The following is an excerpt from The House Research Organization Focus Report No.83-5 released in early August 2013. To view the report in full, go to http://www.hro.house.state.tx.us/pdf/focus/amend83.pdf.
The following is an in-depth look at Prop. 6, along with three other Propositions that affect county government: Prop. 1, Prop. 3, and Prop. 4. For full coverage of all nine Propositions, please go to http://www.hro.house.state.tx.us/pdf/focus/amend83.pdf.
Prop. 6: Creating funds to assist in the financing of priority projects in the state water plan – SJR 1 by Williams (Pitts, Ritter).
Background:
The state water plan is designed to meet water needs during times of drought. Its purpose is to ensure that cities, rural communities, farms, ranches, businesses, and industries have enough water during a repeat of 1950s drought conditions. In Texas, each of 16 regional water-planning groups is responsible for creating a 50-year regional plan and refining it every five years so conditions can be monitored and assumptions reassessed. The Texas Water Development Board (TWDB) uses information from regional plans to develop the state plan, which includes policy recommendations to the Legislature.
The 2012 State Water Plan includes the cost of water management strategies and estimates of state financial assistance required to implement them. Regional water-planning groups recommended water management strategies that would account for another 9 million acre-feet of water (an acre-foot of water is 325,851 gallons) by 2060 if all strategies were implemented, including 562 unique water supply projects. About 34 percent of the water would come from conservation and reuse, about 17 percent from new major reservoirs, about 34 percent from other surface water supplies, and about 15 percent from various other sources.
Among TWDB’s recommendations to the Legislature to facilitate implementation of the 2012 state water plan is the development of a long-term, affordable, and sustainable method to provide financing assistance to implement water supply projects.
Existing state funding for water management strategies within the state water plan relies primarily on general obligation bond issuances that finance loans to local and regional water suppliers. On Nov. 8, 2011, voters approved a constitutional amendment (Prop. 2) authorizing additional general obligation bond authority not to exceed $6 billion at any time. With this authority, the TWDB may issue additional bonds through ongoing bond authority, allowing it to offer access to financing on a long-term basis. Bonds issued by the TWDB are either self-supporting, with debt service that is met through loan repayments, or non-self-supporting, which requires general revenue to assist with debt service payments, as directed by the Legislature through the appropriations process.
Digest:
Prop. 6 would amend the Texas Constitution to create the State Water Implementation Fund for Texas (SWIFT) and the State Water Implementation Revenue Fund for Texas (SWIRFT) as special funds in the state treasury outside the general revenue fund. Money in the funds would be administered, without further appropriation, by the Texas Water Development Board (TWDB) for the purpose of implementing the state water plan, with oversight by the Legislative Budget Board.
Money in the funds and any money appropriated from the Economic Stabilization Fund, also known as the “Rainy Day Fund,” would be dedicated for the purpose of complying with constitutional provisions that exempt constitutionally dedicated funds from counting toward the spending cap.
The SWIFT and the SWIRFT would consist of:
money transferred or deposited by law to the credit of the funds, including money from any source transferred or deposited at the TWDB’s discretion;
the proceeds of any state fee or tax that by statute was dedicated for deposit to the credit of the funds;
any other revenue that the Legislature by statute dedicated for deposit to the credit of the funds; and
investment earnings and interest earned on amounts credited to the funds.
In addition, money would be transferred to the SWIFT under a bond enhancement agreement, and proceeds from the sale of bonds, including revenue bonds, would provide money for the SWIRFT. The SWIRFT also would consist of money disbursed to the fund from the SWIFT.
The Legislature, by general law, could allow the TWDB to enter into bond enhancement agreements to provide additional security for general obligation bonds or revenue bonds, the proceeds of which would be used to finance state water plan projects. The TWDB could also provide direct loans for water projects in the state water plan.
The Legislature, by general law, could allow the TWDB to issue bonds and enter into related credit agreements payable from all revenues available to the SWIRFT.
Any bond enhancement agreements or obligations would have to be payable solely from the SWIFT or from amounts in the SWIRFT and would not be constitutional state debt payable from the general revenue of the state.
The TWDB would be required to set aside amounts sufficient to make payments that became due that fiscal year.
