Kyle City Council considers debt defeasance for the upcoming fiscal year

KYLE — During its July 29 budget meeting, Kyle City Council directed staff to look at the possibility of keeping the property tax rate the same for 2024. At its Aug. 10 special meeting, council was presented with a debt defeasance option.

Director of Finance Perwez Moheet, city attorney Paige Saenz, bond counsel Stephanie Leibe of Norton Rose Fulbright and financial advisor Mark McLiney of SAMCO Capital Markets were in attendance to provide insight on debt defeasance and what that would look like in Kyle.

According to McLiney, a debt defeasance is a legal action that takes bonds that are due in future years and applies it to the present, allowing it to be paid via property taxes. Essentially, it is paying off future debt to avoid interest and save money.

McLiney explained that there are multiple reasons cities look into adopting a debt defeasance, such as paying future debt to eliminate future interest, which allows room for the creation of future bonds and slightly minimizes the future Interest and Sinking (I&S) tax rate. The I&S tax rate is currently at $0.5082 per $100, but as more bonds are added to the city, the rate would increase. With a debt defeasance, these bonds would be paid off, which would minimize the amount the rate would increase. There is a $25,000 cost that would be paid with the city’s savings to start the debt defeasance, but according to McLiney, the city would save $51,000 in the first year and $715,000 of interest over the life of the $2,345,000 bond.

He continued by stating that the city has estimated the 2024 tax rate to be $0.4693 per $100 and with the debt defeasance, it would rise to the previous­ — and current — voter approved tax rate of $0.5082. This would not require a formal election with voter approval because the only thing increasing is the I&S rate, not the Maintenance and Operation rate.

Moheet provided data calculated by the Hays County Tax Assessor-Collector that showed the average home value in Kyle and what the taxes would look like with each option. In 2023, the average house in Kyle is valued at  $356,031. The net tax on a home with this value with the defeasance — at the $0.5082 rate — would be $1,606.07, including the homestead reduction while the net tax bill on the same house at the proposed rate of $0.4693 would be $1,483.13. The difference between the two is 8.29% or $122.94 for the year.

“Do we know if the rate, and I don’t know how they handle this, will increase for the county or the school district?” asked council member Daniela Parsley. “Because what I’m thinking now is, like $122 may not be  [a big difference], but I don’t know how much [the other entities] are charging and I don’t know what the overall picture will be for a homeowner.”

Council member Yvonne Flores-Cale was skeptical about the defeasance due to the financial struggles that many residents already face.

“It’s really hard times right now. Inflation is high,” said Flores-Cale. “I don’t think people can afford to continuously keep paying increases on not just their home valuations, but you also have [inflation] in food and everywhere else.”

According to Leibe, the homestead exemption for Texas school districts is increasing from $40,000 to $100,000. This, theoretically, should help balance the difference if the school taxes rise.

Mayor Travis Mitchell was in favor of the defeasance in order to benefit residents in the long run.

“We know for a fact that a large amount of future debt is coming and so the question is, ‘Do we want to keep the rate the same in preparation?’ Like, it’s a prudent thing to do from the standpoint of planning,” Mitchell said. “If you think of the tax bill, yes, it goes from $1483 to $1600, but what we’re doing is ultimately saving folks long-term.”

He further explained that the future debt will come through road bonds and the possible community center.

Council member Bear Heiser shared similar sentiments stating, “We’re going to have future expenses that we need to provide for the city. Whether it’s other infrastructure projects or amenity related projects, it doesn’t have to be this community center [specifically], but there are things that we’re going to have to do to support our residents in the future. So, whatever it is that we’re going to have to borrow in the future, doing this, from my understanding, would put us in a better position to not only manage the tax rate increase … But also it’ll allow us to be in a better position to borrow new money.”

To approve the debt defeasance, it would have to have at least 60% of the governance vote, meaning 5-2. Staff and bond counsel advised that if it were to pass, it would be best if no council member changed their vote for the future tax rate because if they did, the bond would still have to be paid.

“If you [vote for the ordinance] and don’t have a 5-2 vote for the tax rate, it will cost your general fund $2,345,000,” said McLiney. “That’s the dollar amount that would have [to be paid] because you’ve called the bonds.”

After the discussion, a straw vote — a vote which has no authority — was taken to decide if there was enough interest in opening the second item on the agenda which would call for an official vote. As a result of the vote, item two was opened.

Mitchell motioned to approve the defeasance ordinance after additional deliberation. The roll call vote failed 4-3 with council  members Michael Tobias, Parsley, Flores-Cale and Mitchell dissenting, in that order. According to Mitchell, though he was in support of the debt defeasance ordinance, he voted against the item because otherwise it would have passed 4-3, which is what the council  wanted to avoid due to uncertainty of the tax rate being approved 5-2 later in the year.

Council will hold the next budget meeting on Sept. 5.