Part I of TCCRI's recently published State Budget & Taxation Task Force Report provided an overview of the fiscal condition of the state and suggested several reforms to control government spending. What follows is an excerpt from the Report on that topic.
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Article VIII, Section 22 of the Texas Constitution, provides that, “In no biennium shall the rate of growth of appropriations from state tax revenues not dedicated by this constitution exceed the estimated rate of growth of the state's economy.”[i]
The constitution grants the Legislature authority to provide statutory guidance to facilitate implementation of the spending limitation. Under this guidance, the rate of growth of the state’s economy is calculated by the Legislative Budget Board (LBB) by “dividing the estimated Texas total personal income[1] for the next biennium by the estimated Texas total personal income for the current biennium.”[ii]
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Texas' current constitutional spending limit applies only to certain aspects of state spending; it does not impose any limit on local spending. The arguments for capping state spending by reference to population growth and inflation which are discussed below apply with equal force to local government spending.
An indication that spending at the local level in Texas has become problematic and that local governments are living beyond their means is the growing aggregate debt burden of local governments in Texas.
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[A]t the end of fiscal year 2007, the total debt held by Texas local governments was $141.4 billion. Over the ensuing 15-year period, local governments more than doubled that, increasing their debt by a net of $143 billion. That increase alone is vastly greater than the state’s total outstanding debt of $64.4 billion as of August 31, 2022.[iii] This substantial increase in local government debt is striking because Texas’s economy experienced solid growth of 4.73 percent annually from July 1, 2007 to July 1, 2022.[iv] Despite this growth, local governments still felt compelled to borrow to finance their spending.
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The excessive borrowing of local governments in Texas is especially concerning given the growth of property taxes in Texas in recent years. While borrowing may allow local governments to temporarily prevent property taxes from rising at an even greater rate, paying down principal of many billions of dollars in addition to the interest on that amount inexorably puts upward pressure on property taxes, which are easily the most significant revenue source for local bond repayment. The Bond Review Board’s 2022 annual report indicated that $186.7 billion of the $284.2 in outstanding local debt is scheduled to be paid back with tax revenue (the remainder is attributable to alternatives such as revenue bonds, which are repaid with revenue generated from projects, such as water and utility fees).[v] As noted elsewhere in this Task Force Report, the Legislature passed significant property tax relief in the 86th Session, which slowed the rate of growth of maintenance and operations (M&O) property taxes imposed by local governments. However, growing local debt is still a concern because much of it is repaid through interest and sinking (I&S) property taxes, not M&O property taxes.
Implementing a limit on spending by local governments could be accomplished by a simple statutory change. Recognizing the threat of excessive spending by local governments, Senate Bill 18 (85S1, 2017) proposed to limit local government spending by reference to population growth and inflation. Under the bill, a local government could exceed its spending limit only if the voters approved the excess spending or if the governor declared the area governed by the local government a disaster area. Importantly, the spending limit would not have applied to funds raised by voter-approved bonds, or to a gift, donation, or grant to the local government. Although it was not enacted into law, the bill struck the correct balance between fiscal prudence and flexibility.
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[T]he Legislature should seek [an] amendment to the constitution: imposing a limit on the ability of local governments to take on debt.
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A limit on the debt issued by any local government entity could be phrased in terms of the taxable value of property within the local government entity’s boundaries. For example, the Washington constitution imposes a cap on tax-supported (i.e., payable from property taxes), non-voter-approved debt equal to 1.5 percent of taxable values. If three-fifths of voters approve, the limit on total debt is increased to 5 percent of taxable values. Cities and school districts are permitted to issue debt of up to 10 percent of taxable values in certain circumstances.[vi] Notably, these constitutional caps in Washington are often supplemented by stricter statutory caps.[vii]
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Policy Recommendation: Limit local spending based on population and inflation
The Legislature should adopt a joint resolution that, if approved by voters, would limit the rate of increase in annual spending by a local unit to population plus inflation growth. Exceptions would be made for disaster situations and for proceeds from voter-approved bonds that comply with the policy recommendation immediately below. If adopting a joint resolution is not feasible, then consider a statutory cap, as in Senate Bill 18 (85S1).
Policy Recommendation: Limit local government debt based on property value
The Legislature should adopt a joint resolution that, if approved by voters, would prohibit local governments in Texas from issuing tax-supported debt in an amount that exceeds a certain percentage of the taxable value of property within their boundaries. Exceptions could be made for disasters, for grandfathering, and for bonds approved by two-thirds of local voters. In addition, school districts could be permitted to carry a greater debt load than other local government units.
You can read this and the rest of the report here.
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Notes: [1] The Legislative Budget Board relies on the U.S. Bureau of Economic Analysis’ definition of “personal income”, which consists of “the income that…residents get from paychecks, employer-provided supplements such as insurance, business ownership, rental property, Social Security and other government benefits, interest, and dividends,” but not capital gains. See https://www.bea.gov/resources/learning-center/what-to-know-income-saving.
[i] Texas Const. Article VIII, Section 22 (Emphasis added). [ii] Section 316.002(b), Government Code. [iii] Texas Bond Review Board, Annual Report for 2022 (December 2022), available at http://www.brb.state.tx.us/pub/bfo/AR/AR2021.pdf (p. iv). [iv] Data from the Federal Reserve Board of St. Louis indicates that from 2007 to 2021, Texas’ gross state product grew at a rate of 4.73 percent annually. See https://fred.stlouisfed.org/series/TXNQGSP [v] Id. at p. iii. [vi] Article 8, Section6, Washington constitution, https://leg.wa.gov/CodeReviser/pages/waconstitution.aspx. [vii] Washington State Department of Commerce, Local Debt Limitations Primer, https://www.commerce.wa.gov/about-us/research-services/bond-users-clearinghouse/local-debt-limitations-primer/ (last visited November 30, 2022).