Written by Steven Malanga
Local liabilities threaten the state’s fiscal reputation
Though Texas has rightly earned kudos for its balanced budgets and its high-powered, business-friendly economic environment, it has an emerging debt problem. From money borrowed to build extravagant sports facilities to rising obligations for government workers’ pensions, Texas’s state and local debt is increasing at a faster rate than its gross state product, raising fears about the burden on future generations. On the cover of a recent report by state comptroller Susan Combs, a young child holds a sign: WILL WORK TO PAY PUBLIC DEBT.
While Texas’s state government debt is relatively modest—just $40 billion, or $1,577 per resident—local government debt is more than four times higher: $192 billion. That’s $7,505 per capita, according to Combs’s report—the second-highest sum in the nation, behind only New York’s municipalities and far ahead of third-place California’s. Over the last decade, moreover, local debt has increased 144 percent, much faster than the rate of population increase plus inflation.
Some of this debt stems from voters’ willingness to spend their prosperity on municipal-finance baubles, bangles, and beads. In Texas, that means huge expenditures by local school districts on athletic facilities. When I attended a legislative conference in Texas last summer, the talk was all about the $60 million high school stadium just opening in Allen, a Dallas suburb of 83,000 residents. The 18,000-seat facility, which boasts a massive, high-definition TV screen, was built with funds from a $119 million bond offering in a state where high school football is a consuming passion.
Allen isn’t alone. According to an article last fall in Bloomberg Businessweek, more than 100 high school stadiums had opened in Texas during the previous five years. Pricey upgrades are common, too. Carthage High School, with an enrollment of just 750, used a bond offering to raise $750,000 for a video scoreboard for its football stadium. More than 100 Texas high school stadiums have such scoreboards. Not surprisingly, debt owed by public school districts constitutes the biggest chunk of the state’s soaring local obligations. Over the last decade, it has increased 155 percent, even as the state’s student population has grown just 21 percent. And the fastest-growing part of Texas school budgets is debt service, which has gone up by 126 percent in ten years, to $5.5 billion. Payments on debt now constitute 10 percent of school spending, up from 7 percent a decade ago.
Debt is also growing rapidly among the state’s 81 retirement systems for local-government workers. Not only are these systems poorly funded; it isn’t even clear how much some owe, since they haven’t disclosed the financial information necessary to verify their financial position, even to state oversight officials. After an extensive survey of municipal pension systems, Combs determined that none of the local plans was fully funded and that only 19 percent had 80 percent of the funds on hand to meet future obligations. The Houston Municipal Employees Pension System is only 61 percent funded, for example; Austin’s pension plan for city employees is just 66 percent funded.
As a result of this underfunding, the contributions to pension systems that municipalities must make each year are rising, eating up large portions of local budgets. Pension payments have risen from 11 percent to 13.4 percent of Houston’s budget in five years, and they’re projected to increase to 17 percent by 2017. Even those numbers may underestimate the scope of Houston’s problem, since one of the city’s three pension funds, for firefighters, is administered by an independent pension board that refused to allow Houston’s mayor and his staff access to financial data. The mayor sued last May; in November, a judge ruled that the fund had to turn over the data.
Other localities are seeing their employee costs rise, too. In Austin, the cost of fringe benefits—consisting mostly of pension contributions and health-care spending—has exploded over the last decade, from 15 percent of the city’s budget to 30 percent. Those cost increases, according to a report in the Austin American-Statesman, are partly to blame for a sharp increase in property taxes—38 percent over the decade.
Facing this growing debt load, some state officials are urging reform. Combs worries that residents don’t understand how much debt is piling up. She advocates greater transparency and has proposed that ballot initiatives seeking voter approval for new debt include comprehensive information about the obligations that government already owes. She has also pushed for laws limiting government uses of the types of debt that don’t require voter approval.
Others want more dramatic changes. Texans for Public Pension Reform, a group formed by Houston attorney Bill King and other business executives, seeks to curtail the use of defined-benefit pension plans and shift government employees into defined-contribution, 401(k)-style plans to limit taxpayers’ liability for pension debt. The Texas Public Policy Foundation backs legislation returning control of local pension systems to municipal-government officials and requiring those systems to provide more disclosure of their financial situation. Right now, the state controls some municipal systems, while localities bear the cost.
Texas doesn’t face the immediate debt problems that burden states like California and Illinois. Still, without reform, the Lone Star State could jeopardize its reputation for fiscal prudence.
Steven Malanga is the senior editor of City Journal and a senior fellow at the Manhattan Institute. His latest book is Shakedown: The Continuing Conspiracy Against the American Taxpayer.