In November 2013, voters in the Katy Independent School District, which stretches 181 square miles in and around Houston, heatedly debated, and then voted down, a bond offering, the proceeds from which largely would have gone toward the construction of a controversial $70 million football stadium. The intense debate followed the opening, a year earlier, of the most expensive high school stadium in the country, in the Dallas suburb of Allen; that $59.6 million gem sported a high-definition Jumbotron that thrilled local sports fans, though it appalled fiscal watchdogs. Undaunted by the bond offering’s defeat, and intent on not being left behind in a stadium-building boom, Katy school officials came back in 2014 with a proposal for a smaller—though, at $58 million, still-expensive—facility. This time around, voters approved the project as part of a massive $748 million bond offering, which included funds to erect six new schools in the rapidly growing district. The stadium will open in 2017.
The multiyear political battle over the Katy stadium offers a microcosm of a larger issue confronting Texas. Over the last decade, Katy’s enrollment has increased by nearly 26,000 students, a striking 58 percent rise. To provide classroom space for all the new kids, the district has built and opened more than 20 schools and numerous support facilities, a dizzying rate of construction. But Katy is far from alone: the Frisco school district outside Dallas, for instance, claims to be the fastest-expanding in America, with enrollment since 2006 blasting from about 20,000 students to more than 53,000, spurring district plans to open a dozen new schools within the next five years, adding to its current 64. How schools and municipalities manage such lightning-fast expansion is provoking anxiety across Texas, for, as in Katy, localities have been borrowing heavily to finance the construction and have included in the bond deals extravagant amenities, such as the country’s priciest high school athletic facilities.
Even more troubling: as Texas has grown, the number of municipalities and other government entities permitted to float debt in taxpayers’ name has increased exponentially, which makes it tough to determine exactly how much some of these governments owe. What then–Texas comptroller Susan Combs told City Journal in 2013 remains true: “I went to dozens of town hall meetings around the state, and when I asked, not a single member of the public knew just how much people in their towns were on the hook for.”
Though Texas’s state government has a reputation for fiscal moderation, its localities collectively owe about $213 billion, up from $130 billion in 2006. In 2015 alone, the Texas Bond Review Board reports, localities issued nearly $39 billion in new debt, compared with $20 billion a decade ago. The board now estimates the state’s per-capita local debt supported by taxes to be $4,861 per resident. When debt supported by fees and other sources is included, the total rises to $8,350—the second-highest in the nation, trailing only New York’s $10,465 debt per person.
The Texas debt frenzy’s apologists contend that the Lone Star State’s situation differs from those of other heavy-borrowing states like New York, Illinois, and Pennsylvania. New York has managed to amass its record obligations despite nearly stagnant population growth of just 401,000 people, a 2.1 percent increase, during the first decade of the new millennium. Texas’s population, by contrast, expanded by 4.3 million, or nearly 21 percent, during that same period. New York’s school enrollment, a key factor in education borrowing, has shrunk by 6 percent since 2000, meaning about 180,000 fewer students in classrooms. In fast-growing Texas, by contrast, the schools have swelled with 1.1 million additional students, a 30 percent increase, since 2000.
Texas officials have rushed to build the most basic projects needed to accommodate so many newcomers. School-district borrowing accounts for 34 percent, or $72.4 billion, of the local debt—the most of any category. Another major borrower: water districts, which are working to install essential hydration and sewage systems to help transform undeveloped land into new communities before new residents, and their tax dollars, even arrive. The water districts now hold $31.5 billion in debt, behind only the school districts and cities.
But some critics point to troubling signs that the debt surge isn’t just about accommodating new Texans; it is also fueling a massive growth of government. Local debt has been rising at about twice the rate of population growth, plus inflation. The increase in school debt has been particularly alarming. In a 2013 study, the state comptroller’s office found that over the previous ten years, enrollment rose 63 percent in the fastest-growing districts—but debt blew up 138 percent. Worse, debt more than doubled in districts with falling enrollment. The cost of servicing new debt rose 125 percent, more than double the rate of spending growth.
To borrow all this money, Texas localities have resorted to financing techniques typically associated with struggling communities, looking to push costs off into the hazy future. Texas municipalities have made liberal use of so-called capital-appreciation bonds, which let the issuer make no payments to bondholders for years. Such bonds often increase the total amount that a community must pony up over the long term, meaning big bills for future taxpayers. The 37,000-student Leander School District, spread out over 200 square miles in and around Austin, to take one example, has amassed $1.1 billion in bonded debt, much of it in capital-appreciation bonds. Though the local economy has expanded vigorously, ratings agencies downgraded the district’s credit in 2012 because of the forbidding amount of debt that it had piled up and its use of the controversial bonds.
Leander has lots of company. From 2011 through 2015, Texas localities issued $1.7 billion in capital-appreciation bonds, with schools making up the bulk of the borrowing. Though municipalities claimed that the financing technique was essential to help them deal with rapid growth, the Texas legislature passed a bill last year to limit the bonds to 25 percent of a school district’s obligations.
