In light of the recent decline in oil prices, some comments on bonds related to school districts and counties in Texas are in order.
In raising tax revenue, real estate and other properties are assessed their worth for the purpose of taxation. An ad valorem tax then is levied on that real estate or property value for the support of the credit or other necessary expenses of the municipality, school district or county.
Joseph C. Taylor, a vice president in the municipal research department of Smith Barney Harris Upham Co., recently pointed out in an article that Texas is one of the few states that assess the mineral resources (primarily oil and natural gas deposits) as taxable property when calculating the assessed valuation for local entities.
A bonanza occurred for these local entities in the 1970s and early '80s when the market value of the mineral resources was increasing. With this good fortune, the taxing authorities were able to lower the tax rates on individuals while shifting the bulk of the tax burden to owners of the oil properties.
Now, as the properties across Texas are being reappraised for 1986, "the assessed valuation in these 'mineral' districts will decline precipitously," as oil and gas prices have, Taylor notes. He estimates that these valuations could decline as much as 20 percent to 30 percent in 1986, and perhaps another 20 percent after the 1987 assessment. This means that over a two-year period, the assessed valuations on the "mineral resources" could be halved -- which, if no action is taken by the taxing authorities, would halve tax revenues.
The alternatives for the taxing authorities in this situation are to double the tax rate or to drastically reduce services in the various school districts or counties. A lot of school districts and counties obviously will be caught in a financial squeeze, and State of Texas squeeze, help is unlikely to come from the State of Texas, in a tight financial squeeze itself.
Taylor points out that 230 school districts in Texas depend on mineral properties for more than 50 percent of their tax base, while in 35 districts 85 percent of the tax base is mineral based. Similarly, he notes that 50 of Texas's 254 counties have more than 50 percent of their assessed valuation in minerals.
Although Taylor doesn't foresee any defaults at this time, some credit downgradings are a distinct possibility -- unless the price of oil rises dramatically. Taylor suggests that the state adopt a defensive strategy before the ominous outlook comes to pass.
The $5.1 billion Texas Permanent School Fund (PSF), established in 1854 for the benefit of public schools in the state, now is permitted to act as guarantor of municipal debt issued by the school districts in the state. Such debt carries the highest of credit ratings, a AAA. For that reason, Taylor suggests you check whether the school bonds you own already are guaranteed by the PSF; if they are not, and if they have a high percentage of their assessed valuation im minerals, he recommends switching to PSF-guaranteed bonds or to those of financially stronger school districts, such as Dallas, Fort Worth or San Antonio.
Or, for that matter, switch to any other good bond issues outside of Texas, such as those of Cook County, Ill., or Los Angeles County. A list of potentially shaky Texas school or county bonds should be available from a brokerage firm.