New tax cap law may wound Texas cities’ credit ratings
The nation’s three major credit agencies are warning San Antonio and other Texas cities that a new state law capping property taxes likely will strain their finances, possibly leading to a lower credit rating that would cost taxpayers money.
The bill signed into law Wednesday by Gov. Greg Abbott limits how much additional property tax revenue local governments can collect before they must seek voter approval.
Now, property tax collections can increase by up to 8 percent. Voters must approve anything higher than that. Under the new law, which takes effect in 2020, any increase larger than 3.5 percent would trigger a referendum.
Abbott praised Senate Bill 2, saying the Legislature is making “tremendous strides to provide long-awaited relief to Texas homeowners and businesses.”
While many are hopeful a separate law addressing school finance will result in real property tax reform, the credit agencies said SB 2 will hinder local governments’ ability to raise revenue needed to pay for services.
A lower credit rating matters because it means a city has to pay higher interest rates to raise money in the bond market for new roads, recreation centers and other public improvements.
“SB 2 is a big, fundamental shift in terms of how local governments in Texas are going to manage their budgets,” said Ben Gorzell, San Antonio’s chief financial officer.
Moody’s called the law a “credit negative” in a recent analysis.
S&P Global said revenue losses stemming from SB 2 could “create structural gaps in future years.” And Fitch said it expects the law “to negatively impact its assessment of some local governments’ independent revenue raising ability,” one of four key components in determining credit ratings.
“We believe that this constraint, coupled with expanding infrastructure demands, could reduce financial flexibility and stress Texas municipalities’ creditworthiness,” S&P wrote .
San Antonio officials and those from other cities long had expressed concern about the constraints the law would place on their budgets.
An analysis by the city of San Antonio found that had SB 2 been in effect for the past decade, the city would have collected $81 million less in property tax revenue. The owner of an average-value home would have saved $129 in that span, about a dollar a month, the analysis found.
The impact of SB 2 will be lessened to some degree by a rollover provision that gives cities credit for staying under the 3.5 percent revenue cap. For example, if a city’s revenue grew by only 2.5 percent in one year, it could collect 4.5 percent more the following year.
San Antonio now has an AAA rating, the highest possible, from two of the three major agencies — Moody’s and S&P.
Last year, Fitch downgraded San Antonio’s rating from AAA to AA+, citing a charter amendment pushed by the firefighters’ union that gave the organization unilateral authority to declare an impasse in contract negotiations with the city and submit the dispute to binding arbitration.
Before that, San Antonio had maintained an AAA rating for nine consecutive years, the only city of more than 1 million population to accomplish the feat. That record was one of former City Manager Sheryl Sculley’s most significant accomplishments.
Gorzell addressed the City Council on Wednesday, explaining how SB 2 and other legislative actions could force the city to change some of its policies.
With property values on the rise for the past seven years, the city has consistently taken in more property tax revenue year over year without having to increase the tax rate. Property tax bills have gone up steadily, even though the tax rate has stayed the same and occasionally gone down slightly.
Gorzell said those flush years allowed the city to recover from the Great Recession of 2008, when property values fell and revenues plunged. From 2010 to 2014, property tax collections declined by an average of about 1 percent per year.
“We know (SB 2) makes recovery almost intractable when cities come out of a recession,” Mayor Ron Nirenberg said.