A statement of legislative intent in Prop. 6 holds that the proposed amendment is intended only to establish a basic framework and not to be a comprehensive treatment of the SWIFT or the SWIRFT. The Legislature would have full power to delegate duties, responsibilities, functions, and authority to the TWDB as necessary.
Supporters say:
Prop. 6 would constitutionally create two funds for the implementation of water projects in the state water plan. It would work together with two bills recently enacted by the 83rd Legislature – H.B. 4 by Ritter and H.B. 1025 by Pitts. HB 4, the enabling legislation, contains the mechanics of the funds, including the prioritization of projects that would receive funding. HB 1025 would make the appropriation from the Rainy Day Fund for the initial capitalization of the SWIFT, contingent on voter approval of the proposed amendment.
Prop. 6 would constitutionally create the SWIFT to assist in the financing of priority projects in the state water plan. The SWIFT would serve as a water infrastructure bank to enhance TWDB’s financing capabilities. The fund would serve as a source of revenue for debt service payments in place of general revenue or as security for principal and interest payments on general obligation bonds or revenue bonds to finance or refinance projects included in the state water plan. It also would provide a revolving cash flow mechanism that would recycle money back to the fund to protect the corpus. Money in the fund would be available immediately to provide support for low-interest loans, longer loan repayment terms, incremental repurchase terms for projects in which the state owned an interest, and deferral of loan payments. Prop. 6 also would constitutionally create the SWIRFT to manage revenue bonds issued by the TWDB and supported by the SWIFT.
These funds would be special funds created inside the treasury but outside the general revenue fund, without further appropriation, but with oversight from the Legislative Budget Board. The proposed amendment would ensure that establishing these funds did not create state debt by providing that any bond enhancement agreement or obligation was payable solely from the two funds and would not be constitutional state debt payable from the general revenue of the state. Also, money in the funds would be constitutionally dedicated. Any money appropriated from the Rainy Day Fund also would be dedicated for the purpose of complying with constitutional provisions that exempt constitutionally dedicated funds from counting toward the spending cap.
According to TWDB, critical water shortages will increase during the next 50 years, requiring a long-term, reliable funding source to finance water and wastewater projects. The state water plan has identified projects intended to help avoid catastrophic conditions during a drought. However, rising costs for local water providers, the capital-intensive investment required to implement large-scale projects, and the financial constraints on some communities necessitate a dedicated source of funding to help develop those projects. The capital cost to design, build, or implement the recommended strategies and projects between now and 2060 will be
$53 billion, according to TWDB, and municipal water providers are expected to need nearly $27 billion in state financial assistance to implement these strategies. Any delay in funding would put long-term planning of water projects in jeopardy and increase the overall cost to customers.
Unless the state fully implements its state water plan, 50 percent of Texans by 2060 will lack an adequate supply of water during times of drought. Without an adequate supply of clean, affordable water, the state’s economy and public health would be irrevocably harmed. Water shortages during drought conditions cost Texas businesses and workers billions of dollars in lost income every year. If Texas does not implement the state water plan, those losses could grow to $116 billion annually. Until the state identifies and dedicates a permanent source of revenue to pay for the water infrastructure projects outlined in the state water plan, the future of the state’s water supply will be in jeopardy.
The Rainy Day Fund would provide an ideal source of funding for the initial capitalization of the SWIFT. This investment would seed a revolving fund that could grow with only limited need for further state allocations. A one-time, $2 billion capitalization of the SWIFT could be used in conjunction with the TWDB’s existing $6 billion evergreen bonding authorization to provide a meaningful funding solution for larger Texas water projects and financing for many of Texas’ smaller communities. Without the initial capitalization of
$2 billion from the Rainy Day Fund, revenue would have to be raised elsewhere, such as with a fee or tax.
Providing a funding program for water infrastructure to ensure an adequate water supply would be an appropriate use of the Rainy Day Fund. It was created as a savings account from which the Legislature may appropriate funds in times of emergency, and the state is on the cusp of a drought worse than the 1950s drought of record.
