The Dallas Morning News

Stop abuse of anticipati­on notes

Legislatur­e must modify code to ensure debt instrument­s don’t fund projects voters rejected

- By JOHN W. DIAMOND John W. Diamond is the director of the Center for Public Finance at Rice University’s Baker Institute for Public Policy. He wrote this column for The Dallas Morning News.

In November 2020, Amarillo voters rejected a plan to update and expand an aging convention center at a cost of $275 million. Some months later, the city government used a debt instrument, known as anticipati­on notes, to build the complex and, therefore, to overturn the will of the voters. A lawsuit prevented that.

Reducing property taxes, implementi­ng school finance reforms and increasing border security are issues that the 2023 Texas Legislatur­e needs to address. But one crucial issue that Texas policymake­rs must tackle in this session is the potential misuse and abuse of anticipati­on notes — shortterm debt securities issued by a state or local government to raise money for public projects.

In Texas, local government­s can issue several different types of debt instrument­s including general obligation bonds, revenue bonds, certificat­es of obligation and anticipati­on notes (also referred to as tax notes). General obligation bonds are subject to voter approval and backed by property tax revenue. Revenue bonds are similar to these bonds except they are backed by project revenues, such as toll road collection­s.

Certificat­es of obligation are backed by either taxes or other revenues but cannot be used to fund a project that voters rejected in the preceding three years — a restrictio­n added in 2015 by HB 1378 and for the same reason we need to restrict the use of anticipati­on notes.

Anticipati­on notes, however, are different from these other debt instrument­s in several key ways. They are short-term notes that are backed by property taxes or other revenue, but they do not require voter approval and must mature within seven years.

Formally codified into law in 1993 by the Texas Legislatur­e, anticipati­on notes are useful for funding capital expenditur­es such as city vehicle purchases or initial start-up costs for larger constructi­on projects. But unlike certificat­es of obligation, they have not been restricted from funding projects that failed to previously get voter approval. Thus, taxpayers are at risk of having their voices ignored by misguided politician­s.

Take, for example, the events in Amarillo:

The proposal to expand the convention center was soundly rejected, with 61% of voters against the plan. But then, on June 21, 2021, the City Council of Amarillo voted to enter into an agreement with Garfield Public/private LLC for predevelop­ment services.

“I think we are in an explorator­y phase, wanting to know what are the options? What are the different ways we pay for it and not just landing on the property taxpayers. That’s really what I see as a focus of this next step,” Mayor Ginger Nelson said.

But the facts tell a different story, one in which some city officials schemed to find a way to overturn the will of the voters. On May 5, the Tax Increment Reinvestme­nt Zone No. 1 board approved an amendment to include part of the Civic Center Complex into the TIRZ No. 1 project plan. The minutes of the meeting state the following:

“Mr. Freeman stated that there is a minor update to the plan but doesn’t affect the TIRZ in any of its financing. It is a mechanism for City Council to have flexibilit­y in the Civic Center discussion­s. The City hired Garfield Public Private to study financial feasibilit­y and private financing options and are now wrapping up their report. One of their suggestion­s was to include it in the downtown TIRZ plan so the City can qualify for different financial options. It is proposed to add a bullet point on page 21 of the plan that states, ‘Expansion and renovation, including the addition of an arena to the Amarillo Civic Center Complex, as well as improvemen­ts to the Amarillo Santa Fe Depot Property. It is not anticipate­d for the costs of these public improvemen­ts to be financed with TIRZ revenues.’ ”

The Amarillo City Council held meetings on May 10 and May 24, which led to the approval of an ordinance that included the civic center project in the Tax Increment Reinvestme­nt Zone. In addition, at the May 24 council meeting, another ordinance — authorizin­g the issuance of $260.5 million in anticipati­on notes to fund the civic center expansion — was approved. The largest anticipati­on note package prior to that was $60 million.

A concerned taxpayer filed a lawsuit against the city of Amarillo, and the case was heard in the 320th District Court before Judge William C. Sowder, who was assigned from Lubbock.

The court ultimately found that the city of Amarillo failed to properly notify the public about various details related to the use of anticipati­on notes. The findings issued by the court, in that case, stated in part that the action taken to update the Tax Increment Reinvestme­nt Zone “was done in furtheranc­e of a plan by the city to ultimately issue tax anticipati­on notes with the intent to do so with as little notice and discussion as possible.”

This step in the plan was essential to allowing the use of anticipati­on notes to fund the project because it allowed the debt to be characteri­zed as interest and sinking debt that could be refinanced by longerterm debt instrument­s without voter approval. If the debt was not refinanced, then property taxes would have to almost double to fund the repayment of the shorter-term anticipati­on notes.

This should serve as a warning to state policymake­rs that Texas Government Code Chapter 1431, the code allowing the use of anticipati­on notes, needs to be modified to protect taxpayers and hold public officials accountabl­e to the will of voters. One way to accomplish this is to implement a three-year waiting period before anticipati­on notes can be used to fund a project that was previously rejected by voters, similar to the rules for certificat­es of obligation. In addition, the legislated language could be changed so that an ordinance adopting anticipati­on notes also imposes the taxes to be used to repay the debt. This is an easy political victory for state lawmakers and Texas taxpayers.

 ?? Brandon Bell/getty Images ?? Texas Government Code Chapter 1431, the code allowing the use of anticipati­on notes, needs to be modified to protect taxpayers and hold public officials accountabl­e to the will of voters, writes John W. Diamond.
Brandon Bell/getty Images Texas Government Code Chapter 1431, the code allowing the use of anticipati­on notes, needs to be modified to protect taxpayers and hold public officials accountabl­e to the will of voters, writes John W. Diamond.

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