Overview of the Latest Texas Legislative and Regulatory Developments

Transcription:

Introduction (00:07):

Started with our next panel here and audience will keep coming in. Alright, our next panel is our latest Texas legislative and regulatory developments. Let's please quiet down and I'm going to leave it to our moderator. Jacqueline, please to introduce the panel.

Jacqueline Hale (00:28):

Thank you. I'm Jacqueline Hale with McCall, Parkhurst & Horton. I am in an attorney in their Austin office. I've been there for a little over six years now. My practice is focused on serving as bond council and Disclosure Council to various political subdivisions across the state, but particularly here in central Texas focusing on special districts, cities, counties, the occasional school district as well, and serving as underwriters counsel as well. And I will let my esteem panelists introduce themselves.

Stephanie Leibe (01:07):

Thank you. Good afternoon everyone. My name is Stephanie Leibe. I'm also a public finance attorney with Norton Rose Fulbright here in the Austin office. I've been with the firm for a little more than seven years, Neil, and before I joined Norton Fulbright, I was with the Texas Attorney General's office and their public finance division for about 13 years and I spent the last five years of my time there as chief of the public finance division.

Bennett Sandlin (01:35):

Good afternoon. I'm Bennett Sandlin. I'm the Executive Director of the Texas Municipal League. TML is a membership association of nearly every Texas city and we represent city interested mostly at the Texas capital but at the Federal Capital as well. I've been Executive Director for 14 years. Prior to that I was General Counsel for the League and prior to that I was at the Attorney General's Office as well in the Municipal Affairs Division. So it's great to be with you. Thank you.

Jacqueline Hale (02:03):

Thank you all and thank you all for being here on this Monday afternoon to discuss the legislative and regulatory developments impacting the Texas Muni industry. I see many of you have coffee but no coffee needed for this panel, so don't worry about that. Today we just wanted to give you all kind of a summary of the notable bills that passed during the 88th legislative session. Most of those currently impacting the muni industry in Texas, but those that we're expecting to impact the muni industry as well in addition to some bills that were filed that did not pass, but that we have seen in prior legislative sessions and that we can likely expect to see in the next legislative session as well, particularly in light of the Senate interim charges that were circulated last week. So just to give you all kind of a summary, at a high level of the 88th legislative session, there were a total of 8,530 bills joint resolutions that were filed and about 15.9% of those passed with 0.55% vetoed.

(03:19):

So I know all of us up here we're probably tracking hundreds of bills at the beginning of session and again, we'll discuss some of those that passed and some of those that didn't. But by the end of session there were a total, again of 1,124 bills that were signed by the governor. So again, we'll just give an overview of those bills that did pass, discuss the ones that didn't, and discuss a summary of those Senate interim charges that were circulated last week. So we'll start with senate bill two. I know you all are probably pretty familiar with Senate bill to, I think it passed during the second special session last year, and this is the bill that impacts homestead exemptions from Ad Valorem taxation by a school district, increased that amount from 40,000 to a hundred thousand. So we'll be focusing on that change, but it also allowed for a temporary 20% cap on appraisal increases for properties valued at 5 million or lower that aren't considered homestead. So Stephanie, I'll turn it over to you to kind of discuss how we are seeing those changes currently impact school districts, other issuers in Texas.

Stephanie Leibe (04:35):

Sure, thank you. And I'll just start before I provide my first answer with my kind of standard disclosure that I'm sitting up here today and I'll share thoughts that I have related to some of these bills, but I am just speaking for myself, I'm not speaking for my firm. And then further caveat with that, with I'm sure we were all raised with our moms telling us that if you don't have anything nice to say, you shouldn't say anything at all, but we may have to break that rule a couple of times in connection with the discussion for today's panel. So kind of jumping into SB two as it relates to our school district clients, I think for the increase in the homestead exemption from 40,000 to a hundred thousand, the impact of that change has been fairly consistent with how school districts thought that that increase would impact their budget.

(05:27):

There has been, I think maybe some pressure points associated with the over 65 population because there was also a charge in the bill that required that those amounts be recalculated to the date that the first exemption was provided. And so I think the budgetary impact for the over 65 population has been more than what was originally anticipated at the time that the legislation was introduced. And then as it relates to non-homestead properties, I think that too has had some, I don't want to say unintended consequences, but maybe just some impacts that people were not anticipating at the time that the legislation was introduced. We've heard from some appraisal districts throughout the state that certain property owners are using that cap in conjunction with some other laws within the tax code as it relates to how property is either assigned tax IDs or can be assigned tax IDs.

