KEY CONCEPT: Public Finance Options
KEY QUESTION: Can a county finance debt?
MAIN REFERENCE POINTS:
- 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 cents per $100 assessed valuation of which the attorney general will allow 40 cents per $100 to be used for debt.
- Additional statutes apply to specific projects such as road bonds, county hospital bonds, public improvement districts, 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.
- Texas Local Government Code Chapter 372 – authorizes counties to issue assessment revenue bonds to finance public improvements that benefit public improvement districts.
- These county bonds and other obligations are typically issued as tax exempt obligations that can be traded publicly by bondholders, and they create additional federal tax and securities responsibilities for the county.
- 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 government 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. If a GO bond election is not approved by the voters, the county may be prohibited from issuing other types of debt for the same project for three years.
- A bond election order must 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 is 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.
- Texas counties must prepare and publish an annual report on the county’s bond or other debt obligations. The requirements for this report are stated in Section 140.008 of the Texas Local Government Code. The annual report must set out detailed information about the county’s debt obligations on the county’s website along with contact information including the county’s physical address, mailing address, main telephone number, and an email address.
8. 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 is subject to the 80 cents per $100 valuation limit under Article VIII, Section 9 of the Texas Constitution on 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.” The notice, to be published twice in consecutive weeks on the same day, has to identify the projects to be financed; the initial publication must be in a local newspaper of record at least 45 days prior to the date of sale of the COs. The notice must now also include certain information on the outstanding debt obligations of the county and must now also be posted on the county’s website.
- Statutes limit the use of COs to pay for construction of a public work; pay for purchase of materials, supplies, equipment, machinery, buildings, lands, and rights of way for the issuer’s authorized needs and purposes; and pay for professional services such as engineers, architects, attorneys, and financial advisers. COs can be funded by ad valorem taxes, a revenue pledge (as in revenue bonds), or a combination of the two. COs cannot be issued for a project which the voters have rejected at a bond election within the preceding three years. Like GO Bonds, COs can be issued for terms of up to 40 years.
- A county may not issue bonds that have a maturity date that is longer than 120 percent of the useful life of the capital improvements being acquired or constructed with the bond proceeds.
- 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 ad valorem taxes, revenues, or a combination of taxes and revenues. Anticipation Notes do not require an election. The maximum maturity of a note cannot exceed seven years.
- As political subdivisions, the interest paid by counties on bonds and other debt obligations may be eligible to be treated as exempt from federal income tax to the bondholder. Because of this treatment, counties typically obtain more favorable interest rates on their bonds which reduces the cost and burden to the county’s taxpayers.
- In order to be eligible for tax exempt treatment, counties must comply with rigorous and sometimes complicated Internal Revenue Service rules which limit the purpose for which and time period in which the bond proceeds may be utilized and govern the investment of the bond funds.
- If a county’s bonds are marketed to the general public, the county must also comply with certain federal securities requirements administered by the Securities and Exchange Commission concerning the disclosure of annual county financial information while the bonds are outstanding.
- The county’s financial adviser and bond counsel will work closely with the county to explain these obligations to the Commissioners Court and to assist the county in complying with these federal requirements.
- For obligations that are repaid with taxes, as opposed to non-tax revenue, the taxes used for repayment come from either the county’s operations and maintenance taxes or from its interest and sinking fund, or “I&S” taxes. The category of taxes used for repayment depends on the type of project being financed, and the applicable statutory definitions are often the subject of biennial legislation. Counties should consult with their bond counsel or financial advisor to determine the appropriate source of debt repayment.
Gregory Miller, bond counsel with Bickerstaff Heath Delgado Acosta LLP, assisted with this article.