SB1851

Regular Session

Relating to the penalty for noncompliance with certain audit requirements by a municipality.

CriticalImmediate action required

High Cost

Effective:2025-09-01

Enforcing Agencies

Office of the Attorney General

Compliance Analysis

Key implementation requirements and action items for compliance with this legislation

Implementation Timeline

Effective Date: September 1, 2025.
Compliance Deadline: Immediate. You must update standard Master Service Agreements (MSAs) and underwriting criteria now for contracts extending beyond September 2025.
Agency Rulemaking: The Office of the Attorney General (OAG) is not explicitly required to promulgate rules, but must establish an internal mechanism to receive and adjudicate complaints regarding noncompliance. We anticipate OAG guidance on the complaint process by Q3 2025.

Immediate Action Plan

1. Audit Your Portfolio: Identify all municipal clients with contracts extending past September 1, 2025.
2. Categorize Risk: Flag any municipality that has failed to post their financial statements within 6 months of their FYE in the last two years.
3. Update Legal Templates: Revise your standard government contract addendum to include specific protections against statutory revenue caps.
4. Establish Monitoring: Set automated calendar alerts for 180 days post-FYE for all active municipal clients.
5. Prepare for Enforcement: Draft a template complaint letter to the Attorney General to be used if a client becomes delinquent on payments due to fiscal mismanagement.

Operational Changes Required

Contracts

Existing "Non-Appropriation of Funds" clauses in your government contracts are now high-risk liabilities.

New Clause: Insert language defining an OAG determination of audit noncompliance as a "Material Adverse Event," granting you the immediate right to suspend performance or demand assurance of payment.
Payment Terms: Renegotiate payment terms from Net-45/60 to Net-30 for municipalities with a history of late reporting.

Hiring/Training

Accounts Receivable: Train AR staff to identify the fiscal year-end (FYE) for every municipal client.
Sales/Bid Teams: Pre-bid due diligence must now include a check of the municipality’s last three years of audit filing dates. If they are habitually late, price the contract to account for higher default risk.

Reporting & Record-Keeping

Compliance Calendar: You must maintain a tracking system for client audit deadlines (FYE + 180 days).
Evidence Logs: If you intend to file a complaint with the AG to trigger pressure on a non-paying city, you must document the specific date the audit was due and the absence of the filing with the municipal clerk.

Fees & Costs

No Direct Fees: There are no new filing fees for your business.
Cost of Capital: Expect increased costs in municipal bond underwriting and potentially higher insurance premiums for accounts receivable coverage involving municipal debt.

Strategic Ambiguities & Considerations

The "Determination" Timeline: The statute requires the Attorney General to "determine" noncompliance but sets no deadline for this investigation. A city could be in limbo for months while the AG investigates, during which time your invoices may go unpaid.
Cure Period: The law does not specify if a municipality can "cure" the violation mid-budget cycle to lift the tax cap immediately, or if the penalty persists for the entire tax year. Watch for AG opinions clarifying this "cure" mechanism.

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Legislative Timeline

This bill's path through the Texas Legislature

TopicsCity Government City Government--finance City Government--general Audits & Auditors

Official Analysis

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BILL ANALYSIS

Senate Research Center	S.B. 1851
89R8353 DNC-D	By: Nichols
	Local Government
	3/28/2025
	As Filed

AUTHOR'S / SPONSOR'S STATEMENT OF INTENT

S.B. 1851 will hold municipalities accountable by establishing a penalty for noncompliance of an audit or annual financial statement as required by Sections 103.001 and 103.003 of the Local Government Code. This penalty involves not allowing the municipality to raise property taxes above their no-new-revenue tax rate for the year after the attorney general determines a violation, or for the subsequent year that begins before the municipality's compliance.

S.B. 1851 would hold municipalities accountable for failure to comply with basic transparency measures, and ensure that local taxpayers know how their tax dollars are being spent.

As proposed, S.B. 1851 amends current law relating to the penalty for noncompliance with certain audit requirements by a municipality.

RULEMAKING AUTHORITY

This bill does not expressly grant any additional rulemaking authority to a state officer, institution, or agency.

SECTION BY SECTION ANALYSIS

SECTION 1. Amends Chapter 103, Local Government Code, by adding Section 103.005, as follows:

Sec. 103.005. ANNUAL AUDIT AND FILING OF FINANCIAL STATEMENT; PENALTY FOR NONCOMPLIANCE. (a) Defines "no-new-revenue tax rate" and "tax year."

(b) Authorizes a person to submit a complaint to the attorney general of a suspected violation of Section 103.001 (Annual Audit; Financial Statement) or 103.003 (Filing; Public Record).

