Understanding the Law
Texas Senate Bill 1851 (SB 1851) introduces a pivotal shift in how municipalities manage their finances. Under this new law, cities must be current on all required financial audits before they can adopt a tax rate that exceeds the no-new-revenue tax rate. With the passage of SB 1851 during the 2023 Texas Legislative Session, municipalities face a new and potentially disruptive requirement.
If a city or town is behind on its annual financial audits, it may be barred from adopting tax rates that increase property tax revenue. This signals a shift in the state’s approach to fiscal transparency. It introduces a direct consequence for audit noncompliance — one that ties operational funding to timely financial reporting.
In plain terms: If your city hasn’t submitted its most recent audit, you may be unable to raise the revenue you need — even if voters support it.
Why This Matters
This requirement aligns with broader state-level efforts to promote financial stewardship and increase public trust. However, the practical implications for local governments, particularly smaller municipalities with limited administrative capacity, are considerable. SB 1851 is more than a compliance requirement — it’s a signal of a broader shift toward performance-based funding and transparency-first governance.
Key Risks for Municipalities:
- Revenue Shortfalls: Being unable to raise property tax revenue due to audit delays could lead to budget gaps, especially for communities relying heavily on ad valorem taxes.
- Operational Disruption: Budget planning and service delivery may be affected if tax rate adoption is delayed or denied, even temporarily.
- Bond Ratings and Financial Reputation: Audit backlogs can signal fiscal mismanagement to credit rating agencies and the public, potentially leading to long-term consequences beyond just this year’s tax cycle.
- Administrative Burden: Smaller towns may lack the staff or systems to comply.
- Last-Minute Scrambling: Waiting until fall budget hearings to discover you're ineligible to raise revenue could force reactive cuts or emergency sessions.
- Public Perception: Noncompliance could erode trust.
5 Smart Strategies for Compliance
- Create a Compliance Calendar: Track audit milestones, submission deadlines and council meetings.
- Engage Auditors Early: Secure audit firms well in advance and consider multi-year contracts.
- Build a Pre-Audit Checklist: Standardize documentation and internal reviews to streamline prep.
- Train Staff on New Guidance: Host workshops to align finance, legal and leadership teams.
- Leverage Regional Partnerships: Share resources and best practices with neighboring municipalities.
How To Prepare Now
To mitigate these risks, municipalities should act immediately by:
- Assessing Your Audit Status: Conduct a review of your most recent audits. Are any years missing or delayed? If your latest audit is not completed and submitted to the appropriate state agency, this bill applies to you.
- Starting Audit Preparation Early: Many audit delays are caused by poor documentation, incomplete reconciliations or staff turnover. Begin prepping now by reconciling accounts, closing out prior years and engaging with your external auditors.
- Strengthening Internal Controls: Weaknesses in internal processes often slow down audit completion. Use this opportunity to modernize financial systems, automate routine tasks, document policies and implement corrective action plans.
- Engaging Professional Support: This is where outside professionals can help. Advisory firms like ours specialize in audit readiness services, assisting municipalities to clean up financial records, support year-end close and collaborate with auditors for a smoother process.
Strategies for Long-Term Success
- Mid-Year Readiness Reviews
- Cloud-Based Financial Documentation
- Cross-Functional Compliance Teams
- Peer Benchmarking
- Post-Audit Debriefs
National Trends: Texas Isn’t Alone
States like North Dakota, Montana, Alabama and Colorado are also tightening fiscal oversight. Meanwhile, Florida, Illinois and New York are exploring legislation that ties funding to audit compliance.
Trend alert: Expect more states to follow Texas’ lead, linking financial privileges to audit performance.
Looking Ahead
SB 1851 may be just the beginning. Future legislation could:
- Tie grants and infrastructure funding to audit status.
- Increase public scrutiny of financial operations.
- Accelerate technology modernization in local finance departments.
Conclusion: A Proactive Approach Is Essential
Texas SB 1851 may catch some municipalities off guard, but it doesn’t have to. With proper planning and expert support, local governments can not only stay in compliance but also improve the integrity and efficiency of their financial operations. Municipalities that treat new legislation as a catalyst for modernization, rather than just a compliance hurdle, will be better positioned to thrive in a more transparent, performance-driven public finance environment.
Act soon: The deadline is approaching. Now is the time to prepare.
How We Can Help
At Cherry Bekaert, we work closely with local governments to streamline financial operations, eliminate audit delays and build long-term fiscal resilience. Some of our services include:
- Finance modernization and system support
- Governmental Accounting Standards Board (GASB) pronouncement implementations
- Pre-audit preparation and cleanup
- Support with year-end close, reconciliations and Annual Comprehensive Finance Report (ACFR) preparation
- Staff augmentation during peak reporting periods
- Internal control and compliance reviews
If you’re a city manager, finance director, comptroller or elected official, now is the time to act.
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