(06:30):

They have some tax parcels that are being requested to be subdivided so that each of those subdivided parcels would be subject to the $5 million cap. And so the pool of eligible properties subject to that 20% cap, I think has been greater than what was originally intended. Of course, this provision is temporary, so we'll have to wait for either next session or session after to see whether or not this 20% capital non-homestead of properties becomes permanent law. But hopefully in the interim we will have a couple of years of data and analysis behind us so that people can look in real time to see what the consequences or how this has impacted school district's budgets across the state.

Jacqueline Hale (07:21):

I think that provision really affects secondary homes, vacation homes, things like that was designed to help property owners maybe. But are you seeing that certain developers or maybe apartment complexes are using that to kind of parcel things up to get that

Stephanie Leibe (07:40):

Take advantage? That's what we're, yeah, I mean we're hearing from a couple appraisal districts across the state that those, there are some property owners, whether it's apartment complexes or retail developments that are trying to come in and qualify for that temporary cap through those kind of subdivided tax ID parcels. And of course bond buyer does have a panel tomorrow that'll provide a little bit more in depth analysis as it relates to school finance. And I know that they have some school district representatives sitting on that panel. So to the extent that any of them have been impacted by SB two and these homestead exemptions, I'm sure they'll be willing to share their experiences.

Jacqueline Hale (08:25):

Bennett, any additional thoughts on senate bill two or how that appraisal cap may be impacting cities and their next tax collection for the next tax year?

Bennett Sandlin (08:36):

I think the biggest impact of Senate bill two is the tax shift that it accomplishes appraisal caps and increased homestead exemptions don't reduce taxes. The net tax levy, they shift it from folks that are benefiting from the exemption or the new appraisal cap to folks that aren't. And I think that's going to be the big impact. The business community was very much against the new appraisal cap, 20% appraisal cap. And what's interesting about that appraisal cap is it's cap at $5 million properties and less. So I think the point that it's really second homes and very small apartment complexes are going to be the beneficiaries of that. I don't know what kind of apartment complex in Austin, Texas for example, is valued under $5 million. It's not going to be very many. I think it's going to be really hard not to make this permanent. You've got this whole new constituency now that's going to be subject to a 20% cap.

(09:33):

How do you undo that politically? It's going to be very tough. And the other thing that's interesting about Senate bill two is this is billions and billions of dollars of tax compression that was only available because of a huge state surplus. What happens when that surplus goes away in future sessions and we have a down economy, it's going to be really hard to undo some of that from a political point of view. And I know we're going to talk a little bit later about some Senate interim charges about reducing or doing away with property taxes. There's a push right now to lower property taxes and we were only able to do that this session because of a huge surplus. There's going to be kind of a long-term question mark in my mind. How do we overcome that? How do we pay for this? We paid for it one biennium, but how do you pay for it in future biennium when all you've done is compression for the first part of that bill? So I think it's going to be interesting to see how the legislature maintains that balancing act in the future with the political pressure to lower property taxes.

Jacqueline Hale (10:34):

Very good points. Moving on now to Senate Bill 28. Many of you may be aware of what Senate Bill 28 does, but this essentially created the new water supply for Texas Fund administration of that fund and the Texas Water Fund by the Texas Water Development Board. So Stephanie, if you want to kind of give a high level summary of what that bill does and maybe what issuers cities particularly that have water wastewater systems and other special districts need to know.

Stephanie Leibe (11:05):

Sure. Well as it relates to Texas Water Fund, I probably should start off with saying that Bond Buyer does have a water panel which includes Texas Water Development Board Director George Payton as a panelist and I know that he's going to speak directly as to the Texas Water Fund and where TWDB is currently in their stakeholder process. They've been having meetings around the state soliciting interested person feedback into implementation of that new fund, how they intend to roll it out. And I know that he will have a lot of kind of real time updates that he'll be happy to share with everyone in connection with that panel. But we all know that whether it's water fun or swift or defund clean water drinking fun or other programs that are implemented by Water Development Board, they're really important to a lot of our local government clients to bring much needed water projects online.

(12:07):

We heard in the first panel from this morning about the critical need that water plays in the growth of Texas supporting people who are already here encouraging new businesses to come in and there really is a strong water need in Texas right now and we see that with all of our local governments, especially those in the central Texas area. A lot of local governments also issue certificates of obligations. It is the kind of preferred method for Texas waterboard to evidence their borrowings. And so as we move through the process and talk about some of the legislation that's been introduced over time to impact and issue his ability to issue certificates of obligations, I think it's also very important to remember that these are the primary securities that are being issued for a lot of these water projects that the water board is helping to support throughout the state.

