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Legislature could stifle bond funding source for Texas cities

Tuesday, March 19, 2013 by Michael Kanin

A bill introduced by Texas State Rep. Jim Pitts (R-Waxahachie) would limit the ways in which municipalities, school districts, counties, and seemingly any other local governmental entity could use Certificates of Obligation. Senator Tommy Williams (R-The Woodlands) is the Senate sponsor of the bill.


Certificates of Obligation are bond notes often used by jurisdictions to purchase capital investments. Because they do not require voter approval, entities such as the City of Austin and Travis County use them to fill infrastructure gaps between major bond elections.


House Bill 14, couched as a stab at increasing fiscal transparency, contains three specific provisions that could affect the way local jurisdictions do business. The first would prevent an entity from issuing certificates for anything that had failed at the ballot box in any of the previous three years. The second would impact its ability to act in bond markets. The third could dramatically reduce the number of petition signatures that it would take to halt a certificate issuance and bring it to a ballot for voter approval.


“(The bill) would limit local government’s ability to use Certificates of Obligation as a funding option,” Austin City Treasurer Art Alfaro told In Fact Daily.


Alfaro noted that, because Certificates of Obligation are secured somewhat differently than voter-approved – or, general obligation – bonds, they can offer jurisdictions lower interest rates. If the bill were signed by Gov. Rick Perry as written, it would, Alfaro says, “limit the city’s ability to get good interest rates.”


There are other implications. After the failure of a six-year $73.8 million affordable housing bond question last November, Council members were left to their own creative devices to find solutions to fill that funding gap. Though politically risky, Certificates of Obligation may have provided one theoretical avenue. House Bill 14 would eliminate that possibility.


Language in the act would prohibit a governing body from authorizing “a certificate to pay a contractual obligation to be incurred if a bond proposition to authorize the issuance of bonds for the same purpose was submitted to the voters during the preceding three years and failed to be approved,” except for “unusual or unforeseen” circumstances.


It would also increase the number of days that a jurisdiction has to run notifications of its intent to issue the certificates from a current 30 to 45. Alfaro called the 45-day number “random” and noted that it would further inhibit Austin’s ability to time the sale of certificate of obligation debt to match the best market for city interests.


Alfaro calls this provision “most problematic.”


On top of all of those changes, the bill would also change how a petition to call for a ballot vote on a set of Certificates of Obligation is calculated. Current standards allow citizens groups to stop an issue of certificates and send the question to voters with a petition signed by 5 percent of the registered voters in the jurisdiction. House Bill 14 could change that figure to 5 percent of the participants in the most recent gubernatorial election – a number that is almost assuredly lower than that of a Presidential poll and considerably lower than the number of registered voters.


Alfaro notes that the city supports the stated purpose of the bill – to increase fiscal transparency. However, he also says that the city already engages in much of what is in Pitts’ bill.


Pitts’ office did not return a request for comment.


Alfaro and city budget officer Ed Van Eenoo traveled to the Capitol Monday to testify as part of a subcommittee hearing for House Bill 14. 


Travis County commissioners also routinely use certificates of obligation. The county authorized more than $25 million in certificates of obligation for fiscal year 2013. After a budget scrub, that figure was reduced to just over $22.5 million.

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