Texas Permanent School Found Nearly Out Of Capacity To Guarantee New Bonds

Via Bond Buyer, a financial industry publication, comes the news that Texas’ Permanent School Fund is nearly out of capacity to back new school bonds.

For those unfamiliar with the Permanent School fund,it is one of the state’s oldest established designated funds. It was established by the state legislature in 1854, and funded by the Third Legislature with $2 million worth of treasury bonds that came from the state’s settlement with the United States upon annexation for payment of the state’s outstanding debts. The legislature regularly raided the fund through the Civil War for other purposes, and the Constitution of 1876 altered the fund, named it the Permanent School Fund, and prohibited its raiding for other purposes. Funded by the sale of public lands and petrochemical and mining royalties on public lands, today its funds are used to guarantee the issuance of general obligation bonds by independent school districts in Texas. For a mere $2,300 per bond issuance, school districts can have the PSF insure their bonds, negating the need for private bond insurance–which can be quite costly.

With $10 billion in bonds sold last year (including these bonds sold) by Texas schools, plus another $7 billion passed this past May, the PSF has a mere $371.7 million in capacity left to back upcoming bond issues.

Although this could place many Texas school districts in dire circumstances, this has happened before:

“Once, in December 2004,” said Cassie Huggins of the TEA’s state funding office. “Between December, January, and February back then, there were about 25 different school districts that were denied the guarantee due to a lack of available capacity.”

The maximum the PSF can guarantee is $56.3; it currently backs about $47.8 billion, including $4.6 billion issued this year, with $5.3 billion in bonds already in process or approved, but not yet sold. A 5% reserve fund for the Permanent School Fund must be maintained; this equals about $2.8 billion.

This is particularly interesting because the Texas Legislature has already taken steps to allow the PSF to issue additional bonds–up to five times its market value. The bill, SB 389 from the 80th Texas Legislature last year, was authored by State Sen. Florence Shapiro (R-Plano). Only two sessions prior, the Legislature passed legislation to increase the multiplier from 2 to 2 and a half. State Rep. Scott Hochberg (D-Houston) authored the legislation, HB 1295 (which was sponsored in the Shapiro.

However, the changes from the 80th Texas Legislature haven’t yet become a reality. Why? Because final approval for the changes must come from the Internal Revenue Service. The changes have been before the IRS since 2007. Bond Buyer offers the following reasoning:

One Dallas bond lawyer said the delay is partly due to the collapse of the auction-rate securities market, which has drawn federal regulatory resources away from other areas.

Huggins said the TEA has yet to hear anything from the IRS, and a representative from the office of Sen. Kay Bailey Hutchinson, R-Tex., also said he hasn’t heard of an imminent ruling from the Treasury Department.

I guess we’ll see if this added publicity increases outcry from people like Sen. Hutchison to put a fire under the Internal Revenue Service.

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