Jacqueline Hale (13:09):

That's right. I agree that the water is certainly becoming more of a focus over time, particularly as water becomes more scarce in the state. You're seeing rooftops apartment complexes going up everywhere. Cities and special districts need to have these processes in place to be able to pay for clean water systems and wastewater projects as well. Was there anything you like to add with respect to Senate Bill 28 and the Texas Water Fund?

Bennett Sandlin (13:40):

That was a good description of the bill and it was a good bill for water. I'll just point out just related just last week, the EPA issued its new rules for PFAS, the so-called permanent chemicals in so many water supplies around the country. And I think that's going to be a big area, not necessarily under this bill or this fund, but a big area for public finance. You're going to have many, many Texas municipal water systems that are not in compliance with the new EPA rules under PFAS. They're going to have to rush to upgrade their systems to try to get rid of some of that or try to get below the threshold. So I think it's something to keep an eye on. I don't purport to know how big that's going to be for you guys and how much new business and how much opportunity is there, but it's huge. And those PFAS limits were fairly low and what we're expected. And so it's going to impact cities across the country. Of course, many Texas cities and other water systems have joined in the litigation to try to set aside some money and that litigation is going to wrap up fairly quickly, the national litigation. So something to keep an eye on.

Jacqueline Hale (14:54):

Absolutely. A couple other loan grant programs that were created out of the 88th legislative session, the Texas Energy Fund created through Senate Bill 26 27. I suspect this might be discussed in more detail in the power utilities panel or in the weatherproofing, the city's panel, but I think it's important for cities and particularly that have energy systems to be aware of these programs as well that were a focus of the last legislative session. The Texas Broadband Infrastructure Fund again created or extended through House Bill nine that dedicated 1.5 billion to the broadband infrastructure fund. Again, I know particularly for rural communities, getting broadband to citizens is very important and I think it's been a focus in the past couple legislative sessions, some federal grants and loans available for that as well. Anything else you all wanted to add on those or

Bennett Sandlin (16:02):

I'd just add that I think broadband, I think we've come to a point where we have to view it as essential infrastructure, especially from an economic development perspective. Prior to last session we had some zoom round tables with our legislative delegation around the state and I had two state reps join our round tables with dial up. I didn't even wear the middle of beeps and stuff we used to have 30 years ago. I wasn't even aware that was still a thing and try to attract the new business into an area that doesn't have consistent and reliable broadband. And so it's like water and wastewater. Now to me, from a municipal perspective, if you don't have broadband, you're not in a position to attract business. So big bill, important bill and we're behind it, we're supportive

Stephanie Leibe (16:51):

And we've seen that with some of our clients and whether it's through original bond validation suits for some of the early cities that issued public securities to help put broadband in place or kind of the precedent that established with the Attorney general's office as it relates to issuing bonds for broadband infrastructure, the Ag G'S office does recognize broadband as a utility system that can be financed in the same way that an issue would issue revenue bonds for its water sewer and other types of utility systems under 1502 of the government code. So that's very helpful. There are kind of practical considerations which local governments do and do not have capacity to actually own and operate a broadband system. Same federal tax rules apply as it relates to the issuance of tax exempt bonds. You have to talk about some of that dark matter or dark clouds that they associate with broadband and how much of the broadband is really used for city services and make sure that some's not being set aside for private use. So when you would get involved in those types of financing, there's a lot of diligence that goes into it and behind it. But we have had a handful of cities throughout Texas that both have issued either certificates of obligations, revenue bonds to finance, some broadband improvements, and we have more cities who are looking at it right now for the reasons that Bennett mentioned. It really is a necessity in today's world.

Jacqueline Hale (18:33):

Agreed, agreed. Changing gears a little bit onto something, a little spicier house bill 40 82. This was the bill that was filed last session to amend the Co Act. There were several bills that were filed at the beginning of session that I know we were all tracking and this is the one that did end up passing. So I'll turn it over to Stephanie to kind give a summary of that bill and how it may be impacting issuers currently and may impact them in the future.

Stephanie Leibe (19:10):

Yeah, so through HB 40 82, I think for the first time we have a definition, a statutory definition of what constitutes a public work for both purposes of the Co Act and for tax votes that can be issued under chapter 1431. And that's really the first time that we've had that from a historical practice looking at what constitutes a public work, the standard was always to point to another statute that authorizes the issuance of public securities for some type of public work. And so long as you had another authorizing statute, the ags office would recognize that that history and kind of that legal analysis of course has been superseded now that HP 40 82 was adopted and is effective. Some of the stories that we hear related to 40 82 was that 40 82 was really put in place because of some of the unintended consequences that came from HB 1869, which was passed in the 87th legislature and 1869 of course kind of bifurcated the issuer's INS tax rate and their M and O tax rate.

