How the Revenue Cap "Reform" Will Affect Austin and Travis County
Senate Bill 2, explained
Since the dawn of 2019, we here at your local Chronicle, along with the rest of the Texas press corps, have talked a lot about "revenue caps" as a highlight/lowlight of the Legislative session just past. Whether you see the Lege's handiwork in Senate Bill 2 as a triumph (e.g., Texas Public Policy Foundation) or a tragedy (e.g., Mayor Steve Adler), there's a lot of context and backstory stuffed into that term that deserves to be unpacked for our readers. So herewith, an explainer:
To the degree SB 2 will impact the city of Austin, Travis County, and the state's other cities and counties (and other jurisdictions, but not school districts), it's really just changed some names and numbers in the state tax code. What we used to call the "effective" rate is now the "no-new-revenue" rate, and what was the "rollback" rate is now the "voter-approval" rate. In both cases, we're talking about the maintenance and operations (M&O) rate that funds annual budgets, not the separate rate collected to pay off our bond debt. (That's determined by the bond provisions themselves; if it were subject to the whims of legislators, municipal credit would be worthless.)
These new terms do state more bluntly than before what these thresholds represent. The first is the M&O rate a city or county would set to receive the same amount of revenue from the same set of taxable properties as it did the prior year – that is, accounting for changes in property value. In Austin, Travis County, and most of Texas, property values inexorably increase year over year, so the "no-new-revenue" rate would nominally trend lower over time.
The rollback rate comes into play when a jurisdiction wants to raise more revenue from those same properties. This allows cities and counties to account for inflation, compensation increases, and other "cost drivers" of public spending. Current law allows those entities to collect up to 8% more revenue from the same properties without having to go to voters for approval of a higher tax rate. SB 2 lowers that number to 3.5% – that's the "revenue cap" beyond which the tax rate must have "voter approval."
When the 86th Texas Legislature convened, leaders were geared up for a 2.5% cap – jokingly dubbing their bill "SB 2.5" – but were in time convinced that 3.5% more nearly matched the inflation rate for public-sector spending (say, the cost of concrete or labor for public works). That's still a lot lower than 8%, which is why Steve Adler's hair is on fire; he's raising alarms about needing to cut as much as $60 million in spending. The timing of this austerity program is somewhat fuzzy – budget approval is in September, elections are in November, SB 2 takes effect in January, and Council needs to consider whether to make cuts or seek voter approval, this year or next.
Austin's finances are already hard to explain, and easy to attack in bad faith, because of the size of our city enterprise funds – Austin Energy, Austin Water, the airport, etc. – that don't use property taxes at all and the willingness of voters in recent years to approve massive capital spending for roads, parks, affordable housing, and more, which as stated above is not impacted by SB 2. Also, the formula does not constrain a city's ability to capture revenue from changes to its tax roll – that is, from taxing a larger set of properties, which, in theory, is how growth pays for itself. "Larger" here would mean through annexation, greenfield development, infill redevelopment, or private uses of public land; that's all unimpeded by revenue caps though it can face plenty of other local political barriers.
Real-world public budgeting is never this simple; SB 2 itself acknowledges certain costs of government that don't inflate and deflate in perfect sync with the tax rolls. The final bill includes carve-outs for both indigent health care and indigent defense. The former costs, in Travis County, are mostly rolled up into a stand-alone taxing district, Central Health, which is defined – along with Austin Community College – as a "special taxing unit" in SB 2, with a rollback rate that remains at 8%. As for indigent defense, the looming 3.5% cap has shadowed much of the angst about money that's attended the birth of a Travis County public defender office, so the final bill seems like good news.
Texas is a big state with a lot of different taxing jurisdictions – Travis County alone contains more than 100 – so the "special taxing unit" bucket includes utility, water, and road districts that may, depending on where you live, appear on your tax bill. On the whole, SB 2 uses several different ways to ease the pain of a 3.5% cap on small governments and in rural areas, whose lawmakers' votes were needed to get it across the finish line. But were similar concessions made for the big cities where most Texans live, which have for years been holding the state's bag for so many public services? Not so much!
To the TPPF types who've carefully messaged tax "relief" and "reform," the howls of people like Adler or Travis County Judge Sarah Eckhardt signify success – cities and counties should not be afraid to face the voters with justifiable spending plans. That's easy to say when a jurisdiction embarks on a major new endeavor with a significant M&O tax impact – say, when Central Health brought the funding deal for Dell Medical School to voters in 2012 (exceeding its then-rollback rate by more than 60%). It's more troubling when, as Adler fears, a status-quo city budget prompts the precariousness of a tax rate election through ordinary cost drivers, including (ironically) the cost of the election that must be held to approve the tax rate.