Can a county finance debt?
- Article XI, Section 7 of the Texas Constitution – a county that borrows money is required to establish an interest and sinking fund.
- Texas Government Code Chapter 1251 – bond election provisions.
- Texas Government Code Chapter 1431 – authorizes the issuance of tax notes.
- Texas Local Government Code Chapter 271, Subchapter C – authorizes a county to issue certificates of obligation.
- Texas Local Government Code Chapter 271, Subchapter A – authorizes the issuance of contractual obligations.
- Article III, Section 52 of the Texas Constitution – authorizes counties to issue unlimited tax bonds (subject to a limit of 25 percent of the county’s assessed valuation).
- Article VIII, Section 9 of the Texas Constitution – general provision that limits a county to a tax rate of up to 80¢ per $100 assessed valuation of which the attorney general will allow 40¢ per $100 to be used for debt.
- Additional statutes apply to specific projects such as road bonds, county hospital bonds, and bonds for jails and other buildings.
- Additional authority will permit a county to borrow from the State Infrastructure Bank (SIB Loans) and to enter into lease purchase agreements.
- Because a county is not authorized to go to the bank and take out a loan, it must finance long-term purchases through the issuance of bonds or other authorized obligations.
- A bond is like an IOU. In most instances, the county hires a financial adviser who assists the county in selling the bonds to buyers in the financial market, and a bond counsel to prepare the documents and obtain approval from the attorney general.
- The bond is an agreement between the county and the bondholder, whereby the county receives the money from the bondholder and then agrees to pay the money back, plus interest. The agreement includes the interest rate and the timetable of payments.
- Texas law requires that all bond issues, regardless of the type of bond, be approved by the attorney general’s office. Once approved, the legality of the bond cannot be contested, except for a constitutional challenge.
- General Obligation (GO) Bonds are usually used to pay for major capital projects. The county must conduct an election in order to sell these bonds. These bonds are authorized to fund specific public purposes. GO bond debt is paid by property taxes.
- The 83rd Texas Legislature’s House Bill 637 amended the Texas Election Code to now require counties to include additional information in the order calling a bond election and has added additional posting requirements that must be followed. A bond election order must now include, among other items required by law:
- the proposition language that will appear on the ballot;
- the purpose of the bonds;
- the principal amount of the bonds;
- language stating that taxes sufficient to pay the annual principal of and interest on the bonds may be imposed;
- a statement of the estimated tax rate if the bonds pass;
- the maximum maturity date of the bonds;
- the aggregate amount of outstanding principal and interest on the county’s bonds; and;
- the county’s debt service tax rate.
- In addition, the county will now be required to post a copy of the order calling the bond election at each polling location in the county as well as three public places in the county and on the county website.
- GO bonds fall into two categories.
Unlimited Tax Bonds. This type of bond tells the bondholder that regardless of circumstance (i.e. an unexpected catastrophe), the county will tax whatever amount necessary to pay the money back, subject to the 25 percent assessed valuation limit.
Limited Tax Bonds. Most GO bonds (as well as certificates of obligation, tax notes and contractual obligations) are Limited Tax Bonds. This tells the bondholder that the county must limit the amount of taxes that can be pledged to pay the debt.
- Revenue Bonds tell the bondholder that the money will be paid back based on the revenue generated by the new project. Revenue bonds are not funded by tax money.
- Certificates of Obligation (COs) are bonds that do not require authorization from the voters unless the county receives a petition from 5 percent of the registered voters. However, the county must first authorize the publication of a “Notice of Intention to Issue COs.” COs can be funded by ad valorem taxes, a revenue pledge (as in revenue bonds), or a combination of the two.
- Contractual Obligations can be used to finance personal property, only.
- Anticipation Notes, also known as Tax Notes or Limited Tax Notes, were made available to cities and counties by the Legislature in 1993. Anticipation notes can be secured by pledging either ad valorem taxes or revenue or both.
For detailed information on these types of bonds, please see our full article on public financing beginning on page 12.