(20:27):

And the legislation says that you can only levy an INS tax for unbolted debt if it meets one of these qualifying projects. So as 40 82 was adopted, 1869 was not amended. And so there are certain disconnects between HB and 1869 and 40 82. And so as we work with our issuers as they gear up to do certificates of obligations, we do track their projects really closely to both identify those disconnects to the extent there is at least a preliminary desire to finance any of those types of projects and just really council issuers to be aware so that as we move forward with that, people are understanding how any potential issuances could impact, could impact their ability to live an INS tax to repay that debt. And then there are also other types of changes through that definition of public work that issuers have to in some ways be cognizant or aware of.

(21:40):

You have all of your traditional definitions as it relates to facilities, but it is a little bit more limited because you may have the authority to do a road, but then the question comes up, well what about all the support services that you need to support your road department? Is that authorized under the Co Act, Neil? And so we moved through that analysis again with each of our issuers based on facts and circumstances for what they're intending to finance. And then there's also kind of some disconnects related to the statute itself because you have the list of what constitutes a CO and then you have a list of what or public work, but then you also have subsection C which says public works or types of improvements that do not constitute public works. And so included in the public work definition are renovations or improvements to existing city facilities, which would be arenas, convention centers, more of your tourism type facilities.

(22:51):

When you move into what does not constitute a public work, it's those same type of facilities but new facilities or facilities that are primarily used by a or profit user or facilities that are predominantly used for majority of the year by an entity other than the city. So what the Co Act doesn't authorize now and what the ags office has told us it doesn't authorize is a new facility even if you meet those metrics. So even if you want to bring a new convention center online, a new arena online where the city is the predominant user and you meet all of those statutory requirements so that you're not triggering use of a professional sports team use for a majority of the year by the for-profit user as it relates to new construction, the AJ's office has said that those are not authorized purposes right now. So again, for a lot of our local government issuers when we get project lists associated with CEOs, we're really going through there closely being very intentional with how we draft the notice of intent and define our scope of projects so that we're in line both with the requirements of the statute but also guidance that the ags office has provided whether through all bond counsel letters or just some of the feedback that we get from transactions as they make their way through that office.

Jacqueline Hale (24:34):

And the attorney general's office did issue some guidance on 40 82 late last year and we'll be looking for additional certifications with respect to how those projects fit within one of the enumerated projects under the Co Act. And so doing that due diligence upfront with your client to get more information about how the project will be used, how it fits within one of the projects now listed within the Co Act is very important because you're likely to have those same questions come up with the AG's office and maybe additionally required to include an additional certification when you go to issue those Cos and Stephanie mentioned it is a pretty broad list of enumerated projects, but are there any concerns that cities or other issuers are having with respect to these new changes in the Co Act?

Bennett Sandlin (25:39):

No, we had mixed feelings about 40 82 just from kind of a lobbyist point of view. It was confusing now, now looking at a matrix, you've got a definition of debt that you have to meet and now you've got a definition of public works. And just as folks that don't do public finance every day, we were really scrambling to mesh those two and moving forward now there's a different playing ground when we're going to have to oppose bad Co bills. Is it coming under the new rubric of 40 82 or is it under 1869 or some combination? So it's probably worse for you all because you have to pinpoint exactly where the authority is. But from the TML perspective, it's just kind of another playing field. And as was alluded to, we're not even sure what the purpose of 40 82 was. It wasn't necessarily maybe to limit projects, but it's added a new perspective.

(26:28):

I think we did okay. We survived with only maybe a couple types of projects. As Stephanie mentioned, taken off the table. I think hotel projects were something we lost authority for. Probably not something we were doing a lot with cos to begin with, but I guess the bright side of it is it could have been worse. There were a lot of legislation out there that just essentially takes cos off the table. There was literally one bill that just repealed cos you can't do them among other super majority requirements or are putting it to a vote. So considering the alternative, I guess it's okay, I feel for you guys having to, it's going to double your workload when you see a new co project to make sure it complies with both bills from the two sessions, but could have been worse I guess.

Jacqueline Hale (27:13):

Yeah, Stephanie mentioned certainly combing over those project lists to make sure that each of 'em can fit within the projects and crafting OCO notices as well to make sure that everything is in there. Moving on to Senate bill 2038, this is the de annexation law. Admittedly, I think this bill kind of flew under the radar from a bond council perspective, but has certainly had an immediate and significant impact on cities. So I'll turn it over to Bennett to discuss that Bill.

