Texas legislature considers further limitations on local government debt

The 88^th Texas Legislature convened on January 10, 2023 and will adjourn on May 29, 2023 (the 88^th Regular Session). As of the bill filing deadline of March 10, 2023, a record number of bills and joint resolutions had been filed: 8,153. Many of these bills, if passed, will have a direct impact on public finance in Texas. This article focuses on bills filed during the 88^th Regular Session impacting an issuer's ability to issue Certificates of Obligation and Tax Anticipation Notes.

Proposed legislation on COs and tax notes

Eight bills have been filed in the 88^th Regular Session that would impact the Certificate of Obligation Act (Subchapter C, Chapter 271, as amended, Texas Local Government Code, the CO Act) and an issuers ability to issue COs and two bills have been filed that would impact an issuer's ability to issue tax notes. 

Bills impacting the CO Act include HB 3002, which would repeal the CO Act in its entirety. HB 1489 and companion bill SB 2490 would add a definition for "public work" which provides for a very limited list of enumerated projects, remove certain currently authorized projects (materials, supplies, equipment, machinery, buildings, land, rights of way or contractual obligations for professional services), reduce the term from 40 years to 30 years, increase the three year prohibition on issuance in the event of a failed bond election to five years and reduce the petition requirement from 5 percent of the registered voters to 2 percent, among other changes. HB 4082 would add a definition for "public work" which provides for an enumerated list of projects, but explicitly excludes certain projects (semi-professional or professional sports, stadia, arenas, civic centers, convention centers, hotels or coliseums), and assigns this same definition of "public work" to tax notes. HB 3001 would swap out "public work" with "designated infrastructure," added to Chapter 26 of the Tax Code by HB 1869 in the 87^th Legislature, which provides for an enumerated list of projects. HB 4808, SB 1810 and SB 2035 would each increase the three year prohibition on issuance in the event of a failed bond election to five years.

Bills impacting tax notes include, as mentioned above, HB 4082, which would add a definition for "public work" which provides for an enumerated list of projects, but explicitly excludes certain projects (semi-professional or professional sports, stadia, arenas, civic centers, convention centers, hotels or coliseums). SB 1810 would add a five year prohibition on issuance in the event of a failed bond election (similar to COs), add a limitation on the total amount of tax notes that can be outstanding, and add a petition requirement (similar to COs). 

Other recent legislative sessions initiatives toward COs and tax notes

The focus on COs is not new. Proposed legislation being considered during the 88^th Regular Session is a continuation of measures passed in recent legislative sessions, however, this proposed legislation and focus appears to be at an elevated level that could impact issuers much more significantly than previous legislation.

The 84^th Texas Legislature (2015), 86^th Texas Legislature (2019) and the 87^th Texas Legislature (2021) included similar bills aimed at an issuer's ability to issue COs and tax notes. House Bill 1378, Act of the 84^th Texas Legislature (HB 477), amended the CO Act by precluding the issuance of COs for the same purpose as a failed bond proposition within the last three years. House Bill 477, Act of the 86^th Texas Legislature (HB 477), amended the CO Act by increasing the petition period from 30 days to 45 days and providing for additional financial transparency on the notice of intention that is published in a newspaper and posted in the issuer's website for public review. House Bill 1869, Act of the 87^th Texas Legislature (HB 1869), amended Chapter 26, as amended, Texas Tax Code by changing the definition of "Debt" for purposes of calculating an issuer's tax rate. While HB 1869 did not limit an issuer's ability to issue COs under the CO Act or tax notes, the intended result was to force the financing of certain projects with proceeds of COs or tax notes that do not meet the definition of "Designated Infrastructure" over to the maintenance and operations (M&O) side of the tax rate calculation (as opposed to the interest and sinking (I&S) fund side). Including the debt service on the M&O side of the tax rate calculation could result in a tax rate that exceeds the voter-approval tax rate, which would require the city to conduct an election on the tax rate. It is worth noting that HB 1869, as introduced during the 87^th Texas Legislature, would have forced all unvoted debt over to the M&O side.

Impact of proposed legislation on needed infrastructure

COs and tax notes are crucial financing tools available to issuers to address their annual plans of finance and projects that are on an expedited timetable and need streamlined financing. COs are also crucial tools available to issuers placing debt with the Texas Water Development Board. If legislation aimed at further limiting an issuer's ability to issue COs and tax notes is passed, especially HB 3002, HB 1489 and SB 2490, issuers would be significantly impacted and would be limited in how they address the significant growth that Texas is facing today, as well as addressing aging infrastructure. Without these financing tools, issuers would have to look to bond elections, which is a much more time consuming (and expensive) process. 

Next steps

The deadline for filing bills during the 88^th Regular Session was March 10, 2023. Bills filed are starting to advance through the legislative process, including being advanced to various committees for public hearing. The status for any particular bill can be tracked on the Legislative Reference Library of Texas website. The outcome for any particular bill considered during the 88^th Regular Session will be known as of May 29, 2023, however, the Governor may call one or more special sessions thereafter. Issuers should monitor the proposed bills as they progress and take shape during the 88^th Regular Session and inform their representatives and constituents of the impact that passage of such anti-debt bills may have on the issuer. More specifically, how would further limitations on an issuer's ability to issue COs and tax notes impact an issuer's options to address significant growth in their jurisdiction, which a lot of Texas issuers have seen over the past several years and continue to see currently?

Please reach out to the Norton Rose Fulbright US LLP Public Finance team to discuss the anti-debt bills and any other public finance bill that has been filed during the 88^th Regular Session.