The South Texas oil and gas boom has achieved legendary status, enriching some of the state’s poorest counties along the way as property values have skyrocketed.
In out-of-the-way places such as Karnes City, appraisers have charted a dizzying rise in values that should spell nothing but good news for traditionally property-poor school districts.
If only it was that simple.
Because of the state’s education funding formula, known as Robin Hood, the districts could end up giving the state some of their newfound wealth to be funneled to other, poorer districts.
In the West Oso Independent School District, a taxing entity in Nueces County that for the most part is home to light industrial properties, receiving notice of an almost $100 million rise in taxable property values from the appraisal district did not bring a shout of joy from the district’s chief financial officer.
David Palacios said last week the sudden windfall brings problems of its own.
“We’re as surprised as anyone else,” Palacios said.
The district learned of the increase in April, when the appraisal district notifies all taxing entities in the county of its preliminary estimates of the property values in their areas. Certified values are due in late July, and entities use those values to set their property tax rates and budgets.
Robstown ISD saw an almost 20 percent increase in values from 2011, from $375.4 million to about $450 million, and London ISD’s preliminary estimate came in 23 percent above 2011, rising from about $233 million to about $287 million.
Those numbers pale in comparison to districts in the heart of the Eagle Ford Shale. Karnes City ISD has seen valuations increase nearly sixfold in the past two years.
While the numbers for all entities are preliminary, if the final, certified numbers come in anywhere near the preliminary estimates, another financial knot will need to be untangled in the coming budget cycle.
In Texas, school district finances are intimately linked to Chapter 41 of the state education code, the “Robin Hood” provision based on per student spending that requires wealthy districts to share tax revenues, above a state-dictated maximum limit, with poor districts.
The idea, among others, is to give students in poor public school districts the opportunity to receive the same quality of education as students in wealthy public districts.
Six school districts in Nueces County, including West Oso, were considered poor for the 2011-12 school year, according to a spreadsheet published by the Texas Education Agency.
Palacios said while West Oso certainly is not wealthy, being classified as poor is not entirely accurate, either.
“When compared to the other districts across the state, we’re more middle-of-the-road,” he said.
He acknowledged a $100 million increase in property values — up 18 percent from last year — might put the district in the wealthy column, but it also means the district will have to decide whether to capitalize on the windfall or lower its tax rate on property owners, a difficult and often painful choice.
Fresh in Palacios’ memory is last year’s budget cycle, when the appraisal district, then under the direction of a different chief appraiser, underestimated Corpus Christi’s property values by several hundred million dollars.
The mistake forced planners to hit the delete key on early versions of their budgets and had politicians screaming for scalps.
Palacios said he does not want to assume anything.
“That’s a huge increase we were not planning on,” Palacios said. “We want to make sure the figures are solid before we start basing our budget on it.”
On Monday, Palacios will join the district’s board of directors in a meeting with Nueces County Chief Appraiser Ronnie Canales to discuss the increase.
The figures have been triple-checked, Canales said.
“We understand how last year’s experiences are affecting this year’s perceptions,” he said.
If the numbers stand the review period when property owners can contest their appraisals, it will be in part because of the presence of oil and gas industry-related companies.
“Sixty million of that $100 million valuation is oil-related property,” Assistant Chief Appraiser Robert Cencisaid last week. Of that, Cenci said, a healthy percentage belongs to Orion Drilling.
Appraisers figure the value of property using a combination of three approved methods: cost-based, market-based and income-based.
In the case of Orion Drilling and most light-industrial property, such as warehouses — another common sight in the West Oso district — appraisers use the cost-based approach. Cost-based appraisals take the value of the land and factor in buildings and other assets.
For a company like Orion Drilling, the assets come in the form of oil rigs. The rigs are not drilling in the district, but they are stored at Orion’s property.
Cenci said about $15 million in taxable property that was not on Orion’s site last year is there, this year, based on the company’s voluntary disclosure that appraisers depend on to get an accurate number.
London ISD saw a 23 percent increase for 2012 in part because of the reserves in a single oil and gas well that came in last year with a reserve value now in the millions, Cenci said.
Even if a historically cash-strapped district such as West Oso may not have to contend with being classified as a wealthy district under the state’s complex funding formulas, they will have to meet the windfall as a temporary state of affairs.
In Karnes City ISD in Karnes County, a hotbed of the shale, certified property values in 2010 were about $270 million, said Wayne Block, the district’s business manager.
In 2011 they more than doubled to about $598 million, he said.
This year preliminary values are at about $1.8 billion.
“I have a hard time even saying it,” Block said Thursday.
Because the state uses certified appraisal values and not actual revenue to define Robin Hood status, a $1.8 billion valuation in a district with about 1,000 students is a sure bet for wealthy status next year. The district will be at about 4½ times the state limit for moving into wealthy status, Block said.
But the appearance of wealth does not translate into a change in fortunes.
“We’ll bring in these extra taxes, but under Chapter 41 and target revenue, we’ll pay it back,” he said.
The thought of the Eagle Ford Shale coming home to roost in Nueces County is something Canales said he’s been waiting to see and understands what it means.
“Now some of these districts are on the bubble between being considered poor or wealthy districts,” Canales said. The problem is the year-to-year fluctuation in values depending on the activity in the oil and gas industry, he said.
Even traditionally wealthy districts feel the pinch from time to time, said Carol Sue Hipp, executive director of business and operations at Port Aransas ISD.
“Just take it cautiously,” Hipp said of West Oso’s situation. “We’re a Chapter 41 district, and we’re looking at a deficit.”
Port Aransas’ deficit is a many-headed monster born from state and federal cutbacks, an eroded tax base and the potential that contested appraisal values may erode tax revenues even more, at least this year.
“But we’ll still have to give to the state,” she said.
For nouveau rich districts like Karnes City, the key is sowing while the seeds abound, Block said.
Because the state lags a couple of years behind the counties in certifying appraised values, Karnes City will have a grace period before the state catches up with the numbers and comes calling for the money.
Districts, although limited in how they can invest surplus cash, can invest in low-yield investments such as Treasury bills, he said.
“The best thing you can do is make money on the money, while you have it,” Block said. “Hopefully, our values will go up forever and we never have to give it back, but I don’t see it happening.”