Bennett Sandlin (27:48):

This was one of the worst bills of the session from our perspective that passed. It's very troublesome Bill that's a continuation of something that's been going on the last four sessions in 2017 and 2019. Texas City's lost the ability to easily annex surrounding areas that were in their ETJ. In other words, cities can't grow as easily as they used to. 2038 goes one step further and says that it's almost a ministerial action to get yourself out of the extraterritorial jurisdiction, which is a strip as you know of land around a city that's subject to some city regulation but not other city regulation. This bill could be the end of the ETJs because really the way it's written, if you get three neighboring property owners and two out of three petition to remove themselves, it appears that you have to release that area. Now there is some litigation going on right now, city of Grand Prairie and another coalition of cities senator around Grand Prairie are suing to declare that it's unconstitutional.

(28:54):

It takes away what is a nondelegable authority to a city council, especially if the council created that ETJ through annexation. But if that litigation is not successful, I think it's sort of the beginning of the end of easy expansion of Texas city limits. And that's a problem from an infrastructure perspective. You can have a hodgepodge of special districts, and I'm not criticizing special districts, but it's a lot harder to attract an economic development project nationwide project or to do something meaningful when you're dealing with six or eight special districts in an urban area. We have an old saying at TM L, it's over a hundred years old that we believe everything urban ought to be municipal. And the point that is, and you heard the governor's representative say earlier that you've got mayors that are working hand in hand with the governor's office and that's true for economic development, but if you've got six or seven special districts, some of which are being managed out of law firms in Houston, nothing against law firms in Houston, but how do you coordinate that really timely economic development?

(30:04):

And so these combination of the annexation bills in 2038 really are going to have the effect of freezing city limits for some time until we sort this out Texas, I kind of a saying that Texas is an urban state that pretends it's a rural state and you think about it, 74% of Texans live in incorporated cities. So that's the first piece of the puzzle. Second piece I always ask people, I'll let you all throw out a number of those 74% living in cities, what percentage of the surface area of Texas do you think is within those incorporated cities? Do you have any guesses?

(30:48):

Eight 10. I hear 20 when I make this question. 4% of Texas is incorporated cities and we have 74% of the population crammed into those cities. And as urban areas expand, cities need to expand for economic development reasons, for infrastructure reasons, 2038 is going to make it harder to do that. In fact, there was a good article, community Impact newsletter. Do you all get that? It's a pretty good little newspaper. I'm impressed with it. I think it's different for each community that have different versions. But the Austin version a couple of weeks ago showed a map of dozens of folks that are already removing themselves from the ETJ and some of them in the middle of the ETJ, not on the edge. So you've got these now, these donut holes of folks that have no regulatory oversight by any city in the ETJ. What does that mean for infrastructure?

(31:39):

Who provides the police? Does the sheriff's department suddenly have to come serve three houses in the middle of an ETJ but not the surrounding house? Nobody knows. So it's a troublesome bill. It's one of the charges that's been sent to Senator Betancourt's local government committee in the Senate. He was quoted in that Community impact article is saying the people removing themselves from EDJ, it's happening a whole lot faster than even he'd anticipate. I dun no if that means he has any regrets, but I think it indicates that he's open to looking at this and we're going to work with his office and talk about how important it is that fast growth urban areas ought to either be municipal within the city or have some limited ability by the city to manage that growth. Because the downside of this is if you have a lot of subdivisions that are going in with no oversight, no building codes, no curb cut regulations, you name it, the city's not going to want them down the road if they decide they want to be annexed.

(32:36):

So you're going to have kind of a have and have not system of subdivisions in Texas that have the benefit of municipal services and subdivisions that have a permanent hodgepodge of special districts, which is not ideal. So this is one of our biggest bills. It was not a good result. We are going to work with Senator Bettencourt and see if we can curb some of the abuses of it or the perceived abuses, but it's going to be a big deal and I think it's a big deal for you guys as well from the debt side because as Jacqueline mentioned earlier, what happens if you have one of these areas that's released, they go into a special district, you issue some kind of debt instrument for that, and then let's say it's declared unconstitutional, it's litigation. How do you undo that? How do you unring the bell? A lot of confusion in that area. So I could talk all day about it. I hate this bill, I wish it hadn't passed, but we've got to work with it. It's the future of infrastructure from a municipal perspective and we're certainly concerned about it.

Jacqueline Hale (33:41):

I agree. It certainly create a lot of confusion and it'll be interesting to see how that litigation pans out and what sort of impact that decision has. Whether there's some sort of retroactive impact on the land that has been released from those city ejs, either through a consent or some sort of resolution ordinance or just by operation of law, which the bill does provide for. Stephanie, anything you'd like to add with respect to that bill?

