The Legislature Has Spoken: Now Our Job Begins
It is no secret that local government vigorously opposed the passage of S.B. 2. However, now it is the law of the land, and it is time for us as finance professionals to implement its mandates professionally and thoroughly. Fortunately, with an effective date of next year, there will be time to attend training and adequately prepare for implementation. GFOAT will work with the Texas Municipal League (TML) and the Texas Comptroller’s Office to assist with or to provide targeted and timely training.
UNDERSTANDING THE BILL. As each of you prepares to brief your respective elected officials, I encourage you to read the bill multiple times as there is much more to it than merely the revenue growth cap. Major items to consider:
- The mission has not changed. The purpose of local government regarding the safety and quality of life of our citizens is the same as it’s always been. We must also remember that S.B. 2 will not change what we do but may affect when and how we do it.
- Financial flexibility is reduced. In a typical Texas city, 80-85% of its general fund revenue consists of property tax, sales tax, and franchise fees. Of these three revenue sources, the only one we have any ability to adjust from year to year is property tax. Under S.B. 2, our ability to compensate for anemic or even shrinking sales and franchise revenue will be limited.
- Pay as you go (PAYGO) funding will be more difficult. Texas cities multiplied in the 1970s through the 1990s with the inevitable result being that infrastructure with 30-year design lives is now wearing out. Traditionally, we have used PAYGO funding to help with this replacement while managing debt levels. Under an eight percent maintenance and operations cap, as mandated by state law, reductions in the needed debt service rate could be easily redeployed to PAYGO. With a smaller capacity, cuts in needed debt service will no longer be easy to transfer.
- Debt and debt service will need to be more closely managed. Since the debt service tax rate does not have a rate cap, there will be a temptation to migrate expenditures towards debt and debt service over time and in difficult budget years. This may be especially true if elected officials are hesitant to reinstate the debt service tax rate that was cut in previous years.
WE NEED TO SET THE TONE. How we as elected and appointed officials implement S.B. 2 will have far-reaching implications on the future financial viability and flexibility of Texas governments. We can do this through the following:
- A comprehensive review of fiscal policies, including:
- General fund reserve policies: The reduction of flexibility – and the inevitability that both franchise and sales tax revenues will likely drop in a recession – make a reexamination of the adequacy of financial reserves prudent financial policy.
- Fees for service: A reexamination of all expenses for service in the general fund, including cost recovery targets, will help governments better understand its other general fund revenues and opportunities to reduce dependence on the three main revenue taxes. A good place to start is to comprehensively review and revamp your building permits. We also need to be aware of the likely decline in franchise fees due to the passage of S.B. 1152 limiting the cost to only the most expensive service provided through the same line and build that into our projections for fiscal year 2020.
- Debt management: Policies that explicitly set strategies for debt management, including its appropriate use is essential. Emphasis should also be placed on the internal controls ensuring that only necessary capital expenditures are charged to debt proceeds. Finally, if the government chooses to use specific debt instruments to manage the debt service tax rate, clear parameters on the use of these tools should be established.
- Long-term financial planning: With elections as often as every year, it can be difficult for elected bodies to think long term. However, with the limitations on revenue increases in any given year, it is essential that we become more strategic and think long term on both the capital and operating side of the budget. New programs will need longer lead times to implement, and if a governing body decides a tax rate election is necessary, planning should begin long before the normal budget process.
- Infrastructure management strategies: It has never been more critical to get the biggest bang for the buck regarding infrastructure replacement. If your city has not contracted with an infrastructure management company to survey your city, I strongly recommend you do so. Your local council of government may have shared services for infrastructure management, which is accessible by any Texas city. This facilitates objective, fact-based allocation of resources.
- Operating cost containment. Containing growth in operating expenditures and thoughtfully anticipating known cost drivers will be more critical than ever. Governments should be particularly cautious regarding programs or additions that have carryover effects on future budgets. Committing to funding a new program in the fiscal year 2020 partially, for example, can cause significant fiscal stress in fiscal year 2021 when the full year impact must be financed. This is a massive opportunity for our membership that deals primarily with budgets.
In conclusion, we as finance professionals have a huge opportunity to provide the objective analysis and information to promote a thoughtful implementation that will maintain our government’s financial strength while recognizing our responsibilities for controlling growth in property tax burdens. Holistic approaches that breakdown departmental silos, fully integrate capital and operating impacts together, and anticipate future replacement needs will be vital to effective financial management within the caps. GFOAT is committed to assisting you in this journey.
Together, we’re stronger!