The school district in Frisco, Texas, the second-fastest growing U.S. city, is swelling its debt load by almost 60 percent as Governor Rick Perry lures companies like Toyota Motor Corp. (7203) with financial incentives.
The $775 million of bonds that Frisco voters approved last month will go toward schools. The district north of Dallas and adjacent to the planned site of Toyota’s new U.S. headquarters added about 3,500 students this year.
Localities in Texas, home to seven of the nation’s 15 fastest-growing cities, are bearing the financial burden as the state gains 1,000 residents a day. While Perry and legislators have lured businesses with subsidies from the Texas Enterprise Fund, they’ve been “short-sighted” by failing to help municipalities provide services for new residents, said Jeremy Lyon, superintendent of Frisco Independent School District.
“State leaders have done an excellent job creating an environment that interests companies in moving here,” said Lyon, whose district sold $111.5 million of federally tax-exempt bonds in May. “What gets lost is that you need a vibrant school system to attract the families that also will move.”
Texas is home to three of the nation’s 10 largest cities -- Houston, Dallas and San Antonio -- with Austin ranking 11th, according to Census data. Some of the cities with the most explosive growth -- Frisco, San Marcos, Cedar Park, Georgetown and McKinney -- are on the outskirts of those metropolises.
Toyota’s decision, announced in April, to move its U.S. headquarters from California highlighted job-creation efforts under Perry, a Republican who is considering running for president again after his final term ends next year. The state offered $40 million of incentives to lure the carmaker and Plano approved $6.75 million of grants and discounts on property taxes. Companies such as Occidental Petroleum Corp., Apple Inc. (AAPL) and Comerica Inc. (CMA) have also moved operations to Texas.
Fueled by an energy boom, Texas’s population has grown about 25 percent since Perry took office in 2000, to 26 million, second behind California’s 38 million.
“Communities benefit from population and economic growth through increased sales and property taxes,” Lucy Nashed, Perry’s spokeswoman, said in an e-mail. “The responsibility for making local financial decisions rests squarely with local officials, as it well should because they are the ones best suited to determine the future of their communities.”
Texas’s debt increased about 170 percent to $41 billion from 2000 to 2012, and local borrowings grew by 145 percent to almost $196 billion, according to state data. In that stretch, the entire municipal-debt market increased about 150 percent, to $3.7 trillion.
Since 2004, metropolitan Austin, the state capital, has grown 36 percent to 1.9 million residents. Its debt has risen 30 percent to $5.6 billion at the end of June 2013 from $4.3 billion in 2004, according to financial reports.
Issuers have taken advantage of municipal interest rates near generational lows. The state benefits from its top credit ratings, and most Texas school districts can get backing for their bonds from the $29 billion Permanent School Fund.
Demand for funding is set to increase as the state’s population may more than double to 55 million people by 2050, according to Steve Murdock, former director of the Census Bureau and now a professor at Rice University in Houston.
Spending needs for roads, schools and water projects may total $650 billion in the next half-century, based on estimates compiled by Bloomberg. Much of that will probably be paid for by local bond issues combined with state and federal funds.
“When you bring people in, you need more roads and water,” said Mike Eastland, executive director of the North Central Texas Council of Governments. The group coordinates planning for growth in the Dallas area, which has been gaining about 100,000 residents a year. “You want to see continued economic growth and development, but there are costs.”
The region needs to spend about $100 billion through 2035 to keep up with transportation needs, said Eastland. Statewide, road construction needs may tally $370 billion through 2030, though only half that money may be available, according to the Department of Transportation.
Perry, 64, the state’s longest-serving governor, “understands the need for improving our state’s water and transportation infrastructure,” Nashed said in an e-mail.
He has supported studies of water desalination, put a ballot measure up for vote this year that could put billions of dollars into transportation projects and led an effort to fund a 50-year water plan, Nashed said. Perry also has signed legislation to allow expansion of charter schools, she said.
The state created and funded the Texas Enterprise Fund in 2003 to award grants to companies that relocate or expand there. The $558 million the state has invested has led to the creation of about 74,500 jobs, according to Perry’s office.
Susan Combs, the Texas comptroller, has questioned the growing debt of school districts and localities.
Bonding can “spiral out of control,” she said in a 2012 report.
Combs is “concerned about debt at the local level,” she said in an e-mailed statement. “Local governments must analyze their own communities to determine their economic structure or ability to pay debt and whether the proposed project is being done in the most cost-effective and efficient manner.”
In Texas, growing school districts get more financial assistance from the state for operations, but not for the cost of new classrooms, said Dan Casey, partner with Moak, Casey & Associates, an Austin consulting firm.
“Many school districts have relatively high debt-service tax rates,” said Casey. “It’s putting financial pressure on districts where growth is continuing.”
Texas districts are adding 80,000 students a year, with much of the expansion concentrated in a few suburban areas, according to the Austin-based Fast Growth School Coalition. The Permanent School Fund backs about $55 billion of school debt, up from under $20 billion in 2000, its data show.
Frisco’s enrollment may climb to 66,000 by 2020, from 46,500, Lyon said. The community will open three high schools in the next three years, adding to the six now in place.
The city grew 6.5 percent in the year through June 2013, to 136,791 residents, according to Census data. Among U.S. cities, the rate trailed only San Marcos, between Austin and San Antonio, which saw an 8 percent boost to about 54,100.
Officials also have to pay for the water needs of a drought-plagued state.
It will cost an estimated $231 billion over 50 years for new drinking water, treatment, distribution and flood control, according to the state. Voters in November approved using $2 billion of state reserves to help meet the expense.
The Tarrant Regional Water District, which serves Fort Worth and nearby cities, has borrowed more than $600 million this year, mostly to build pipelines connecting to its reservoirs in east Texas, said Dan Buhman, assistant regional manager of the district.
“We have the water, we just need a way to get it here,” he said.
Texas will have a budget surplus of about $8.1 billion in August 2015, up from about $2.6 billion in August 2013, according to Combs.
“The pressure on services is offset somewhat by a larger economy,” said Murdock. “I don’t think most people in Texas would say they don’t want the growth, but there is no doubt it is putting pressure on our infrastructure.”
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