Stephanie Leibe (34:13):

Not too much. I think Ben did a really good job of covering everything from a public finance standpoint. What we're seeing with our clients is kind of twofold, especially questions related to if you say you have a city that's consented to the creation of a special district in their ETJ and within there they have certain consent requirements right before that mud can issue mud bonds, city consent for that bond issuance is required. Well, if the developer subsequently removes the land from the ETJ, are those consent requirements still applicable to the public finance transaction? Right? Because you have documents that say one thing, but kind of the boots on the ground and the facts have changed. And so how do those change facts impact any bond financing? And really what we're hearing from our local, our city clients and especially some of our fast growth city clients is that some of the residents are just confused, especially as it relates to ETJ.

(35:16):

They don't understand that they live in the ETJ and why they don't get the same services, but everyone else has the opportunity to avail themselves to. And it's one thing to talk about a special district coming in to kind of provide those services to get the houses on the ground right? But it's very limited when you look at quality of life projects that cities also provide to their residents and people who live in the ETJ as they're there for a while, they realize that they're missing out on a lot of those quality of life projects and they don't understand why they don't have opportunities for them and it's a void that there's no one there to provide them. So again, kind of talking about economic development and providing things to entice new businesses or new residents to the state. I think people have to understand that quality of life associated with roof types, but you have to have something to go along with those rooftops is really important.

Jacqueline Hale (36:21):

And on a similar local control note, Bennett House Bill 2127, also known as a Texas Regulatory Consistency Act, was also passed the last legislative session and I suspect is also causing a bit of confusion among cities, counties, other political subdivisions.

Bennett Sandlin (36:42):

Yeah, 2038 was kind of one example, one A of what was hard for cities last session. This is certainly one B if not one A itself. Its acronym is the Texas Regulatory Consistency Act. The proponents of the bill call it the Death Star bill. And that should tell you kind of what the intent was with cities. What this bill does is it turns home rule Texas cities that cities over 5,000 with a charter into general law cities across eight different state codes. The big difference between a home real city and a general law city home real cities can do anything. The legislature doesn't prohibit a general law. City has to look to state law for permission to do things. This bill turns that on its head, it's said in very in eight broad codes including the finance code, the ag code, business and commerce code, you name it. The city has to look for permission to do things under state law.

(37:37):

Like I said, 2038 is being challenged. This bill has already had some success and a challenge that the city of Houston and other cities have levied against it in district court. It'll go all the way to the Supreme Court. It's a big deal and I think it will be overturned. And I'll tell you why. The home rule amendment was passed by the voters of Texas back in 1912 as an amendment to the Texas constitution. And our position at TML is you can only undo a constitutional amendment by another constitutional amendment. You can't legislatively say King's X, we didn't mean it. You're not a home rule city anymore. Now the legislature is certainly capable of preempting cities on individual issues. They can tell you we can't have plastic bag bans or straw plastic straw ban, you name it, they can do that. We don't feel like they can come in and categorically turn cities home, real cities into general law cities.

(38:31):

So this is a big deal. I haven't really even thought through the infrastructure impact and things that you in this room are going to be thinking about, but it's a problem for home real cities. If there's any consolation, it's when I think how many of you all saw my age saw Star Wars in the theater when it came out? Remember Death Star was a big scary thing that could blow things up. Remember what happened at the end though? They blew it up not just once but twice in the third film as well. So if there's any bright spot is that the Death Star had a bad fate in those films and I'm hoping we see the same fate. It's going to be a few years though before this gets sorted out. Austin District Court declared it unconstitutional, but for strategic reasons, the cities that were in that lawsuit did not ask for an injunction. So it's still technically in effect, but we haven't seen very many challenges to city regulation yet under this bill. I think challenges are waiting to see how this plays out in court. It's going to go all the way to the Texas Supreme Court and it's going to be a big deal. And so we're keeping an eye on it. We're supportive of that litigation and we'll see what happens.

Jacqueline Hale (39:43):

Thank you for that summary. Want to shift gears now and just quickly discuss, there were a series of all bond council letters that were released sort of from November of last year up until late last month that discussed some more regulatory policy changes requirements with respect to Senate Bill 1319, but had some other changes as well and requirements that we're seeing out of the Attorney General's Office. So just turn it over to Stephanie to kind of give the folks a high level overview of those letters.

Stephanie Leibe (40:20):

So a lot of the Alban Council letters that came out kind of in that November January timeframe we're primarily focused on SB 13, SB 19. And of course we had the task force that came together through Texas Mac that was very instrumental in providing a lot of guidance to both the bond council community underwriters, issuers themselves related to what was and was not acceptable for SB 13 SB 19 processes as we work our way through the ags office. And so I feel like as an industry we've really covered that in depth and people have a general idea of, at least for today, where we stand on a lot of those issues. Of course they have certain banks that are still under review by the ags office, but we understand that that is working through the process and we're not anticipating some of the hiccups that we had in the early days of some of this legislation.

