Explosive population growth has encouraged Texas localities to borrow, borrow, and borrow -- and the bill is coming due.
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.
“As Texas has grown, the number of municipalities and other government entities permitted to float debt in taxpayers' name has increased exponentially...”
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, 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 $748 million bond offering, which included funds to erect six new schools in the rapidly growing district. The stadium will open in 2017.
The 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% 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 in rapid growth, and how schools and municipalities manage it is provoking anxiety across Texas. 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 a worried Texas comptroller Susan Combs said 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 -- $8,350 -- to be 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% increase, during the first decade of the new millennium. Texas's population, by contrast, expanded by 4.3 million, or nearly 21%, during that same period.
New York's school enrollment, a key factor in education borrowing, has shrunk by 6% 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% 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%, or $72.3 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.
But some critics point to troubling signs that the debt surge 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, debt more than doubled even in districts with falling enrollment. The cost of servicing new debt rose 125%, 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.
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% 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% of residents submit a petition demanding a vote. Governments are supposed to use the certificates when the need arises to raise money quickly for important projects. Over the past decade, however, localities have issued about 15% of their debt in the form of these certificates.
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.
Houston represents a particularly disturbing case, 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%. 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. 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. In 2015 Moody's downgraded the city's financial outlook to negative, warning that it needed "a sustainable plan to manage its costs."
Retirement costs worsen the fiscal picture. Houston owes a whopping $5.5 billion in unfunded retirement obligations to government workers. Some of the debt comes from an unwise 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.
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 nation, at $3,327 per home. The impact on Texans' wallets is still offset to some degree by the absence of a state income tax. Still, with debt mounting so fast, Texas residents are beginning to wonder if the state can manage the fruits of prosperity without succumbing to the lure of bigger, costlier government.
This piece originally appeared at Investor's Business Daily
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Steven Malanga is the George M. Yeager Fellow at the Manhattan Institute and a senior editor at City Journal.
Adapted from City Journal's special Texas Rising 2016 Issue
This piece originally appeared in Investor's Business Daily