The Kay Bailey Hutchison Center for Energy, Law, and Busines

Brown, Jeremy

English

Texas ScholarWorks

'f': SCHOO fro!~ W. 1 .~~Ii., THE UNIVERSITY OF TEXAS AT AUSTIN , , I ~\ ' ' ' ' \ ' , ) , ' ENERGY CENTER The Center for Global Energy, lnternational Arbitration and Environmental Law UT UT LAW ABOUT RESEARCH AND PROJECTS EVENTS STUDENTS NEWS BLOG '# p Proposition 6 and Local Debt Levels in Texas .1. Jeremy Brown O November 1, 2013 We recently blogged about a Columbia University study showing that there is a correlation between rising water rates and utility debt leve ls. The study found, by way of recap, that utilities across the country have inc reased water rates to pay off nevw' infrastructu re, and - somewhat unexpectedly - the higher rates depressed the demand for the very water that the infrastructure was supposed to provide. Co lumbia is not the fi rst to dra\v this connection. Sharlene Leurig at the Boston-based nonprofit Ceres is probably the leading authority on the subject and has advised a range of investors and util itles on the risk that this debVrate feedback loop poses for traditionally sleepy and secure water infrastructure bonds. This risk is particularly relevant to Texas, which next Tuesday will put Proposition 6 to voters. If successful, the propos ition will appropriate $2 billion fro1n the state's Rainy Day Fund to the new State Water Implementation Fund (SWIFT). The state intends to use SWIFT to kickstart infrastructure projects in the State Water Plan (SWP). Basically , the state est ima1es tha1 it can leverage the in it ial $2 billion capitalization to S27 billion - a little more than half of the $53 billion worth of capita l costs fo r SWP projects The polit ica l subdiv isions sponsoring indiv idua l projects - such as n1 unic ipalit ies, water dist ricts, and river authorities - would have to foot the remaining costs_ The political and business establishments have lined up behind Proposition 6, but certain Tea Party activists and politic ians have criticized it for, among other things , creating more debt. This criticism is not precisely accurate but has an element of truth. Proposition 6 would not, by itse lf, create more debt. It would simply n1ove n1onies that the state has already collected through tax revenues into the SWIFT. To leverage these monies, the agency responsible for SWIFT, the Texas Water Oeve lop1nent Board ([W.DB), 'I.Viii have to issue bonds. These could be general obligation bonds that th e TWDB already has the authority but has not had the reason to issue, or they could be revenue bonds secured by payment streams from the projects that are being provided wit l1 financ ial assistance. To cover their share of project costs, political subdivisions wil l also have to issue bonds. For the most part, these wi ll be revenue bonds repaid through utility charges like rates and connection fees. At least some political subdivisions 1,vill probably also use some sort of general obligation financ ing for some projects. General ob ligation debt is backed by the full faith and credit of the entity that issued it and cou ld affect credit ratings and the funding of other po licy priorities. Revenue bonds are generally secured only by the revenues from the projects they finance. The type of debt that the TWDB and political subdiv isions use to finance SWP projects col1ld thus influence the fisca l implications of that debt So could the political and economic context in which the debt is issued. Since the Great Recession, 1n unicipal f inance has come under its greatest sc rutiny since Ne1,v York City's disco-e ra fl irtation with bankruptcy. Several local governments, Detroi t being the largest, have either fi led for bankruptcy or come breathtakingly close. (See also: Vallejo, Stockton , Los Angeles, San Bernardino, Harrisburg, and Jefferson County.) Pundits and foundations have wa rned of a looming "pension bomb." The Securities and Exchange Commission has stepped up its muni enforcement and sanc tioned Ha rrisburg and South Miami for inadequate disclosure practices. For severa l years, the Obama administration has been exploring the possibility of capping or even eliminating federal income tax exemption on municipal bonds. Last fall, the New York Times quoted Georgetown professor John Buckley as saying "[t]his is the most serious threat to