Katy-area local governments prepare budgets ahead new law

SB 2 Katy
(Designed by Anya Gallant/Community Impact Newspaper)

(Designed by Anya Gallant/Community Impact Newspaper)

Image description
(Designed by Anya Gallant/Community Impact Newspaper)
Image description
(Designed by Anya Gallant/Community Impact Newspaper)
Image description
(Designed by Anya Gallant/Community Impact Newspaper)
A new state law going into effect Jan. 1 has complicated the budgeting and tax rate setting process for cities and counties this year.

Senate Bill 2 will limit how much a city or county can increase its property tax revenue to 3.5% from the previous year before mandatory voter approval is required for fiscal year 2020-21 and beyond. Under existing law, these taxing entities are subject to petition by property owners to require a rollback election for an increase of more than 8%.

Specifically, under SB 2 entities cannot raise the maintenance and operations tax rate—from which revenue goes into the general fund to finance operations—more than 3.5% than a tax rate that would produce the same amount of property tax revenue as the year prior from existing properties.

Proponents of the new law said it will provide tax relief to property owners. In conjunction with another new law, SB 2 is projected to save a homeowner of a $187,392 house, which is the median-valued home in Texas, about $3,453 over five years, according to the office of state Sen. Paul Bettencourt, R-Houston, the author of SB 2. This savings estimate is based on a flat 5.8% increase in appraisal value each year.

Katy-area cities and counties have varying reactions to SB 2 because it will limit the revenue they can raise to finance day-to-day operations.

For fiscal year 2019-20, Fort Bend County rearranged its budgets so more expenses go into its debt service fund, which is not limited by the 3.5% cap, officials said. Waller County and the city of Katy also plan to rearrange their budgets in this way, officials said. Meanwhile, Fulshear increased its tax rates, and Harris County tried to but failed.

“SB 2 will undoubtedly increase the debt level of local government entities across Texas, and it will make it virtually impossible for an entity to build their reserves over time to pay for a project,” Waller County Judge Trey Duhon said.

Increasing the debt fund

To prepare for SB 2 and the limits it may impose, Fort Bend County shuffled its budgets, county Auditor Ed Sturdivant said.

The county moved several capital expenditures, such as equipment, from its general fund to the debt service fund for its FY 2019-20 budget—ahead of the FY 2020-21 budget, when SB 2 will take effect—he said.

By moving capital purchases to the debt service fund, the county will receive a return on its investment, which will offset the cost of borrowing, he added.

“Moving [capital purchases] to the I&S relieves the capital burden on the M&O rate, so the county has the ability to take care of annual operational needs as demand for services increase,” Sturdivant said. “[County commissioners are] still going to be able to give tax rate back to the taxpayers while continuing to meet the priority needs of the residents of Fort Bend County well within the limits of SB 2.”

Duhon said Waller County is doing its best to decrease operational costs and also plans to add more expenditures to its debt service fund.

“When it comes to capital expenditures, such as construction equipment, I think we will be left with no other choice but to finance those type of items,” Duhon said.

Katy Finance Director Andrew Vasquez said the city of Katy plans to follow the counties’ strategy for the FY 2019-20 budget.

“As a result of SB 2, cities will be looking for debt funding more often,” Vasquez said. “Debt is not always a bad thing; it allows future users of a city asset to pay for it, but it certainly must be managed.”

Katy City Council Member Durran Dowdle said the city has been carefully planning for a situation such as SB 2 for about two decades by diversifying its revenue sources and building up reserve funds.

“SB 2 could affect us possibly in the future, but it’s a guessing game,” Dowdle said. “The city of Katy has planned well, and we will continue to plan well.”

Raising tax rates

Ahead of SB 2, the city of Fulshear increased its tax rate to nearly the highest amount before voters could petition for an election, city Chief Financial Officer Wes Vela said.

For FY 2019-20, property owners in Fulshear will pay $0.21851 per $100 in valuation, up from $0.16251 per $100 valuation the year prior.

This increase will help the city provide services for its fast-growing population as well as continue to pay ongoing rebates to developers, which are now paid through the debt service fund rather than the general fund, Vela said.

Before FY 2019-20, Fulshear was unable to have a debt service fund and I&S tax rate due to developer agreements related to the rebates, but the city has renegotiated these deals, Vela said.

In terms of SB 2, Vela said it is difficult to predict how the revenue cap will affect Fulshear.

“The city is growing in value, which will distort [the effect],” he said. “We’ll gain new taxes from new property. ... But we think we can manage.”

A showdown in Harris County

Concerns about SB 2 and how it could restrict a government’s ability to deal with growth were at the center of Harris County’s discussion regarding a proposed tax rate increase to $0.6526 per $100 valuation, the maximum rate allowed by law without giving voters a chance to ask for an election.

Jack Cagle and Steve Radack, the Commissioners Court’s Republicans, both opposed the increase, and the argument came to a climax when the two skipped the Oct. 8 meeting where the tax rate was to be adopted.

They took advantage of a state law that requires at least four members of a commissioners court to be present for a vote on a tax rate to take place.

As a result, the court was forced to adopt a total tax rate of $0.6117 per $100 of valuation.

County Budget Officer Bill Jackson projects the county to raise about $186 million less in property tax revenue using this rate compared to the proposed rate.

Bettencourt said in a statement SB 2’s 3.5% limit does not apply to any revenue made from new property, allowing Harris County to theoretically increase its revenue by more than the 3.5% threshold. He also clarified the county can still raise taxes even higher with voter approval.

“Going forward, Harris County taxpayers will be able to vote on these type of tax increase proposals,” Bettencourt said. “As appraised values go up, property tax rates should come down.”

Shawn Arrajj and Hannah Zedaker contributed to this report.
By Jen Para
Jen joined Community Impact Newspaper in fall 2018 as the editor of the Katy edition. She covers education, transportation, local government, business and development in the Katy area.


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