How Rich School Districts Find a Tax Shelter in School Bonds

Equity advocates say wealthy districts are putting more of their costs into recapture-proof school bonds.
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In some ways, Tatum ISD is a lot like any other rural East Texas school district. About 2,000 students attend its schools 20 miles southeast of Longview, where livestock and football are big news. But because Tatum is also home to the Martin Creek Lake Power Plant, with an appraised value of nearly $1 billion, Tatum is among the richest districts in the state.

So, like the wealthy enclaves of Dallas’ Highland Park and San Antonio’s Alamo Heights, Tatum ISD sends a portion of its local tax revenue to the state under Texas’ “Robin Hood” plan. Like a handful of other districts, Tatum sends more than half its local tax revenue to the state to fund poorer districts.

School districts also employ another tax—one used to cover the school bonds that typically pay for new construction. That tax is called “interest and sinking”—I&S to those who deal with this stuff—and thanks to a legislative compromise, I&S isn’t subject to Robin Hood recapture.

That creates an incentive for wealthy districts like Tatum to cover their costs through bond issues and avoid sending the money to poorer districts. 

Over the last 12 years, the district says, it has avoided $52 million in recapture payments by issuing bonds. The Tatum school board approved a new bond package in February that will “maximize” funding by avoiding recapture on $5.5 million in technology, transportation and maintenance expenditures. “The $29,990,000 cost of this bond would cost approximately $57,670,000 in M&O revenue, avoiding sending $27,680,000 to the State,” the district announced in a press release in April. It goes before voters later this month.

Avoiding recapture is good news for Tatum residents who want to see their money spent on their own kids. 

But to poorer districts that could never raise so much money on their own, it looks like a cheat—particularly, some school finance watchers say, because rich districts are increasingly skilled at squirreling away their costs in recapture-proof bonds.

“In the past, I&S expenditures have been considered long-term building supplies, tables and chairs when you’re building a new building, but not tables and chairs that you need to replace in the course of normal maintenance and operation,” says Ray Freeman, deputy executive director of the Equity Center, an advocate for poor districts.

State law says I&S money can be used for the “construction, acquisition, and equipment of school buildings in the district”—and “equipment” can mean many things. So far, rich districts have been stretching the definition unchallenged. Eanes ISD, encompassing the wealthy Austin suburb of Westlake, bought iPads for its high school students with bond money.

That’s why the Equity Center has gotten so interested in the trend right now. It may challenge this loophole in court. The richer the district, they’ve found, the more the district tends to rely on bond money. The Equity Center contends these tax swaps are just another way the system lets rich districts gain an advantage on poor ones.

Patrick Michels is a reporter for the Texas Observer and a former legislative intern. He has been a staff writer and web editor at the Dallas Observer, and a former editor of the Texas Independent. He has a bachelor's in journalism from Northwestern University, a master's in photojournalism from the University of Texas at Austin, and is a competitive eating enthusiast.