Senate Finance:  Certificates of Obligation

On September 25, the Senate Finance Committee held a hearing to receive a briefing on local debt issues, with an emphasis on the use of certificates of obligation.  The committee hearing coincided with the comptroller’s release of the report “Your Money and Local Debt.” The report appears to paint an incomplete portrait of debt financing by Texas cities.  (The report’s conclusions are refuted elsewhere in this edition in an article titled “Comptroller Addresses Local Taxes:  Part Two – Property Taxes.”) 

While some at the hearing expressed concern over local debt, one witness’s testimony included a rational explanation of the underlying factors driving the issuance of local debt.  Testimony from the Texas Bond Review Board (BRB) showed that increases in local debt are not as drastic as the raw numbers might suggest when factoring for growth in population and personal income in the state over the last decade.  Further, the BRB pointed out that certificates of obligation make up a very small portion of all debt issued by Texas cities, reinforcing the fact that cities use certificates judiciously and usually only when issuing a general obligation bond or another debt obligation is not a viable alternative.

Click here to view an excerpt of the BRB’s testimony from the hearing.  The BRB charts and data that were provided to the committee are available at:

House Land and Resource Management:  “Pay or Waive”

On September 24, the House Committee on Land and Resource Management held a hearing on whether cities should be subject to a state law known as the Private Real Property Rights Preservation Act (Act).  The Act is designed to protect rural landowners from unnecessary government actions, and most city actions are exempt from it.  It is an example of a “pay or waive” statute that would require a city to either pay a landowner for any alleged reduction in value of his property from any city regulation, or to waive the regulation altogether.  (Of course, nothing in the law provides that if a land use regulation increases a parcel’s value, the owner must compensate the city in any way.)  

Cities are exempt from the law as a matter of good public policy.  As opposed to rural residents, people move to cities with the expectation that their property will be protected for the good of the city as a whole.  Because of that expectation, cities regulate private real property in many ways, such as by zoning and platting, by regulating nuisances, sexually oriented businesses, setbacks, and landscaping requirements, and by adopting building codes.  If the Act is made to apply to cities, those regulatory powers would essentially become useless.  Other states, such as Oregon, that have enacted similar laws have seen devastating results.

Bills filed in every recent legislative session have attempted to make cities subject to the Act.  These bills are championed by “property rights” advocates.  Of course Texans, including city officials, believe in “property rights.”  But the law’s proponents fail to take into account that, for those living and working in close proximity, everyone has property rights, and the stability cities provide is necessary to protect those rights.
At the hearing, a representative of the Texas Landowner’s Council testified under oath that “a TML attorney got up and said to the assembled that a 99-percent reduction in property value should not be considered a taking in Texas.”  That witness must have been misremembering the 2005 hearing to which he was referring.  In fact, under fire from a former state representative who is no longer in office, the TML attorney said nothing of the sort.  Click here to see the actual statement of the Landowner’s Council representative, and the actual testimony of TML staff from 2005.

House State Affairs:  Electric Rate Cases

On October 24, the House Committee on State Affairs held a hearing on the following charge:

Identify inefficiencies in the regulation of public utilities in order to minimize the cost of regulation to consumers.

At the hearing, representatives from Centerpoint Energy and the Texas Public Policy Foundation (TPPF) appeared and testified that cities should not have a role in gas and electric rate cases.  The TPPF representative told the committee that rate case expenses are extremely high, and that those expenses get added on to consumers’ utility bills.  His solution?  Eliminate cities’ original jurisdiction over investor-owned utilities and their ability to be reimbursed for legal and other fees in rate cases. 

The legislature can certainly do that.  But what would be the effect?  Almost certainly the answer would be exponentially higher bills for consumers.  Historically, cities have formed coalitions to represent the collective interests of cities and their citizens before the regulatory agencies.  By forming coalitions, cities have been able to present a strong consumer voice, which has served to reduce the costs that cities and their residents pay for electric and gas service.  In numerous instances, without city participation, rate increases would have gone into effect without any meaningful review of a utility’s application.

City participation in rate cases saves their ratepayers money by refusing to accept a utilities’ rate increase requests at face value.  By participating in rate cases, cities are able to dig into the complex calculations of ratemaking to determine whether a utility has made a reasonable request.  When cities determine that a utility’s request is unreasonable, they present evidence supporting the findings to the PUC or Railroad Commission and recommend reducing the rate increase requested by the utility.  

City coalitions do indeed incur expenses that are ultimately passed on to the consumer, but those expenses tend to be a small fraction of what a utility’s increased rates would have been without municipal scrutiny.

The TPPF representative testified that “[we don’t need cities involved because] there are plenty of folks looking out for the consumer.”  If the legislature removes cities from the ratemaking process, the falsity of that statement will certainly be borne out.  To view the testimony of the TPPF representative, click here.

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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