(41:19):

We think any determinations that are made or things that have rolled out or intended to be rolled out in a way that provides the least amount of distraction to any finances that are in process. At least that's what's been communicated to our firm from the ags office. But through those Alban counsel letters, they have been other instances where the agency spoke on kind some unresolved issues that we deal with throughout the statutes. It's very common when you have authority to issue a public security for that authorization to provide a maximum maturity. We do have certain instances in which maximum maturities are not expressly provided for statutorily. I think historically the ags office has taken some deference to that statutory silence. We also have provisions whether it's from state law or federal tax law related to your maximum maturity and how that relates to the useful life of the facility.

(42:25):

And so in a lot of financings that's kind of provided that natural breakpoint for what your maximum maturity could be, even if you were operating under a situation in which there was statutory silence. And one of the A BC letters that came out, the ags office is now said that there's a 40 year maximum maturity implied for all public securities issued in Texas or for those where their statutory silence. And so if you have a lesser maturity that's specified by statute, you adhere to the lesser maturity. If you're up righting under statute that's silent. They won't allow a bond issuance to go out more than 40 years. There was also some contacts with an A BC letter that came about as a result of City of Amarillo and their bond validation suit related to 1431, the ability to refund 1431 notes but then also the ability to do 1431 commercial paper programs.

(43:27):

And so 1431 probably for the majority of my career had the ability of an issuer to use 1371 powers and to have a 1371 commercial paper note program to bring some of those projects online. And so we have a BC letter that says the agency is no longer going to allow those programs for any issuers that don't have them currently in place. And then I think the intent is that they'll have subsequent discussions if there's projects are programs that are in place, how they become renewed, what the future life of those types of projects will look like. So that was a big kind of change to past precedent to instruments that we currently have in the market. But again, just issues that we have to work through both with our clients and with the attorney general's office. One of the A BC letters talked about school districts and their bond propositions.

(44:31):

The agency Neil wants to see all of the voter information documents that come through related to school district's bonds and they want to reevaluate how separate propositions have been crafted so that they feel comfortable that projects were properly characterized. I personally feel like that's an overstretch by the agency. These determinations are made by the school district. We talk with all of our school districts about this as we walk through the process and the election orders, the board makes special determinations or specific determinations about certain of these facilities and elections go through election contests and election contest periods and there has to be some certainty associated with that for these bond elections. And so I just have concerns that through some of this process we may get into a situation where the agency's trying to put their interpretation of the projects and use that in lieu of what's been decided by the board and by district staff.

(45:45):

So I definitely have concerns about some of the requirements associated with school district bonds and what that review and approval process is going to look like on a moving forward basis. So then for the first time, there was one of the more recent all bond council letters talked about mud deliverables and the ability to use what's in essence an out-of-state issuer to reimburse a developer to provide interim financing through a quasi bond anticipation note for public projects in Texas. And so this has implications both for special districts, for local governments related to public improvement district bonds and their special assessments. That's going to open up an avenue for developer reimbursements through those special assessments as well. And I think this is going to be something that will just be evaluating in real time to see what those impacts are.

Jacqueline Hale (46:46):

Thank you Stephanie. That was a great summary. Appreciate that. As we discussed at the beginning of the panel, there were hundreds of bills that were filed that would've impacted the Texas Muni market. Some of those did not pass. We've seen them filed in past legislative sessions again, likely to see them come up again. And there are specific categories where these bills come up each year, one of those being the November uniform election dates. We've seen that likely to see it again, but also the super majority requirements. And Ben, I know you wanted to touch on those.

Bennett Sandlin (47:27):

The November election date is sort of a small subset of a larger effort, not just at the Texas Capitol but at other states as well to sort of politicize nonpolitical city elections. There's states in the northeast where mayors have to run with an R or D next to their name. And the joke we have here, or the saying we have here is that there's no Republican way to fix a pothole or a democratic way to fix a pothole. It just takes a certain amount of asphalt and that's the way. So we like this nonpartisan nature. There's bills that would do away with a may election date, which is traditionally a sort of a nonpartisan date. How many of you all recall? We used to have four uniform election dates not too long ago, and I think there was more prior to my getting involved in this area.

(48:17):

Now we're down to two. We think it's important to maintain that. The argument goes of course, that local governments try to hide a bond proposition on the may ballot to sneak something through. But interestingly, if you look at data from the bond review board, the passage rate of bonds in May election is almost identical to November. So it's really more about the specifics and taking advantage of interest rates and the timing of it. So we think it's important to hang on to that date. Even worse, this bill didn't go very far this last session, but of course worse would be a two third super majority requirement to pass a bond. I got in trouble many years ago before I was executive director. I was testifying against a super majority requirement, not on a bond, but on the tax rate setting. And I said something to the effect of if you didn't win your own election by two thirds, you shouldn't force cities to have a bond election by two thirds.

