Recent news articles have drawn attention to municipal debt financing.  Those articles seem to highlight the widespread lack of understanding about how cities and counties finance public works projects.

For more than four decades, state law has provided cities and counties with two options for issuing long-term debt to finance most public works projects.  With general obligation bonds, a city calls an election for voter approval.  With certificates of obligation, voters can petition for an election.

In the vast majority of cases, city officials choose to seek voter input through a bond election to authorize the issuance of general obligation bonds.  Over the past ten years in Texas, city voters have approved nearly 92 percent of the bonds proposed in 205 elections.

But the law also gives cities and counties the flexibility to issue debt through certificates of obligation on a shorter timeline.  This enables them to take advantage of favorable interest rates or an opportunity to acquire a property, to make emergency repairs after a disaster, or to address a critical public need without having to wait for the next uniform election date on the calendar.  Of all the debt issued by Texas cities in 2011, less than fourteen percent was through certificates of obligation.

With certificates of obligation, voters have the option to petition for an election on whether the certificates should be issued.  The bar was set relatively low for the petition requirements to call an election.  Only five percent of qualified voters need to sign a petition for an election on the issuance of certificates of obligation.  By comparison, at least seven percent of qualified voters have to sign a petition to call an election to roll back a property tax increase in larger cities.  In smaller cities, ten percent must petition for a rollback election.  And, it takes ten percent of qualified voters to petition for an election to reduce or increase a city’s sales tax rate or for an election to create a charter commission to write a new city charter.

In 2007, the legislature amended the law on certificates of obligation to lengthen the notice period, from fourteen days to 30 days, before a city can pass an ordinance to issue certificates.  This provides more time for citizen input and more time to gather signatures for a petition to call an election.

It’s vital that Texas cities maintain this flexibility in financing public improvements because every city has different needs and resources.  The process for issuing debt, by law, has extraordinary levels of transparency and accountability.

The decision on the kind of debt financing to use is a serious one for city officials involving many considerations.  And, like every decision city officials make, the voters will hold them accountable.

TML member cities may use the material herein for any purpose. No other person or entity may reproduce, duplicate, or distribute any part of this document without the written authorization of the Texas Municipal League.

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