What's a Certificate of Obligation?
And Other Debt Instruments, and How We Use Them.
Editor’s Note: This post is an edited version of a question I responded to on NextDoor. I strived to give neutral and objective information. For that reason, it did not include the last section, which is strictly my opinion.
Prompt:
What is the allowed debt process in West U? My revised understanding is that COs do NOT require voter approval (unless 5% of the voters petition to vote). Thus, govt. can approve debt with no vote.
My Answer:
What Are Certificates of Obligation (COs)?
Debt instruments available to West U are governed at the State level. Under Texas law, Certificates of Obligation (COs) can be issued without voter approval, unless 5% of registered voters submit a valid petition within 30 days of the city’s notice of intent. That means cities have legal authority to issue certain kinds of debt without holding an election — but that authority comes with restrictions.
Permitted Uses for COs:
COs are meant for long-term capital improvement projects, such as:
Public works (streets, drainage, water, sewer systems)
City buildings
Land or equipment for public purposes
Infrastructure related to utilities or public services
Limitations on Use:
There’s no exhaustive list of prohibited uses, but key restrictions include:
Operating expenses – COs can’t be used for salaries, maintenance, or ongoing services
Private or speculative development – projects must have a clear public purpose
Unrelated pet projects – cities must clearly state the purpose in the notice of intent
Additional Legal Requirements:
Repayment term must not exceed the useful life of the asset
Typically secured by ad valorem taxes (but may also be backed by utility revenue)
Notice must be published at least 45 days before issuance
Petition trigger: If 5% of registered voters sign a petition within 30 days, an election is required
Other Types of Municipal Debt Available
In addition to COs, West U has access to other debt instruments:
General Obligation (GO) Bonds – Require voter approval and are typically used for major projects with broad community benefit. (Note: Proposition D is a GO bond. While there was early discussion of using capital reserves to fund the library/community center project, COs were never proposed for that purpose.)
Revenue Bonds – Repaid from a specific revenue stream (e.g., water bills), not property taxes. Commonly used for utility infrastructure.
Contractual Obligations – Often used for equipment purchases. These don’t require an election but are more limited in scope.
West U’s Debt Philosophy
West U’s formal Debt Management Policy guides how the city evaluates and uses these tools. It emphasizes:
Debt should only be used for capital assets, not operations
The city should consider grants and reserves first
Debt should be structured to match the useful life of the asset
Transparency and long-term financial planning are core principles
Right now, COs are being considered for utility-related projects — such as water system upgrades. That fits West U’s historical pattern: voter-approved bonds for major, visible investments (like new buildings), and COs reserved for narrower, infrastructure-focused needs.
Issuing COs for something like a new facility or community center is legally permissible but generally considered politically risky, and most cities avoid doing so. (For what it’s worth, I believe the new Public Works building now under construction was funded through COs.)
Proposed Legislation That Could Limit CO Use
If you’re concerned about how COs might be used — here or elsewhere in Texas — you should know that there are several bills under consideration at the state level aimed at limiting their use.
House Bill 1453 (Rep. Tepper)
Limits COs to projects necessary for legal compliance, emergencies, or court orders
Lowers the petition threshold from 5% to 2%
Requires contracts to be executed within 180 days
Imposes a 5-year blackout after a failed bond election
Senate Bill 470 (Sen. Sparks) – “CO Reform Act”
Prohibits COs for a broad list of public facilities: police/fire stations, libraries, admin buildings, and parks
Lowers the petition threshold to 2%
Reduces maximum CO term from 40 to 30 years
Also includes a 5-year blackout period
House Bill 4986
Restricts COs to regulatory compliance or emergency purposes
Lowers petition threshold to 2%
Requires contract execution within 90 days
Caps change orders at 15% of original contract value
Enforces a 5-year blackout after a failed bond election
My Thoughts
If I were elected to City Council, I would be highly skeptical of using CO bonds for anything other than true infrastructure needs — where timing is critical and where I felt reasonably confident that most residents would view it as a no-brainer.
That said, I’m not going out on a limb here. No one on the ballot is advocating for a wave of CO debt without voter approval. This is why it’s frustrating to have to push back against the idea that supporting Proposition D somehow opens the door to tens of millions in CO bonds being used to fund the next phase of the Capital Improvement Plan — including tearing down buildings and constructing new ones. No one is proposing that. Aside from being political suicide, it would be terrible stewardship to push through multiple large initiatives like that without consensus. It’s never been done in West U, and it won’t be.
Some may feel that the city’s original plan to build the library and community center without a bond vote was a misstep. I disagree. The city had a surplus in reserve funds, primarily from the sale of detention land that was no longer needed, and the need for new facilities was clear. Still, I respect that others might see that differently. But even then, there was never any plan to issue DEBT without public input — the idea was to fund construction with available cash on hand, not through CO bonds.
So be wary of anyone who claims that candidates are secretly planning to saddle the city with a mountain of CO debt. That viewpoint is, at best, rooted in misunderstanding, and at worst, a willful attempt to mislead for political gain.
Thanks for the educational piece, Mateo. A couple questions and points:
1. You note the original plan was to build the new library and community building with a surplus of reserve funds from the sale of detention land that was no longer needed. How much was in those "reserve funds"? Was there enough to provide a. a raise for police officers for the next five years to make our city more competitive, or b. more detention land for the east side so we can lift the restrictor plates to allow more water to flow?
2. I think my concern is that everything in the facilities master plan could have been justified in a way to allow COs (without a vote) since they involve "city buildings," including a. the new public works buildings (which I support moving out of the city but was not a necessity); b. the originally planned new fire station which many said was needed (which I question), and c. a new city hall if the fire station must be expanding in its current location.
There was understandable uproar over moving the fire station to the corner of Auden and Rice. That was not fair to people who owned homes near that corner and the city should have been knocking on doors around that corner to tell them the plan. My understanding is that did not happen, in which case you can understand the lack of trust by homeowners near that corner.
3. The decision having been made NOT to move the fire station, my understanding is the city will expand the fire station in its current location. Will this create a need to move City Hall? If so, is the city justified in using COs to expand the fire station and build a new City Hall? Has there been discussion of building a new City Hall where the current community building and library are?
Thanks again for the education on different types of bonds, and for taking the time to answer my questions!