Discussion of 19 TAC Chapter 33, Statement of Investment Objectives, Policies, and Guidelines of the Texas Permanent School Fund,
§33.65, Bond Guarantee Program for School Districts
April 10, 2014
COMMITTEE ON SCHOOL FINANCE/PERMANENT SCHOOL FUND: DISCUSSION
STATE BOARD OF EDUCATION: NO ACTION
SUMMARY: At the request of a board member, this item provides an opportunity for the Committee on School Finance/Permanent School Fund to discuss 19 TAC Chapter 33, Statement of Investment Objectives, Policies, and Guidelines of the Texas Permanent School Fund, §33.65, Bond Guarantee Program for School Districts. The board member has presented for discussion a proposed amendment to the rule that would explicitly provide that notes, including commercial paper notes, are eligible for the Bond Guarantee Program. Agency staff members, including agency legal counsel, note that thus far the Bond Guarantee Program has not permitted the guarantee of notes and recommend that the rule not be amended as proposed. Agency staff members do, however, recommend amending the rule to define more precisely the types of debt that are eligible for guarantee.
STATUTORY AUTHORITY: Texas Education Code (TEC), §7.102(c)(33) and §45.063, and the Texas Constitution, Article VII, Section 5.
BOARD RESPONSE: This item is presented for review and comment.
PREVIOUS BOARD ACTION: Section 33.65 was adopted effective September 1, 1996, and last amended effective December 26, 2013.
FUTURE ACTION EXPECTED: Any proposed amendment to 19 TAC §33.65 resulting from this discussion would be presented to the State Board of Education (SBOE) for first reading and filing authorization at the July 2014 meeting.
BACKGROUND INFORMATION AND SIGNIFICANT ISSUES: The TEC, §7.102(c)(33), authorizes the SBOE to adopt rules for the implementation of the Permanent School Fund (PSF) Bond Guarantee Program as authorized in the TEC, Chapter 45, School District Funds, Subchapter C, Guaranteed Bonds. The TEC, §45.063, authorizes the SBOE to adopt rules necessary for the administration of the program. Section 33.65 is the rule the SBOE adopted to implement the program.
Section 33.65 sets out the statutory provisions for the Bond Guarantee Program, provides definitions, specifies bond eligibility requirements, and explains the requirements of and policies related to the program's application process. The rule also describes how PSF capacity to guarantee bonds is determined, provides limitations on access to the program, and allows for the commissioner to allocate specific holdings of the PSF under certain conditions. In addition, the rule provides requirements specific to districts that have declared financial exigency, explains what effect defeasance has on guaranteed bonds, and sets out specific program conditions for bonds issued or guaranteed on certain specified dates. The rule also explains program payment conditions and guarantee restrictions. The current text of 19 TAC §33.65 is shown in Attachment II.
Since the Bond Guarantee Program's inception, program rules have not permitted the guarantee of notes. The amendment proposed by the board member would explicitly provide that notes, including commercial paper notes, are eligible for the Bond Guarantee Program and provide for additional accommodations to permit the notes to be eligible for the program.
Agency staff members note that amending the rule in this way is problematic for several reasons. Most importantly, because notes are considered a bigger financial risk than bonds, allowing the guarantee of notes could cause credit rating agencies to reconsider the AAA credit rating of the PSF. Also, if notes were eligible for the guarantee, and if a school district that had the attorney general's approval to issue notes up to a certain amount applied for and received the guarantee for notes that were a fraction of that amount, the program administrator would be obligated to set aside program capacity in the total amount for which the attorney general had approved the district. In this way, the guarantee of notes would consume capacity without that capacity being used for the benefit of districts. Finally, allowing for the guarantee of short-term debt instruments such as notes, which would require much more frequent applications, would create an administrative burden for the agency.
Also, it is not clear that amending the rule as proposed would benefit school districts, as it would result in several costs that could negate any savings resulting from the guarantee. For instance, to issue notes, a district is required to set up a line of credit and to use a broker, both of which have costs. Also, if a district planned to refinance notes repeatedly, as is likely, it would have to pay a new program application fee every few months as the notes became due.
Agency staff members recognize that it would be beneficial to define more precisely the types of debt that are eligible for guarantee. For this reason, agency staff members recommend amending the rule to add a definition of the term "bond" that specifies, in part, that a bond is a debt instrument with a term of at least three years. Agency staff members also recommend amending the rule to require that each issuance of bonds be approved by the attorney general for the bonds to be guaranteed. These changes would better define the eligible debt instruments and help ensure that guarantee capacity was not reduced for unused issuance capacity.
FISCAL IMPACT: Fiscal implications will be assessed if the committee directs staff to bring forward a proposed amendment for first reading and filing authorization.
PUBLIC AND STUDENT BENEFIT: The Bond Guarantee Program provides low-cost bond insurance to school districts in Texas. The program also ensures that the bonds issued by school districts under the program are rated competitively in the bond market. A competitive bond rating allows districts to market their bonds at lower interest rates and thus reduces the long-term costs of the bonds for school districts and taxpayers.
PROCEDURAL AND REPORTING IMPLICATIONS: Procedural and reporting implications will be assessed if the committee directs staff to bring forward a proposed amendment for first reading and filing authorization.
LOCALLY MAINTAINED PAPERWORK REQUIREMENTS: Locally maintained paperwork requirements will be addressed if the committee directs staff to bring forward a proposed amendment for first reading and filing authorization.
PUBLIC COMMENTS: None.
OTHER COMMENTS AND RELATED ISSUES: None.
Staff Members Responsible:
Lisa Dawn-Fisher, Associate Commissioner
School Finance / Chief School Finance Officer
Amanda Brownson, Director
I. Statutory Citations (PDF, 13KB)
II. Text of Current 19 TAC Chapter 33, Statement of Investment Objectives, Policies, and Guidelines of the Texas Permanent School Fund, §33.65, Bond Guarantee Program (PDF, 48KB)