Big property tax cut could pressure future Texas budgets, Fitch says

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Texas and its public schools could face future budget pressures in the wake of last month’s passage of a constitutional amendment to decrease school property taxes, Fitch Ratings said Thursday.

Proposition 4 was among 12 other constitutional amendments Texas voters approved Nov. 7 with many of the measures tapping surplus state money for tax relief and a variety of one-time uses. It added more than $13.3 million of tax cuts to $5.3 billion of reductions already included in the fiscal 2024-25 Texas biennial budget, putting the state on the hook for a greater portion of school funding to compensate for lower local tax collections, according to the rating agency.

Fitch Ratings said the passage of a Texas constitutional amendment for a big school property tax cut may pressure the state’s future budgets and leave school districts more exposed to state fiscal actions during downturns.

“The legislation and Proposition 4 provide a bypass of the state’s constitutional spending limit to pay for the property tax relief by drawing down its substantial accumulated carry-over balance,” Fitch said in a report.  “Although state officials expect to be able to absorb the obligation, estimated by the state comptroller’s office at just over $6 billion per year, within normal revenue growth, there is some risk to the state in funding a significant new ongoing expense with accumulated balances that by definition are one-time in nature.”

Meanwhile, K-12 schools have not had a state funding boost since at least 2019 and an attempt to tie increased funding to school vouchers failed in the latest special legislative session called by Gov. Greg Abbott.

“The inability to move the legislation forward highlights the vulnerability of school districts to state spending cuts in the event of a future downturn in state revenue,” Fitch said.

It added that most of the other constitutional amendments will have limited credit implications for the triple-A-rated state or its local governments.

“The majority of amendments fund one-time spending initiatives, drawing from the state’s accumulated balances or relatively minor diversions of future funding from its robust rainy-day fund,” the report said.

The annual cash report for the fiscal year that ended Aug. 31 said the state’s $48.4 billion cash balance was $14.6 billion or 43.4% higher than in fiscal 2022. After transfers to the state’s rainy-day and other funds, the available balance was $39.24 billion, which surpassed a January forecast of $32.7 billion, according to the Texas Comptroller’s Office.

A post on the X platform this week from Texas Comptroller Glenn Hegar pointed to a current $19.6 billion rainy day fund balance and said that after accounting for interest and investment earnings, along with legislatively authorized expenditures, a $23.77 billion balance is projected at the end of fiscal 2025.

“The state’s healthy fund balances, robust revenue growth and overall economic strength put Texas in a position to fund all the important measures voters approved in November, including much-needed and meaningful ongoing property tax relief,” Chris Bryan, a spokesman for the comptroller’s office, said in an email. 

Proposition 5, which creates a $3.9 billion Texas University Fund for emerging higher education research institutions, includes a one-time $3 billion allocation from the state’s accumulated surplus and an annual up to $100 million transfer of rainy day fund earnings, Fitch said.

S&P Global Ratings cited greater financial support from the new endowment fund when it revised the outlook on the University of Houston System‘s AA rating to positive from stable this week.

Other voter-approved amendments provide one-time payments to retired teachers, as well as allocate nonrecurring funding for water supply, energy production, broadband expansion, and state park projects.

Texas officials are fighting lawsuits challenging constitutional amendment vote results over allegedly improper voting machines, according to local news reports.

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