There’s no debate in Clear Lake Shores that the city’s entrance, marred by vacant buildings and cracked parking lots, should be renovated.
But when city council members tried to pay for the renovation with certificates of obligation — debt without voter approval — residents overwhelmingly opposed the plan. They objected to the city taking on debt during a recession.
In one afternoon, Former Mayor Katherine McIntyre collected enough signatures on a petition to block the city from taking on debt without voter approval, making Clear Lake Shores residents the second group of Galveston County residents to successfully kill plans to issue certificates of obligation. Earlier this year, five Friendswood residents opposed a plan to issue certificates to pay for ballparks, street repairs, drainage improvements, an animal shelter and a records building.
Concerned about a growing national debt, some area residents are scrutinizing the spending habits of their local municipalities and discovering that cities and schools are heavily in debt, much of it in forms — including certificates of obligation — that don’t have to be approved by voters.
But in Texas, state law allows municipalities broad discretion to take on debt without voter approval to pay any “contractual obligation,” including constructing buildings, purchasing land and hiring attorneys or auditors.
Legislative OK
The law governing certificates of obligation hasn’t changed much since Charles Ferguson Herring, an Austin senator, authored Senate Bill 607 in 1971. The bill, which came to be known as the Certificate of Obligation Act, authorized cities and counties to take on debt without voter approval to pay for construction, materials, equipment, land, rights of way and even services, such as attorneys or auditors.
The law required cities and counties to use competitive bidding practices when paying for property or services with certificates of obligation. But even that stipulation could be skirted.
The law allows cities and counties to skip competitive bidding in the case of an emergency or in other situations of urgent or public need.
The goal of the law was to provide municipalities with ways to pay for projects, property and services without having to follow more “cumbersome laws” governing municipal finance, according to the 1971 legislation.
The law passed the House and Senate unanimously during the tumultuous 62nd session — lawmakers were called back to Austin four more times after the regular session that year to redistrict legislative seats — and it was overshadowed by more riveting legislation, including the ratification of a federal law allowing 18 years old to vote and a new tax on mixed beverages.
Herring, the father of certificates of obligation, died in 2004.
But John Boyle, an Irving attorney specializing in municipal finance who was a state legislator in 1971, said certificates of obligation were meant to help cities pay for projects quickly without having to call an election.
“This hasn’t been used to sneak around the voters,” he said.
Projects financed with bonds approved by voters typically are more expensive because cities have to hire bond counsel and pay for an election. Then the bonds, if approved, must be sold on the open market, which could bring a higher interest rate, Texas Municipal League attorney Bennett Sandlin said.
“With a certificate of obligation, you don’t have to sell it on an open market,” he said. “You can literally give the certificate directly to the contractor and promise to pay him back. It cuts out a lot of transaction cost.”
Taxpayers Complain
The taxpayer advocacy group Americans for Prosperity argues that, when cities take on debt without voter approval, city leaders leave residents in the dark about the large amounts of debt saddled on taxpayers’ shoulders.
Director Peggy Venable said people find it shocking when they discover the amount of debt carried by schools, cities and counties.
While the recession was a sharp reminder to Americans of the pitfalls of racking up debt on credit cards, cities and schools in Texas have piled up debt equivalent to $5,700 per every person in the state, Venable said.
She estimated the national debt at $33,000 per person.
In Galveston, the city had $272 million in debt by Aug. 31, 2008, according to the Texas Bond Review Board, a state agency charged with ensuring that debt financing is being used prudently. Galveston’s debt equals $4,782 per person, according to its pre-Hurricane Ike population.
Galveston County is $385 million in debt, or $1,355 per person, while Clear Creek school district has $1.04 billion of debt, or $4,331 per person, according to the board.
“I think it’s very dangerous,” Venable said. “I’m concerned about this debt we’re leaving a future generation that might not be able to enjoy the American dream simply because of debt we’re leaving citizens.”
The state ought to consider curtailing some of the broad powers it gives cities to take on debt without voter approval, Venable said. It’s time to more clearly define the kinds of projects cities can pay for with certificates of obligation, she said.
Addressing Emergencies
After a judge struck down Friendswood’s plan to finance $11 million of projects with certificates of obligation, city officials are struggling to figure out how to address problems they consider emergencies.
“We’re left with all these projects, and we don’t have a way to finance them,” Mayor David Smith said.
Smith said the city’s ballparks are growing increasingly crowded, as is the 30-year-old animal shelter where paint is peeling from the floors and walls and the ceiling tiles are falling down.
City officials also said the city needs a new records center.
City records are stored at a private facility.
Officials also said the city must repair its roads and drainage system.
But critics argued this summer that a 1997 charter amendment prohibited the city from taking on debt without voter approval if it couldn’t pay for the debt from existing revenue streams, except in cases of “emergency or public need.”
Smith said he didn’t think the judge’s ruling prohibited the city from issuing certificates of obligation, but he admitted he would be wary of paying for projects with certificates because of the outcry this summer.
The city could call a bond election, but voters in May struck down the city’s proposed $9.6 million bond package, which would have paid for unspecified parks improvements, the construction of a new library and the conversion of the existing library into a community center.
None of those projects was an emergency, Smith said. The projects the city planned to pay for with certificates of obligation are emergencies, he said.
“Those are issues we’ve got to address,” he said. “And that’s going to be a challenge for council — planning and paying for those things.”