Use of the Rainy Day Fund would not jeopardize the state’s credit rating or ability to handle an emergency. The Rainy Day Fund is expected to reach
$11.8 billion by the end of fiscal 2015, according to the comptroller’s January 2013 Biennial Revenue Estimate. A transfer of $2 billion from the fund would leave a comfortable balance for handling an emergency while preserving the state’s superior credit rating. Given that the boom in the oil and gas sector shows no sign of slowing, any funds appropriated from the Rainy Day Fund would be replenished quickly. In addition, spending down a portion of the fund to support urgently needed water projects would help prevent the eventual spillover of Rainy Day funds into general revenue for spending on less pressing priorities.
Many entities that have the credit rating to finance projects on their own typically are not interested in using state financial assistance that is currently available due to the administrative burden and additional oversight involved. Financing projects through the SWIFT, by contrast, would offer several loan enhancements that would make financial sense to such entities, such as a lower loan rate and a deferral of principal and interest for a specified amount of time. This would encourage development and build-up of projects ahead of the critical need, which would facilitate the timely implementation of the state water plan.
Opponents say:
If Prop. 6 won voter approval, the SWIFT would be capitalized initially by a one-time, $2 billion transfer from the Rainy Day Fund, which would not be an appropriate source of funding. Taking $2 billion out of the fund could result in a credit downgrade and curtail the state’s ability to deal with a revenue shortfall, a natural disaster, or a school finance case decision that required additional state spending on public education. The provision in Prop. 6 that would constitutionally dedicate the money in the funds, including money used to capitalize the funds, would allow the Legislature to circumvent the constitutional spending limit on undedicated funds.
Texas has a Moody’s AAA bond rating, which allows tens of millions of dollars a year in lower borrowing costs for the state. Texas needs to keep sufficient revenue in the Rainy Day Fund, and this large an appropriation out of the fund could put at risk the state’s ability to maintain its AAA bond rating and could imperil what has become a major state asset.
The comptroller estimates that the Rainy Day Fund will reach $11.8 billion by the end of fiscal 2015. However, deposits into the Rainy Day Fund have been historically hard to estimate, and the last seven estimates have been off by an average of 166 percent, with the closest estimate off by 23 percent. The Rainy Day Fund primarily is funded by oil and natural gas production tax revenue. The oil and gas industry is both cyclical and volatile, and it would not be responsible for the state to act in a way that assumes the fund will continue to grow at its current rate.
Funding another water lending program would be unnecessary and an inefficient use of Rainy Day funds because entities needing water infrastructure project funding already have tremendous access to capital. TWDB has several lending programs for water infrastructure through bonding programs that use the state’s superior credit rating to guarantee water debt, enabling TWDB to offer inexpensive financing on a long-term basis. TWDB recently received approval for ongoing general obligation bond authority not to exceed $6 billion at any time. This financing is available even though many entities that are asking for help with projects in the state water plan already have a sufficient credit rating to complete a project without financial assistance from the state. Spending Rainy Day funds for infrastructure projects that already have access to capital would be inappropriate, given that there are several other critical needs in the state with limited funding options.
Prop. 1: Property tax exemption for surviving spouses of certain service members – HJR 62 by C. Turner (Van de Putte).
Background:
Texas Constitution, Art. 8, sec. 1(b) requires that all real and tangible personal property be taxed in proportion to its value unless exempted under the Constitution. Art. 8, sec. 1-b(i), added in 2007, authorizes the Legislature to exempt from property taxes all or part of the value of the residence homestead of a veteran certified as having a service-related disability of 100 percent or as totally disabled. Tax Code, sec. 11.131 fully exempts from property taxes the value of the residence homesteads of 100 percent or totally disabled veterans.
Texas Constitution, Art. 8, sec. 1-b(j) allows the surviving spouse of a 100 percent or totally disabled veteran to inherit the deceased veteran’s property tax exemption if the surviving spouse has not remarried and the property was the residence homestead of the surviving spouse when the disabled veteran died.
Supporters say:
Prop. 1 would allow for spouses of active duty service members who were killed in action to receive a property tax exemption for the total appraised value of the surviving spouse’s residence homestead. Texas is a national leader in honoring the service and sacrifice of veterans and their families – not just with words, but with meaningful assistance. In this spirit, Prop. 1 would provide an exemption for the total appraised value of the surviving spouse’s residence homestead.
