Regional News

In Texas, More Bad Insurance News

DALLAS -Texas is nearly out of capacity to back new school bonds with its triple-A rated Permanent School Fund.

The constraints come at a time of strong demand for the PSF backing from school districts and as the private bond insurance market reels from the impact of the subprime mortgage crisis.

The Texas Education Agency administers the PSF bond guarantee program, which has served to negate the need for school districts to purchase private bond insurance. The enhancement costs school districts just $2,300 per issuance, a fraction of what private bond insurance would cost.

Last year, state's school districts sold more than $10 billion of bonds, the vast majority of which came to market backed by the PSF. In early May, voters across the state approved another $7 billion of new-money debt issuance for schools and there are billions more expected to be on the November ballot.

But as of May 31, the PSF had just $371.7 million in remaining capacity available to back upcoming bond sales.

The tap has run dry 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 allowable debt for guarantee under the program is $56.3 billion.

Including the $4.6 billion of Texas school debt already issued this fiscal year the program currently backs slightly more than $47.8 billion, with about $5.3 billion in process or already approved.

The state Board of Education stipulates the TEA maintain a 5% reserve fund for the PSF, which equates to about $2.8 billion.

After factoring in all those figures, there is just the $371.7 million available, according to the TEA.

During the last session of the Texas Legislature, a bill written by Sen. Florence Shapiro, R-Plano, to increase the bond guarantee capacity of the PSF to five times its market value was passed and Gov. Rick Perry signed it into law.

Now Texas legislators and school districts await a final decision from the Internal Revenue Service, which had the matter on its 2007 agenda but didn't render a ruling last year and still hasn't done so. 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.

In 1854, the Texas Legislature created the Permanent School Fund, which includes stocks, bonds, and oil and gas royalties from state-owned land. The "sole purpose of the PSF is to assist in the funding of public education for present and future generations," according to the TEA. Some estimates have the fund generating nearly $700 million a year in earnings.

The fund has been used to guarantee school district debt since 1985. Over the past 23 years, nearly 2,600 bond sales worth about $80.2 billion have been issued with the PSF gilt-edged backing.

Last week, about $680 million of school debt was priced and it was all backed by the PSF. The state approves school districts' requests for the guarantee months in advance of issuance.

This week's schedule has just four smaller school districts set to issue debt. Yesterday, the Fredericksburg Independent School District sold $9.7 million of bonds and the George West Independent School District sold $8.6 million of bonds, both in negotiated sales.

At some point this week, the Stanton Independent School District expects to offer $9 million of unlimited-tax school building bonds and the Sherman Independent School District will issue about $22.7 million of variable-rate school building bonds through negotiated sales.

All the bonds come to market with the triple-A wrap provided by the PSF.

Sherman ISD carries underlying ratings of A2 from and A-plus from Standard & Poor's.

Bruce Barnett, assistant superintendent of finance for the North Texas district, said he's glad the bonds will be sold with the PSF backing.

"Ultimately it cost taxpayers more money when you have to buy the private insurance," he said. "But we have the piece of paper from the TEA telling us we're qualified and the bonds have the guarantee."

Barnett also said the new election cycle for Texas schools has led to a flood of bond sales after elections that are now mandated to be held in May and November.

In addition, numerous school districts have been in the market lately because of the need to make a debt service payment during the current fiscal year to be eligible for assistance under the state's existing debt allotment.

The Dallas Independent School District finally completed its long-overdue audit for fiscal 2007 and now plans to start selling some of a $1.35 billion bond package approved by voters last month. The second-largest district in Texas may be in the market with as much as $400 million of school building bonds in the next few weeks.

DISD co-chief financial officer Steve Korby said he doesn't see any short-term problems with the PSF and said the district will try to get the triple-A enhancement for its upcoming bond sales.

"If we're unable to have our bonds sold with the PSF backing, it's going to be expensive but we may ultimately have to purchase bond insurance," he said. "There's been a significant number of bonds approved lately and those districts are going to all seek the PSF backing for their bonds, but I still don't think [purchasing private insurance] is going to occur this time."

The Dallas school district, which is the 12th-largest in the country, carries underlying ratings of AA from Fitch Ratings and Standard & Poor's and Aa3 from Moody's Investors Service.

DISD has $1.5 billion of outstanding debt guaranteed under the PSF.

A rating agency analyst who did not want to be named said one solution the TEA might consider is becoming a little more restrictive with which schools qualify for the program. He suggested that perhaps the PSF should only back districts rated single-A or lower.

Reaching capacity a few years ago did nothing to hamper the fund's gilt-edged rating.

In a note from April 2007, Standard & Poor's said "reaching capacity in recent years has not hindered the fund's AAA credit fundamentals, but it has recently posed challenges for school districts forced to seek private bond insurance to achieve the AAA enhanced rating."

That may be even harder and more expensive now given the woes that have lately afflicted bond insurers. And it may force investors to look even more closely at an issuer's underlying ratings.

Financial Security Assurance Inc. and Assured Guaranty Corp. still carry triple-A ratings from all three agencies, but most other insurers have been downgraded over the past few months, including some to junk status. Billionaire investment guru Warren Buffet's foray into bond insurance - Berkshire Hathaway Assurance Corp. - also is rated triple-A.



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