National Debt Is Important, but Local Debt Is, Too
This commentary originally appeared in the Tyler Morning Telegraph on February 11, 2014.
Cities, counties, school districts, and special districts in Texas are drowning in debt.
According to newly-released data from the Texas Bond Review Board (BRB), Texas’ local governments had outstanding debts totaling more than $200 billion in fiscal year 2013. That marks an increase of more than $25 billion over the past five years.
On a per person basis, the amount of local debt that exists is equally concerning. In 2013, Texas’ local debt per capita — ranked as the 2nd highest among the top 10 most populous states in a September 2012 Texas Comptroller report — totaled more than $7,500 per Texan. That figure has also seen significant growth in recent years, when only ten years ago local debt per capita was just over $4,300 per person.
Now for the bad news — Texas taxpayers are actually on the hook for much more than the figures above would suggest. That’s because those figures only refer to the principal amount owed, and don’t account for the interest owed.
To fully service Texas’ local debt, as of fiscal year 2012, taxpayers will need to cough up an estimated $323 billion or roughly $12,500 per Texan. While the fiscal year 2013 estimate has not been reported, total debt service outstanding has also seen a marked increase since 2009, increasing roughly $25 billion over the period.
It’s not an exaggeration to say that Texas’ local governments have gotten themselves into a deep, dark hole and they continue to dig.
Without major changes to the status quo, Texans can be sure that local property taxes will remain necessarily high to help service the debt and that the Lone Star State, which has found enormous success with its state-led limited government approach, could be headed down the same profligate path of places like Detroit and Stockton .
So the key question is: How can we begin reversing course?
First, the Legislature should require a minimum level of local debt transparency at the ballot box so that voters can make informed decisions about the direction of their community. Providing basic financial information — such as the cost of a proposition; the amount of existing debt; and the tax increase or decrease that might result from the proposal’s passage — at the voting booth is a no-brainer.
Second, any governing body that has the power to tax and borrow should be required to create and maintain a website that features its budget, financial statements, and a check register. It’s surprising, and somewhat disheartening, that in today’s day-and-age there are still local governments who operate without some or all of this, but it’s a relatively straightforward fix in the next legislative session.
Next, Texans should demand an end to the use of exotic public financing instruments that enable local governments, and particularly school districts, to get around existing debt limits. One particularly devious device that merits a ban, or at least severe curtailment, are capital appreciation bonds (CABs).
CABs permit local governments to borrow now and defer principal and interest payments until the bond matures, which is oftentimes decades later. According to the Legislative Budget Board, this buy-now, pay-later approach can result in “crippling repayment obligations,” with as much as $10 being owed for every $1 borrowed. Clearly, this kind of borrowing, of which Texas leads the nation, is exacerbating an already difficult debt situation.
Finally, Texans in “home-rule” cities should begin looking at ways to amend their city’s charter to include new or stronger debt limitations. Seeing as one-third of all local debt is incurred by cities, this is a direct and effective way for certain local taxpayers to address the issue of local debt head-on.
In concert, these reforms can help educate and empower Texans on the massive local government debt challenges and reverse course before it’s too late.
James Quintero is Director of the Center for Local Governance with the Texas Public Policy Foundation. Vance Ginn, Ph.D., is policy analyst for the Center for Fiscal Policy at the Texas Public Policy Foundation.