Six years ago, Texans voted to amend the Constitution to grant veterans who were rated 100 percent disabled a complete property tax exemption. Last session, the voters extended that exemption to a veteran’s surviving spouse to protect against sudden spikes in property taxes due. The Legislature should extend this same protection to the surviving spouses of military members killed in action.
Prop. 1 would provide real assistance to a surviving spouse who, after the awful shock of losing a husband or wife, must suddenly try to prepare for the future. According to the Texas comptroller, the average Texas homeowner pays about $3,170 a year in property taxes. For many taxpayers, these taxes are due in a lump sum. The proposed amendment would provide real relief to surviving spouses in a time of need.
Under the proposed resolution, a surviving spouse would lose the property tax exemption upon remarriage because the exemption would be designed to help offset the loss of income the service member brought to the marriage. If and when a surviving spouse remarried, the assistance should no longer be needed. Prop. 1 would not provide an incentive against remarriage that skews marriage rates because it would apply only to a small number of surviving spouses.
Because the exemptions would apply to such a small group of people, they would not impose an economic burden on local governments or the state. According to the fiscal note for the enabling legislation, SB 163 by Van de Putte, such exemptions would cost the state only $98,000 during fiscal 2014-15 in providing a total exemption.
Prop. 1 deliberately would not require that the surviving spouse already have a homestead in Texas at the time of the service member’s death. This would allow military families who rent or live in on-base housing to benefit from the exemption if they later became homeowners.
Opponents say:
No one disagrees with granting benefits to the spouses of those who were killed in action, but Prop. 1 would reduce revenue available to local governments. If the Legislature continues to expand the groups of people who are awarded total property tax exemptions, local governments will need to raise property taxes on the groups that remain in order to stay revenue neutral.
Because Prop. 1 would not impose a time limit on the property tax exemption, a surviving spouse in some cases could receive an exemption for several decades, costing local taxing authorities hundreds of thousands of dollars. The time and cost attached to this proposition make it unlike existing inherited exemptions, including the school property tax homestead exemption that may be transferred from one spouse of advancing age to another.
The loss of the exemption upon remarriage also could, for some people, provide an economic incentive against remarrying.
The proposition would not include a value limit. Any property, regardless of value, would be exempted from property taxes as long as the property was the homestead of the surviving spouse who did not remarry. Widows and widowers of limited means are the only ones who need tax relief. Those wealthy enough to afford extravagant homes need no such protection from property taxes.
By adopting Prop. 1, Texas taxpayers might be required to support more than just Texas families because the homestead exemption would apply regardless of whether the property was the residence of the surviving spouse at the time of the service member’s death. This could create an incentive for out-of-state surviving spouses to purchase a homestead in Texas without any obligation to pay property taxes.
Prop. 3: Allowing extension of exemption from inventory taxes for aircraft parts – HJR 133 by Harper-Brown, et al. (Deuell).
Background:
Both the Texas Constitution and state statutes exempt from ad valorem taxation “freeport” property that is located in the state temporarily. Under Texas Constitution, Art. 8, sec. 1-j, to qualify for the exemption from inventory taxes, such goods, wares, merchandise, and other tangible personal property must have been:
acquired in or imported into Texas;
detained for assembly, storage, manufacturing, processing, or fabrication; and
shipped out of Texas no later than 175 days after acquisition or importation.
Tax Code, sec. 11.251 provides the statutory framework for the freeport exemption and establishes processes for discounting such property from tax rolls.
Supporters say:
Prop. 3, in combination with its enabling legislation,
HB 3121 by Harper-Brown, would provide the constitutional authorization necessary to allow a political subdivision to extend the so-called “freeport” exemption from inventory taxes to 730 days (two years) for certain aircraft parts.
This measure, which would be applied entirely at the discretion of local taxing entities, would accommodate the particular nature of the specialized aircraft parts industry. Airplane parts are expensive and, when needed, must be shipped to a customer with haste. However, because requests for special parts are rare, inventory often sits on the shelves prior to sale for longer than in other industries. It is not unusual for airplane parts to sit in a warehouse for 600 days.