(c) Prohibits a municipality, notwithstanding any other law, if the attorney general determines that a municipality has not had its records and accounts audited and an annual financial statement prepared based on the audit as required by Section 103.001 or has not filed the financial statement and the auditor's opinion on the statement in the office of the municipal secretary or clerk before the 180th day after the last day of the municipality's fiscal year as required by Section 103.003, from adopting an ad valorem tax rate that exceeds the municipality's no-new-revenue tax rate for the tax year that begins on or after the date of the attorney general's determination or for a subsequent tax year that begins before the date the municipality has had an annual audit completed and financial statement prepared or filed the financial statement and auditor's opinion on the financial statement with the municipal clerk, as applicable.

SECTION 2. Makes application of this Act prospective.

SECTION 3. Effective date: September 1, 2025.

Senate Authors

Sen. Robert NicholsRepublican · Primary Author

House Sponsors

Rep. Cody HarrisRepublican · Primary Sponsor

Cosponsors (1)

Carrie Isaac (R)

Bill Text(with markup)

S.B. No. 1851

View bill text in multiple formats on Texas Legislature website

Fiscal NoteView Original

	AN ACT
	relating to the penalty for noncompliance with certain audit
	requirements by a municipality.
	BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:
	SECTION 1. Chapter 103, Local Government Code, is amended
	by adding Section 103.005 to read as follows:
	Sec. 103.005. ANNUAL AUDIT AND FILING OF FINANCIAL
	STATEMENT; PENALTY FOR NONCOMPLIANCE. (a) In this section:
	(1) "No-new-revenue tax rate" means the
	no-new-revenue tax rate calculated under Chapter 26, Tax Code.
	(2) "Tax year" has the meaning assigned by Section
	1.04, Tax Code.
	(b) A person may submit a complaint to the attorney general
	of a suspected violation of Section 103.001 or 103.003.
	(c) Notwithstanding any other law, if the attorney general
	determines that a municipality has not had its records and accounts
	audited and an annual financial statement prepared based on the
	audit as required by Section 103.001 or has not filed the financial
	statement and the auditor's opinion on the statement in the office
	of the municipal secretary or clerk before the 180th day after the
	last day of the municipality's fiscal year as required by Section
	103.003, the municipality may not adopt an ad valorem tax rate that
	exceeds the municipality's no-new-revenue tax rate:
	(1) for the tax year that begins on or after the date
	of the attorney general's determination; or
	(2) for a subsequent tax year that begins before the
	date the municipality has had an annual audit completed and
	financial statement prepared or filed the financial statement and
	auditor's opinion on the financial statement with the municipal
	clerk, as applicable.
	SECTION 2. This Act applies only to the adoption of an ad
	valorem tax rate for a tax year that begins on or after the
	effective date of this Act.
	SECTION 3. This Act takes effect September 1, 2025.

LEGISLATIVE BUDGET BOARD
Austin, Texas

FISCAL NOTE, 89TH LEGISLATIVE REGULAR SESSION


March 30, 2025

TO:	Honorable Paul Bettencourt, Chair, Senate Committee on Local Government

FROM:	Jerry McGinty, Director, Legislative Budget Board

IN RE:	SB1851 by Nichols (Relating to the penalty for noncompliance with certain audit requirements by a municipality.), As Introduced

No significant fiscal implication to the State is anticipated.

It is assumed that any costs associated with the bill could be absorbed using existing resources.

Local Government Impact

There could be an impact on a municipality if the attorney general determines the municipality has not met applicable audit and financial statement requirements. The municipality would be unable to adopt an ad valorem tax that exceeds the municipality's no-new-revenue tax rate.

Source Agencies:

302 Office of the Attorney General, 304 Comptroller of Public Accounts

LBB Staff:

JMc, SZ, BC, CWi

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Frequently Asked Questions

Common questions about SB1851

What does Texas SB1851 do?

SB1851 fundamentally alters the credit risk profile of Texas municipalities by prohibiting cities from exceeding the "no-new-revenue tax rate" if they fail to file annual audits within 180 days of their fiscal year-end. This creates a statutory "budget freeze" risk for government contractors, developers, and bondholders, significantly increasing the probability of non-appropriation contract terminations starting in late 2025. Implementation Timeline Effective Date: September 1, 2025.

Who authored SB1851?

SB1851 was authored by Texas Senator Robert Nichols during the Regular Session.

When was SB1851 signed into law?

SB1851 was signed into law by Governor Greg Abbott on May 24, 2025.

Which agencies enforce SB1851?

SB1851 is enforced by Office of the Attorney General.

How urgent is compliance with SB1851?

The compliance urgency for SB1851 is rated as "critical". Businesses and organizations should review the requirements and timeline to ensure timely compliance.

What is the cost impact of SB1851?

The cost impact of SB1851 is estimated as "high". This may vary based on industry and implementation requirements.

What topics does SB1851 address?

SB1851 addresses topics including city government, city government--finance, city government--general and audits & auditors.

Legislative data provided by LegiScanLast updated: November 25, 2025

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