A blue-chip Texas program that guarantees public school bonds is near capacity amid a large wave of voter-approved debt to fix aging facilities and accommodate a growing student population.
The Texas Permanent School Fund (PSF) program, which is capped at $117.32 billion under federal law and assigns triple-A ratings to school bonds, reducing their interest costs, had $100.15 billion dollars of bonds outstanding as of June 30.
“Due to a variety of factors, including record school bond issuance this year and higher current and projected financing costs, the Texas Permanent School Fund (BGP) bond guarantee program is rapidly reaching limited capacity. by (Internal Revenue Service) rule,” the PSF said in a statement.
He added that the US Treasury and the IRS have been alerted to the problem and the hope is that they “act as soon as possible so that the program is not shut down.”
Projected available capacity from the bond guarantee program was just $3.9 billion at the end of June, while the PSF said potential demand is currently $20.5 billion, matching the amount voter-approved but unissued bonds in 140 school districts.
A shutdown could be costly for school bond issuers.
“The Texas PSF Guarantee is coveted by investors, and Texas school districts have saved a significant amount in interest costs over time by having access to the triple-A-rated PSF Guarantee,” said Ajay Thomas, Head of public finance at FHN Financial Capital Markets in Austin. “For a large number of school districts that fall below the AA rated category in terms of (their) own underlying credit rating, interest charges will be significantly higher, which will ultimately impact taxpayers.”
He added that the last time the program was forced to temporarily shut down, districts continued to have access to the market, but faced “significantly” higher costs.
The fund reached capacity in early 2009, causing the Texas Education Agency to stop accepting applications. The warranty program reopened in early 2010 after tax in December 2009 lifted the limit.
For investors, the program provides liquidity, which makes it easier to sell debt, according to Howard Cure, director of municipal bond research at Evercore Wealth Management.
In the event of a fault, which has not yet occurred in the program history, bondholders are paid by the PSF and this money is then deducted from a municipality’s next state aid payment.
S&P Global Ratings analysts said most of the Texas schools’ debt they assess is guaranteed by the fund.
“We don’t expect the pace of emissions to slow down as there are needs to support the growing population,” said S&P analyst Joshua Travis. “But if capacity is reached, obviously that will result in higher interest charges and we will assess what that impact is on the operating budgets of those school districts going forward.”
In a recent report, the ratings agency said record-breaking bond elections on May 7 helped fuel the movement toward capacity, as Texas school districts placed 207 proposals totaling $16.7 billion on ballots. vote with $10.4 billion in debt.
In many cases, districts are preparing for an expected surge in student numbers as the state continues to attract new residents. The US Census Bureau reported in December that Texas, with an estimated population of 29.5 million in July 2021, ranked second among states for the largest net inward migration gains.
The Forney Independent School District in Kaufman County in northeast Texas won voter approval in May for nearly $1.3 billion in bonds to build new schools and expand ones existing ones, as its student population is expected to grow from 14,351 in fall 2021 to 25,000 in five years and 35,000 by 2031.
The district, which has an underlying A-plus rating from S&P, used collateral for $290.9 million of bonds it sold this summer in a new money series consisting of $191.3 million. dollars of voter-issued bonds in November 2019 and $97.6 million of May Election bonds.
Meanwhile, districts are putting bonds on the November 8 general election ballots as they try to fund capital needs amid escalating costs from high inflation.
The Austin Independent School District has approved its largest package of proposed bond issues at $2.44 billion to fund a variety of projects, including security upgrades, expansions and modernizations.
The district, with underlying Aaa ratings from Moody’s Investors Service and AA-plus from Fitch Ratings, would sell six-year voter-approved bonds and use the guarantee fund to minimize interest rate costs, according to Ed Ramos, its financial director.
The Spring Independent School District, north of Houston, is asking voters to approve $850 million in bonds to rebuild a high school, build a district-wide facility and make safety upgrades. The district, which has an underlying AA-minus S&P rating, has used the guarantee program in the past.
Bond elections in Texas are limited to two dates per year, in May and November.
Thomas said some districts may decide to skip the midterm ballot and opt for May 2023 instead, despite pressing funding needs.
“Suburban schools and what were once described as rural school districts are experiencing steady growth in enrollment, in some cases explosive growth in enrollment per year, and this is contributing to the need for more facilities,” he said. he declares. “Additionally, the continued high cost of construction and high price levels for labor and materials place a significant burden on school districts to meet the needs of their residents.”
Since 1985, $231.3 billion of bonds have been guaranteed. Charter schools, which were added to the program in fiscal year 2014, accounted for $4 billion of the debt.
Cure said that while Texas school districts should have high enough underlying credit ratings to allow them to sell bonds on their own without too much pain, that might not be the case for charter schools.
“As a charter school, you run the risk of not having your charter renewed,” he said, adding that this risk usually results in lower underlying grades.
These schools must have an investment rating to be considered for the guarantee program. The state has 896 charter schools that serve 7% of public school students, according to the Texas Public Charter Schools Association.