tax-exempt bonds since Roosevelt . in the late 1930s, tried to repeal the exemption ac ross the board." Texas, meanwhile, 1s a state that- for all the bluster of its leaders about its low-tax economic mirac le - depends heavily on public financing. Comptroller Susan Combs has adopted loca l debt as one of her key issues, warning in a Wall Street Journal op-ed that "debt excess lives even in Texas." Combs' off ice has publ ished a se ries of reports on the subjec t. One found that loca l debt leve ls in Texas 1,,ve re $7,983_ By this measure, Texas was the second most locally indebted large-population state, trailing only New York and ahead of the supposed fiscal train-wreck known as Ca lifornia. Althoug h local governrn ents had issued much of this debt to keep pace 1,v ith breakneck economic and demographic growth, statewide loca l debt had increased by more than 120 percent between 2001 and 2011 while population increased only 20 percent. The Texas Municipal League has pinned the blame on unfunded mandates and the failure of th e state to pay its share of infrastructure costs _ The conservative Texas Public Policy Fou ndation has said that "soaring local debt threatens to derail the Texas model." The American Spectator has sounded the same alarm, claiming debt cou ld undermine Uthe Texas boom." Though these critics have pointed disapprovingly (and anecdotally) to expend itures on lavish high school football stadiums, much of the debt risk stems from unfunded pension liabilities that must be paid through general obl igation bonds. Revenue bonds, by contrast, are somewhat insulated from pension fallout since they are struc tured to be repa id from designated fees, often for essential services . That does not mean that water revenue bonds are without risk. In fact, as Columbia and Ceres have shown, issuers, underwriters, analysts and investors may frequently underestimate the risk in water reven ue bonds. But lhe concerns surrounding the municipal market in general should be attributed to all of the individual mun i sectors or offerings. The com ptroller's report found that , as of 201 1, water districts and authorities accounted for about 16 percent of Texas' outstanding local debt. Of that , about 35 percent was tax-supported, with the remainder reven ue-supported. Additionally, between 2001 and 2011, tax-supported debt had grown more quickly than revenue-supported debt. These are, to be sure, aggregate figu res. They reveal statewide patterns but not the fi nancial positions of particular water districts. Still , they hint at the current circumstances, the music that will be playing when SWIFT enters the room. Proposition 6 could compound existing trends by encouraging local governments to take on debt that, but for the state subsidies provided through SWIFT, wou ld be proh ibitively expensive Conversely, SWIFT could ease the burden for local govern ments and save them from having to shoulder the fu ll burden of debt that they would have issued regardless of whether the state came to their assistance _ Bottom line: Local debt levels wi ll be high with or without SWIFT; the exact impact tha1 Proposit ion 6 will have is difficult to predict; but the debt-rate cycle cou ld make many infrastructure projects less cost-effective than the SWP implies. # Prooosition 6 # Texas Leave a Reply Your email address will not be published Required fields are ma rked • Name * Email * Website Comment POST COMMENT Tlie Energy Center blog is a forum for faculty at tl ie University of Texas, leading practitio11ers, law1nakers and otl1er experts to co11tribt1te to tl1e disc11ssio11 of vital law ar1d policy debates i11 tl1e areas of e11ergy, e11viro111nerJtal law, a1id i11ter11ational arbitratio11. Blog posts reflect tlie opi11io11s of t/Je a11tl1ors and not of tlie University of Texas or llie Center for Global Energy, fr1ter11atio11al Arbitratio11 a11d Environme11taf Law_ Popular Tags # Texas water drought energy tracking endangered spec ies natural gas groundwater court cases conservation pollution TCEQ LNG climate change cases 

Proposition 6 and Local Debt Levels in Texas

https://repositories.lib.utexas.edu/bitstream/2152/28170/2/2013_11_01_Proposition_6_and_Local_Debt_Levels_in_Texas.pdf

Proposition 6 and Local Debt Levels in Texas

Abstract

Similar works

Full text

Available Versions

Texas ScholarWorks