(49:12):

And that didn't go over very well with a former house member that's no longer in. Somehow I survived that comment, but I still kind of believe it. Super majority is the end of debt. How do you get a two thirds vote and what's the precedent for that? But it's just a further example of a general suspicion in some quarters that there's too much debt and that we need to reign in the issuance of debt. And then finally of course there's bills that would essentially subject cos move them over to the m and o side of the equation, which would be the end of cos in a three point a half percent revenue cap environment like cities and counties have. Now you don't have any wiggle room to ever do a CO that has to count against your three point a half percent rollback rate. So we faced all these bills this last session. I don't know which of any of them will get traction next session. I think the one that probably has the most potential is moving all elections, maybe not just bonds, but maybe all municipal elections to November. There's talk about that. I'm opposed to that. I think that the may date is still useful for nonpartisan elections city elections and we're going to try to hang on to that, but that probably has the biggest chance of movement in future sessions.

Stephanie Leibe (50:28):

And I kind of feel like especially as it relates to the November uniform election date, some of that they couch in terms of voter engagement, but to me the longer you make the ballot, the more you increase the chance of under votes. And so as you have a voter working their way through the ballot, at some point they just stopped voting. And so even though you're intending to do this to increase engagement, I almost feel like practically you'll have opposite effect because as you get to some of those down ballot bond propositions, especially for some of the smaller cities of districts, I think that that has a real chance of happening. Super majority requirements are actually kind of interesting and I don't know if anyone's ever come spoke to it before, but should a super majority bill actually pass? It could have disparate impacts based on the type of local governments because you have certain local governments who constitutionally are required to vote their bonds and within those constitutional requirements, those bonds are passed by a majority of their voters. And so super majority requirements theoretically shouldn't apply to any of those types of local governments. But as it relates to cities, counties and other people who just have kind of a statutory requirement to vote bonds, those super majority requirements could apply. And so I do hope as people kind of evaluate these bills, they keep in mind that again, this bill could have a very disparate impact based on the type of local government that has the bond election and the bonds that are being voted.

Jacqueline Hale (52:18):

And I think the last category bills that were filed that have gained popularity over the past few sessions were the ballot bills that are requiring for all bond elections to include in the ballot language that this is a tax increase. So not just applicable for school districts, but cities, counties, special districts would all be required to include that in their ballot language for any bond proposition. So I suspect we might see some more bills filed next session that we will have that requirement as well. It'll be interesting to see how the Attorney General's office applies those requirements. I noticed in the last all bond counsel letter, there was a statement in there that school districts couldn't include anything that was contradictory to that statement in their voter information document. But the voter information document, as many of you know, is required to have what the increase in the tax bill will be. So if it's $0, is that contradictory to the required ballot language?

Stephanie Leibe (53:25):

It's honestly been a struggle for a lot of our school districts in an environment of tax rate compression, right, where we're having double digit decreases in tax rates for them to be able to communicate to the voters why the ballot says this is a tax rate increase and you have a 12% tax rate deduction on your tax. We've even had some school districts who are thinking about structuring your bonds so that you have a nominal tax rate increase because they feel like it's an easier message to communicate of a very, very de minimis tax rate increase as opposed to having say, this is a tax rate increase, but providing some of that voter information document that shows it's actually a decrease because of the rhetoric that's coming out from some interest groups, some from the legislature, right? There's an idea that voters think that the local governments are not telling the truth or they're hiding something when they go out and say, but there's no tax rate increase because they point to the ballot and they say this is a tax rate increase.

(54:45):

And so we see it with bond elections. We saw it this last cycle with tax rate or tax ratification elections, right? Because they're the ballot prescribes that you have to specify this is a tax rate increase and specify the percentage or the amount and the ballot language itself. And so you have a tax rate increase of a negative number. That was confusing to a lot of voters. And so a lot of this was symptomatic of tax rate compression and the kind of substantial drop that came from school district's tax rates because of SB two and then also because of some of the additional funding that the state provided. But it's an issue that we're constantly talking about with our clients. To the extent that legislation passed to make it applicable to more clients, people are going to kind of be brought into that world voluntarily or not. So it's an interesting time as we move through those processes,

Jacqueline Hale (55:55):

Certainly. Well, I think we're running up against time. We'll pause here for a few minutes for questions and please come up to the mic if you have any questions. We stunned them into silence. Covered it all. Well, thank you all for having us. Appreciate You-all being here. Feel free to ask us any questions as we get off the panel as well.