Texas is one of a small number of states that assesses a property tax on inventory. Certain Freeport goods that are in the state for no longer than 175 days and that meet other criteria under current law are exempt from this tax. While aircraft parts are granted a Freeport exemption under current law, the maximum period is of insufficient duration to benefit many airplane part manufacturers. For example, Aviall, which is a provider of aircraft parts and related support services located in Irving, is considering opening a second warehouse in Texas or another state. Extending the freeport exemption to two years could be a determining factor in Aviall’s decision about whether to locate their new warehouse in Texas.
The proposed tax exemption has all the major elements often considered by the Legislature in deciding whether to grant similar tax exemptions – it would promote economic development, it would have a proven positive impact, and it would be entirely at the option of the local government granting the exemption. Measuring proposed tax exemptions against these criteria provides a fair and uniform assessment of specific requests for tax relief.
In addition, state education financing formulas ensure that any school district offering an extension would retain adequate funding.
Opponents say:
Prop. 3 would allow a political subdivision to extend a freeport exemption for a specific group selling goods for certain purposes. Singling out one group for a tax exemption, even for a meritorious purpose, raises issues of uniformity in taxation. If the extension were authorized for aircraft parts, similar industries that make specialized parts and accumulate a great deal of idle inventory would be justified in seeking a similar extension. The Legislature would have difficulty giving similar industries a principled explanation as to why they should not be granted the same extension as those in the business of selling aircraft parts.
Prop. 3 and its enabling legislation, HB 3121 by Harper-Brown, would have an unknown fiscal impact on the state by reducing revenue available for education funding, as well as for local governments. The Legislature should not contemplate measures that reduce funds available for public education and other important priorities when it has not maintained funding levels to keep pace with a growing population and needs for services.
Prop. 4: Tax exemption for disabled veterans whose homesteads were donated by a charity – HJR 24 by Perry (Van de Putte).
Background:
Texas Constitution, Art. 8, sec. 1(b) requires that all real and tangible personal property be taxed in proportion to its value unless exempted under the Constitution. Art. 8, sec. 1-b(i), added in 2007, authorizes the Legislature to exempt from property taxes all or part of the value of the residence homestead of a veteran certified as having a service-related disability of 100 percent or as totally disabled. Tax Code, sec. 11.131 fully exempts from property taxes the value of the residence homesteads of 100 percent or totally disabled veterans.
Texas Constitution, Art. 8, sec. 1-b(j) allows the surviving spouse of a 100 percent or totally disabled veteran to inherit the deceased veteran’s property tax exemption if the surviving spouse has not remarried and the property was the residence homestead of the surviving spouse when the disabled veteran died.
Supporters say:
Prop. 4, in conjunction with the enabling legislation, HB 97 by Perry, would help certain disabled veterans injured during their military service to stay in homes that were donated to them by charitable organizations. The service injuries suffered by partially disabled veterans often limit their job opportunities, and the tax liability on a donated home could become an expensive burden. This proposition would help ensure that homes donated by builders and charitable organizations did not become a burden to the recipient because of the property taxes associated with these gifts.
Donated homes are a tangible way to help returning disabled veterans transition to civilian life, and this proposed amendment would allow legislation designed to ensure that veterans could remain in those homes. Disabled veterans who have received homes as charitable gifts also may gain the freedom to pursue an education, find a suitable job, and start a business.
The proposal is tailored to apply only to veterans who were disabled during their military service and who received a home from a charitable organization. This tax exemption would cost local governments very little and, regardless of cost, would be appropriate considering the sacrifices made by these veterans.
Opponents say:
Prop. 4 would place Texas further down the slippery slope of carving out property-tax exemptions for certain favored groups. Singling out one group for a tax exemption, regardless of how deserving that group may be, raises issues of uniformity in taxation and could open the door for continued erosion of the local tax base. If the Legislature continues to expand the groups of people who receive property tax exemptions, local governments will need to collect more tax revenue from the remaining taxpayers in order to raise the same amount of money.H
This article was reprinted with permission from the House Research Organization, a nonpartisan department of the Texas House of Representatives that examines state issues and analyzes legislation being considered by the Texas Legislature. To view the report in full, go to http://www.hro.house.state.tx.us/pdf/focus/amend83.pdf.