Robert Henderson, managing director of RBC Capital Markets, gave an overview of the county’s financial situation in regard to suggestions for preparing a budget and setting a tax rate for the coming fiscal year.
Henderson, who has advised Karnes County officials for many years, said that while he has been doing this type of work for more than 30 years, he has never seen a situation such as the one that Karnes County faces in the current budget cycle.
“There is no precedent for what has happened in Karnes County,” Henderson explained. “You guys have gone from a tax base of less than $500 million and a tax rate that for years had been very nearly the maximum tax rate allowed under the state constitution – that is 80 cents – to having your tax base go to $3.14 billion in just three years. That is absolutely incredible.”
Henderson said that while the county’s tax base has grown, so has its need for public infrastructure in the form on roads, bridges and other expenses, due to an unusually high amount of wear and tear on the roads and bridges by heavy oil company truck traffic.
“This county, like every other rural county in the state of Texas has been building roads and maintaining roads with an expectation of these roads having anywhere from a 15 to a 25-year useful life,” Henderson explained. “And you have been paying for them with the expectations that there would be, let’s say, a 20-year useful life on these roads, and now you are in a situation where your roads are being destroyed in a matter of months.”
The huge increase in tax base, Henderson said, is a Godsend, but he cautioned county officials that oil and gas tax values are very, very volatile.
“You have gone from less than $500 million to $3.1 billion in three years and it is almost certain that five years from now, your tax base is not going to be $3.1 billion anymore,” Henderson said, explaining the boom and bust nature of the oil and gas business.
Restoration of the courthouse, repair work on roads and bridges, construction of a new county jail, and other projects are under consideration by county officials, Henderson noted.
“The question becomes: How do you pay for all this stuff?” Henderson said.
In response to a question from Henderson, County Auditor Lajuana Kasprzyk said an effective tax rate of 23 cents per $100 valuation is expected for next year.
“What I would say to the county is that you ought to very, very, very seriously consider adopting a tax rate that is above your effective tax rate,” Henderson said. “If your effective tax rate is 23 cents then you still need to adopt one, in my opinion, that is above 23 cents, because you want to be able to pay for the infrastructure that you have to have – as much out of cash as you possibly can, because if we issue debt to fix these roads, we can pay the debt off in eight or ten years, and I would certainly recommend that we do that, but we don’t know that your oil values are going to be what they are today in eight or ten years.”
Henderson explained that adopting a tax rate above the effective tax rate will help generate the money needed to repair and rebuild roads on a “pay as you go” basis.
The county’s ability to access capital markets, however, has improved dramatically, Henderson said.
“Today, you have got to be a double A credit,” Henderson said. “You have got the ability to access the capital markets. You have got the ability to access it at an incredibly low interest rate because of the economic environment. We could probably issue 20-year debt for less than three percent. That’s pretty phenomenal. I would hate to see you issue 20-year debt for roads.”
In summary, Henderson encouraged officials to keep the tax rate as appropriate as possible in light of the likelihood that the tax base may shrink in future years.
“Most the counties in the state of Texas have tax rates between 30 and 40 cents,” Henderson said. “understand that most of those taxes are going to be paid by the oil companies who under current circumstances, are obviously the ones destroying our roads here, right, and aren’t paying any kind of special fee, although there are options to do that, but aren’t paying any extra money to compensate the citizenry.”
The average homeowner in Karnes County is paying a tax rate that is one third what it was three years ago, Henderson said, and it would be in those homeowners’ best interest for the county to maintain a higher tax rate of about 30 cents, and fund improvements as much as possible with cash and at the same time, also build some reserves.
“Right now, you have got a rare opportunity to build reserves, and all outward appearances are you are going to need them,” Henderson said.
“We want to be in a position that you have got the money to maintain your roads even if your tax base drops,” Henderson said.
Addressing a question about tax abatements, Henderson had some advice to offer.
“As a general rule, I am not opposed to moderate tax abatements for companies that provide long-term employment,” Henderson said. “I am less enamored with tax abatements for modest amounts of employment for an indeterminate period of time.”
County officials said they would continue to work with Henderson and in the near future, will develop a capital improvements plan for Karnes County that will be available for public review before the county formally adopts its budget for the next fiscal year.