January 18, 2017

Certificates of Obligation: A Controversial Funding Tool for Local Projects

(AUSTIN) — Local governments normally must seek voters' approval before taking on new bond debt for the construction of public works such as hospitals, schools and water infrastructure.

One common form of borrowing, however, represents an exception to this rule: certificates of obligation (COs), which some local governments can use to fund projects without voter approval. The use of COs is becoming increasingly common in Texas.

Between fiscal 2006 and fiscal 2015, outstanding CO debt issued by local governments rose by nearly 85 percent, substantially faster than the 50 percent growth rate for total debt held by these entities.

In the latest issue of Fiscal Notes, the Comptroller's office examines these useful but sometimes controversial instruments, which are available to Texas cities, counties and health or hospital districts.

"Certificates of obligation allow governments to move quickly on projects when they need to, but concerns about the way in which they circumvent voter approval recently led the Legislature to put important limitations on their use," Texas Comptroller Glenn Hegar said.

In this issue, the Comptroller's office also looks at the fiscal noting process, which adds up the potential costs, savings and revenue gains or losses that may result from new legislation.

Published monthly, Fiscal Notes is online and also can be received by subscribing via the Comptroller's website.

Fiscal Notes is an extension of the Comptroller's constitutional responsibilities to monitor the state's economy and estimate state government revenues. It has been published periodically since 1975, featuring in-depth analysis concerning state finances and original research by subject-matter experts in the Comptroller's office.

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