Bill Analysis
House Bill 114 would amend Subchapter B, Chapter 1201 of the Government Code related to the issuance and approval of public security.
House Bill 114 would define "capital appreciation bond" as a bond that accrues and compounds interest from its date of delivery, the interest on which by its terms is payable only upon maturity or prior redemption.
The bill would prevent a political subdivision to issue capital appreciation bonds that are secured by ad valorem taxes unless the maturity date of the bonds is not later than 25 years after the date of issuance and the governing body of the political subdivision has received a written estimate of the cost of the issuance, including the amount of principal and interest to be paid until maturity, the amount of fees to outside vendors and each financing team member and the projected tax impact of the bonds and how this is calculated. The governing body of the political subdivision would have to determine in writing whether there is any personal or financial relationship between the members of the governing body and any financial adviser, bond counsel, bond underwriter, or other professional associated with the bond issuance.
Additionally, the governing body of the political subdivision would have to prominently post details on the proposed bonds on the subdivision's website, as well as details on the subdivision's outstanding bonded indebtedness at the time of the election. This information would have to be regularly updated.
A determination that there is a personal or financial relationship between members of the governing body and any financial adviser or other financial institution linked to the bond issuance would have to be reported to the Texas Ethics Commission.
House Bill 114 would prevent capital appreciation bonds proceeds from being to purchase items more regularly considered maintenance items, or transportation items, including buses.
Unspent capital bond appreciation proceeds after completion on the program would have to be used for their intended purpose, unless another purpose was approved by voters at an election for that purpose.
Capital appreciation bonds could not exceed 25 percent of the subdivision's total outstanding bonded indebtedness at the time of issuance. The maturity date could not be extended on issued capital appreciation bonds, including through the issuance of refunding bonds that extend the maturity date.
The maturity date could only be extending if the extension would decrease the total amount of projected principal and interest to maturity or if the subdivision is a school district and the maximum legally allowable tax rate for indebtedness has been adopted and the Texas Education Agency certifies in writing that the solvency of the permanent school fund's bond guarantee program would be threatened without extension.
The requirements imposed on political subdivisions to issue capital appreciation bonds would not apply to refunding bonds under Chapter 1207 or for the purpose of financing transportation projects.
Vote Recommendation Notes
According to the Texas Bond Review Board's latest data, local government debt service outstanding rose to $333.1 billion in fiscal year 2014, or the equivalent of nearly $12,500 owed per Texan.
According to the statement of purpose for House Bill 114, school districts have been increasingly relying on capital appreciation bonds to meet immediate development needs but that this "buy-now, pay-later approach often results in crippling repayment obligations, with the repayment costs being greater than the benefits derived from the bond, and that the repayment ratio of these bonds is much higher than that of other types of
bonds."
House Bill 114 would limit the power of the political subdivisions to issue this kind of bonds, by limiting the number of years before these bonds become mature, as well as the use of the proceeds for these bonds.
The bill would also allow for more transparency for taxpayers by requiring that information on the subdivision's indebtedness be posted on the subdivision's website.
House Bill 114 would limit the cost and scope of government. As a result, we support it.
