading to voters if you show outstanding total indebtedness that includes bonds which are payable from a dedicated revenue source that has nothing to do with repayment of COs

Clayton Chandler, City Manager, City of Mansfield

  • Testifying against HB 1399
  • Mansfield is growing fast and needs flexibility
  • COs are used for things that absolutely need to be done and should not be more burdensome to issue
  • Voters should not be ignored
  • If the city worries that voters will not vote in favor of something, then they should not hold a vote – the city should go on without asking
  • Chair Capriglione asks if Mansfield has had a bond election that has failed or is there a bond election planned
    • None have failed recently
    • Better to put bonds to a vote only if you know the outcome
  • Mansfield currently has $28 million in COs mostly used for streets

Bill Longley, Texas Municipal League

  • Testifying on HB 1399
  • CO is an added tool for the city
  • COs are efficient and often pay tax payers millions of dollars
  • Revenue bonds have higher interest rates

James Quintero, Texas Public Policy Foundation

  • Supports HB 1399
  • HB 1399 adds transparency and accountability for local debt
  • Texas has a local debt problem
  • Too many COs are used without voter approval
  • This bill does not impair ability to issue debt instruments

Deece Eckstein, Travis County Commissioner Court

  • Supports HB 1399
  • Also wants administrative sanctions from state agency to be trigger for issuing COs like state and federal court orders

Jess Fields, Texas Public Policy Foundation

  • Supports HB 1399
  • COs should only be used in absolute emergencies
  • Even short term expenses like fire trucks and ambulances can be planned out and there are two election days to ask voters
  • Bill only asks for a little bit more transparency

Joe Palmer, Johnson County resident

  • Supports HB 1399
  • Mansfield ISD taxes are very high
  • If voters say no, they should not be overlooked
  • Is happy with three year moratorium as progress, but believes no means no until citizens vote yes

Carlos Higgins, Texas Resident

  • Cities should either accept the vote of no, or go back and do a better job of persuading voters why the debt is necessary
  • Risk of not being re-elected is not enough oversight

Rep. Goldman

  • Happy to discuss bill with any stakeholder
  • Most people don’t know what COs are and there should be more transparency

HB 1399 left pending

Subcommittee adjourned