The Ayes of Texas

Referendums held in special districts permit multimillion-dollar bonds to be issued based on the casting of a single vote.
August 2001
John E. Petersen
By John E. Petersen  |  Columnist
John E. Petersen was GOVERNING's Public Finance columnist. He was a Professor of Public Policy and Finance at the George Mason School of Public Policy.

Voting has iconic status in the United States: It is fundamental to democratic decision making. But it can be abused, especially when it comes to disposing of public decisions through referendum, where the voting process can be misapplied or treated with cynicism. Such a misapplication appears to be occurring in Texas, with considerable implications for local debt finances.

Texas is embroiled in a controversy over the legality of a referendum requirement that means hundreds of millions of dollars of special district bonds can be issued based on the casting of a single vote. The uproar is not so much an illustration of the hypocrisy of the voting mechanism as it is an example of what happens when regularly elected officials avoid responsibility for development in their jurisdictions.

Here's how the system now works in Texas: A developer has a large parcel of vacant land to develop. Any bonds issued to pay for infrastructure on the site must win a referendum. But there are no voters. So the developer (or the host government) plops a crony on the site for a few days to establish residency. A special election is held, and as a result of the vote of the one "resident," the special district is now empowered to sell tax-secured bonds to make improvements on the property.

Development districts have been springing up in Texas like bluebonnets after an April rain. Some 1,600 community development and special districts have been formed and have sold $4 billion in debt. Over the years, the state legislature has invented several types of special districts to meet emerging needs for water, sewer and roads in its urbanizing rural counties.

Most of the special district bonding authority has been used to finance water and road systems in conjunction with developers creating building lots. The improvements in developer-owned land are financed by bonds that are to be paid off from special taxes collected from future homeowners and businesses in the district. These special taxes are usually in the form of added property taxes.

Over the past year, Texas Attorney General Jim Cornyn and several Texas lawmakers have become worried that the loosely drawn referendum requirements used to set up some of the special districts permit those districts to issue large amounts of highly speculative bonds. If the planned developments don't work out--if the bonds are sold and the facilities are put in place and new residents don't show up--the bonds can default. That happened in Texas, Colorado and Nebraska in the 1980s, when several of the Municipal Utility Districts got too far out in front of the demand for new housing.

Fuel has been added to the 2001 bond fire by an insightful series that ran this past June in the Dallas Morning News. The series pointed out the outrageous devices used to get some special district bond issues through the referendum process. In one example, a family of three voted to permit the issuance of $270 million in bonds, a larger issue than ever sold by the city of Dallas. Free rent (and sometimes pay) to oversee the vacant acres were provided to individuals who stayed long enough to establish residency and vote in the bond election.

Before waxing "holier than thou" about this miscarriage of the referendum requirement, let's not forget that special taxing districts are a useful tool if applied properly. The Texas muddle appears to be more a matter of letting the general governments--namely the counties- -off the hook in terms of taking responsibility for making development decisions and placing proper limits on the level of taxation and the size and timing of bond issuances.

Other states control special districts differently. They acknowledge that the device is useful in managing the pace of development and making it pay for itself. They also know that these devices work best when carried out by competent, well-financed developers with fiscally prudent projects.

Several common-sense basics would protect the public interest in a special-district debt issuance. There should be disclosure of liabilities to new homeowners and caps on the maximum level of taxes or assessments. New facilities should be paced with the rate of private development. And developers should have their long-term financing lined up and be required to keep their equity invested in the project until sites are sold.

As the districts mature and voters arrive, local control of certain community activities and facilities will likely occur. But the general government and the other special districts, such as school districts, will be responsible for the essential services and will need to expand and upgrade. Pretending that cows will not be replaced by honest-to- goodness voters, who will need and demand government services in urbanizing enclaves, appears to be at the root of the Texas problem.