What’s the tax impact of $1B in Austin school bonds? Hint: It’s not $0

4:05 p.m Monday, Sept. 11, 2017 Local
Tamir Kalifa
Carolino Mendez carefully places bricks as he and a crew from C.W. Oates Masonry Inc. work on a construction project at Patton Elementary School on July 20. The project, which invloves repairs, renovations and the construction of new multipurpose classrooms, is being funded with money from the 2013 bond package. TAMIR KALIFA/AMERICAN-STATESMAN

Austin school leaders say they can take on $1.05 billion in bond debt without raising the district’s tax rate, based largely on climbing property values and the district’s ability to pay down more than half of its existing debt in the next decade.

Keeping the tax rate the same is a central feature of the district’s political campaign for the bond proposition going before local voters in November. The money from the bond measure would pay to construct new schools, rebuild deteriorating campuses and modernize a school system for which the average building is 40 years old.

The district points to its last bond election — $392 million approved by voters in 2013 — as an example of how it can tamp down the impact on property tax bills. Those bonds were expected to raise the tax rate by 3 cents, or about $38.40 a year to the property tax bill for a $200,000 home.

But instead, the district, buoyed by increasing property values, lowered the tax rate by 5 cents per $100 of a home’s assessed value. Homeowners are still paying more, of course, because property values in Austin have shot up 12 percent a year, on average, for the past five years.

The district’s exceptional creditworthiness among bond rating agencies and hefty reserves mean it gets very low interest rates on the money it borrows.

The $1 billion in bonds would be issued over a five-year period. The district expects to take on the debt as projects are ready to be built, and school officials said that will allow the district to layer on new debt as the outstanding debt is paid down.

District leaders said the current tax rate is projected to provide enough money to cover the bond repayment, adding that they are not banking on continued rapid inflation in the real estate market to cover the cost of the bond projects. The bond payback plan assumes an annual increase in property values of 7 percent in the first two years and 1.5 percent for all subsequent years.

Property values actually have a 10-year average growth rate of nearly 8 percent in addition to the five-year average growth rate of more than 12 percent since 2013.

“These assumptions about growth (in property values), people are wondering, ‘are these going to hold?’ ” said Nicole Conley Johnson, the district’s financial officer. “It’s fairly likely that we’re going to perform better, but we’re using conservative estimates.”

Critics point out that the district’s pledge to keep the tax rate flat does not mean tax bills won’t continue to rise. And they question the district’s continuing reliance on property value increases.

“It’s misleading to the public to pretend that a tax impact doesn’t exist,” said Roger Falk of the Travis County Taxpayers Association. “You can’t borrow money for free. It’s smoke and mirrors.”

Falk, who saw Austin’s real estate bust in the 1980s, said the district should use only current land values, instead of assuming they will continue to rise.

Falk’s group ran its own numbers using only the 2017 property tax rolls to show the district’s payback plan won’t work without more increases in land values.

“Markets go up and they go down,” Falk said. “They don’t always go up. … They should be using honest numbers.”

What if the Austin market tanks?

After the first couple of years, the district’s payback plan relies on a 1.5 percent per year increase in property tax revenue. But it says that can be accomplished without raising the tax rate.

The finance team for the Austin district says even if the real estate market softens — as it did from 2010 to 2013 — the district can still depend on a gradual increase.

The district also has $46 million in reserves, or savings, which school leaders will rely on if the values don’t grow.

The Greater Austin Chamber of Commerce’s board of directors gathered financial experts to crunch the numbers and concluded there was a very high probability the bond wouldn’t raise the school tax rate.

Ellen Wood, the board chairwoman, who also is a certified public accountant, examined the numbers herself.

“There is a very significant income stream already in place,” Wood said, “which, when coupled with very modest property valuation projected increases, more than accommodates repayment. … While regional economic forecasts rarely go beyond 12 months, we believe Austin ISD’s assumptions to maintain no tax rate increase are conservative and appropriate.”

But critics are quick to point out that with the increase in values, the actual tax bills will grow. And if it weren’t taking on $1 billion in new debt, the Austin district could lower its tax rate further to cancel out the increase in appraisals.

“You can’t borrow a billion dollars without paying more in taxes than you would pay without this new debt,” said Bill Aleshire, a former Travis County judge and a former tax collector.

What about the district’s cash-flow troubles?

Texas school finance is complicated. Districts in areas where land values are high, such as Austin, are required to give some of their tax money to the state to subsidize poorer districts in a so-called recapture payment. The higher the property values, the more the district must hand over in that recapture payment.

Austin pays the most of any district in the state. This year, the district is estimating its recapture payment to be $534 million, an increase of 32 percent, or $127.8 million, over last year. About $1,700 of the average $4,291 in school taxes that the owner of a home within the Austin district pays will go to subsidize other Texas districts.

The school district tax rate is made up of two parts, one that pays for maintenance and operations, and one that goes toward debt repayment. The recapture payment comes from the maintenance and operations portion of the budget, leaving less for for salaries, campus maintenance and school programs. Next year, 50 percent of the Austin district’s maintenance and operations must go to recapture.

The other side of the district’s ledger — its debt repayment fund — is more stable and not affected by those ever-increasing recapture payments.

Is AISD planning to use 20-year bonds for technology upgrades?

No. The district will issue the bonds as needed for the projects, commensurate with the life of the projects. The district will use short term bonds, paid back in about three to five years, to pay for computers while using at least 20-year bonds to pay for new schools.

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