Municipalities have also issued a rising amount of debt through a loophole that enables them to avoid election battles over borrowing. Since the early 1970s, Texas localities have had the right to float debt in certificates of obligation, which don’t require voter approval unless 5 percent of residents submit a petition demanding a vote. Governments are supposed to use the certificates only under special circumstances, such as when the need arises to raise money quickly for important projects. Over the past decade, however, localities have issued about 15 percent of their debt in the form of these certificates.
Some places have made extraordinary use of them. In 2012, the Fort Worth Star-Telegram found that municipalities in Tarrant County had financed $796 million in projects through the certificates over the previous six years. In 2012, the El Paso city council issued $218 million in certificates to finance, without voter approval, a street-repair plan that some officials and residents complained treated areas of the city unfairly.
Texans can wage petitions against these borrowings, but the bond documents are often incomplete, failing to list everything that the money will fund, including dubious uses. Citizens often aren’t even aware that a borrowing is in the offing. In 2012, Comptroller Combs issued a report recommending that Texas law be amended to require municipalities to disclose more about the purpose of proposed certificates of obligation and to give voters more time to mount petitions against them. The reforms have stalled in the legislature.
Yet another cause for alarm is the swift rise in the number of Texas localities with borrowing power. Texas now has more local governments—5,148, according to Census Bureau data—than any state except Illinois. The Lone Star State leads the nation in the number of counties and school districts.
Texas also has the third-highest number of “special districts,” a vaguely defined term for public entities with governing boards, either appointed or elected, that can levy taxes and borrow money. The designation encompasses districts that run junior or community colleges, housing authorities, water and utility operators, and even crime-prevention and emergency-fire districts, which exist in some Texas areas alongside traditional police and fire departments. Between 1991 and 2010, Texas added more than 500 of these districts. Land developers have been particularly aggressive in establishing them, using them to issue speculative, tax-free municipal debt in advance of building the infrastructure to support future communities. In all, the special districts hold $39 billion in debt. On a percentage basis, they’ve been adding debt at the fastest rate among local governments.
The proliferation of special districts has produced complex arrays of overlapping local entities. In her 2012 report, Combs zeroed in on a single block on Houston’s Wertheimer Road, where she estimated that residents were on the hook for $7.4 billion in debt issued by six different localities, including the Harris County Flood Control District, Houston Community College, and the Port of Houston Authority.
Houston represents a particularly disturbing case for Texas, with some critics comparing the city’s debt situation with fiscally ravaged Detroit—a city that successful Houston otherwise doesn’t resemble in the least. Until the recent collapse of energy prices, Houston was a boomtown. At the end of 2014, unemployment in the greater Houston area was just 4 percent. Yet Houston has been accumulating debt and running a structural deficit for more than a decade, balancing its budget through one-shot revenues, including the sale of city assets. The reason: the city’s spending outraces its recurring revenues. A 2012 report by a Houston task force warned that, without reforms, the city could run out of cash in a few years.
A subsequent flood of tax revenues helped Houston avoid that fate, at least temporarily. The city has made little progress in cleaning up its balance sheet, though, and now its economy is slowing because of the global energy-price drop. Over the last year, Houston’s unemployment rate has moved up by more than half a percentage point; and last summer, Moody’s downgraded the city’s financial outlook to negative, warning that it needed “a sustainable plan to manage its costs.” Houston’s total liabilities, including bonded debt, have reached $22 billion. Debt service on Houston’s general-obligation bonds is set to hit nearly $350 million yearly, or 15 percent of the city’s general fund, by 2017. Houston also owes about $9.6 billion in debt incurred by its special taxing districts, such as its Convention and Entertainment District, which is being paid off by taxes dedicated solely to that borrowing—money thus unavailable for other uses, as Houston’s budget gets squeezed.
Retirement costs worsen the picture. Houston owes a whopping $5.6 billion in unfunded retirement obligations to government workers. Some of the debt comes from a hike in pension benefits under Mayor Lee Brown in 2001. As the cost of paying off those promises rose over the last decade, Houston doubled its annual payments into the pension system, which now eat up one-quarter of the city’s general-fund budget. Yet the infusions haven’t kept up with the liabilities.
Now the question of how to solve Houston’s debt problem is dividing the city. In a closely contested 2015 mayoral race, fiscal conservative Bill King, whose campaign focused on slashing spending and instituting a defined-contribution pension plan for new government workers, lost to progressive Democrat Sylvester Turner, who enjoyed heavy backing from government-worker unions but little support from the city’s business community. Many observers worry that higher property taxes are inevitable.
Indeed, one consequence of the local-debt explosion in Texas is the state’s rising taxes on residential real estate—they’re now fifth-highest in the U.S., at $3,327 per home. The impact on Texans’ wallets is still offset somewhat by the absence of a state income tax. Still, with debt mounting so fast, Texas residents are starting to wonder if the state can manage the fruits of prosperity without succumbing to the lure of bigger government.
Top Photo: School districts in Texas have borrowed tens of billions of dollars, some of which have gone to finance controversial building projects, like this $59.6 million high school football stadium in Allen, Texas. (LM Otero/ AP Photo)