DALLAS - Texas school districts must build new facilities to keep pace with population growth at a time when the state's triple-A rated bond guarantee program remains on hiatus awaiting a federal tax ruling.
In March, Texas education commissioner Robert Scott suspended Permanent School Fund guarantees because the value of the fund "had declined to the point that outstanding guarantees ... exceeded capacity under the federal regulations."
Last week, the Texas Education Agency said the program won't be available to wrap bonds coming to market until the Internal Revenue Service issues a ruling on a proposal to increase the fund's capacity. The agency had the matter on its 2007 agenda but has yet to issue a decision.
TEA spokeswoman DeEtta Culbertson said it is not clear when a ruling may come.
Two years ago, the Legislature passed a bill to increase the PSF's capacity to five times its market value from the current two and a half times.
Scott initially hoped the bond guarantee program would be available again as early as September after the seasonal retirement of bonds in August added some capacity to the fund. But even if capacity opens up some, the TEA won't reinstitute the program until the IRS ruling comes down.
"Right now, it's still on hold," Culbertson said.
Several municipal market participants in Texas have said the delay in the federal ruling could be related to the collapse of the auction-rate securities market and the myriad other financial problems that have popped up over the past 18 months.
Culbertson agreed that the national credit crisis has apparently superseded the PSF's capacity issue for regulators.
"We'll welcome the decision when it comes and hope they understand that the PSF has saved billions in interest costs for us here in Texas," said Jim Brooks, senior vice president at Southwest Securities Inc.
At $2,300 per issue, the PSF enables Texas schools to issue debt with the highest-possible ratings at a fraction of the cost of private bond insurance.
Brooks added that the change in the executive branch administration earlier this year may have led to "not enough undersecretaries in place yet to look at everything."
Nevertheless, fast-growing school districts need to issue bonds to build facilities to house swelling enrollments. And the interest rate spread between a double-A underlying credit and a triple-A enhanced bond "can be 20 to 30 basis points" depending on the market the day of the sale, according to Ryan O'Hara, a director at RBC Capital Markets in Houston and a financial adviser to numerous school districts.
Brooks said the spreads between a Baa1 or BBB-plus credit and a triple-A can be as high as 200 basis points.
Texas school bonds already in the market with the PSF guarantee are pricing well because there is not a lot of "pure triple-A debt out there anymore," O'Hara said. "Trying to sell a revenue bond that's in the A category is pretty tough right now."
O'Hara has six clients with refundings on hold because the PSF isn't available to insure the bonds. One client, the Conroe Independent School District, had its Aa3 rating assigned to a $13.4 million refunding withdrawn by Moody's Investors Service due to the "indefinite postponement of the bond sale." Analysts did affirm the Aa3 rating on the district's $843 million of parity debt outstanding.
The district initially expected to price the refunding bonds in March. Officials did sell about $83.8 million of unlimited tax school building bonds in early April following an upgrade to AA from AA-minus by Standard & Poor's.
Conroe ISD, which is roughly 35 miles north of downtown Houston, has a current enrollment of about 47,900 and is adding almost 1,500 students a year. Projections show enrollment swelling by about 21,500 students over the next eight years, necessitating at least seven new campuses.
Moody's also recently withdrew a Baa1 rating assigned to a $2.1 million refunding by the Troup Independent School District that was expected to price in March but didn't.
"They were looking to price just when [the TEA] thought the PSF capacity might open up at some point," Moody's analyst Gera McGuire said of the Troup ISD. "But without the triple-A wrap, I guess they were moved out of the market or didn't see an opportunity for the market to provide the anticipated level of savings and they postponed the deal."
The district did not return telephone calls seeking comment.
Some districts don't have the luxury to postpone borrowing.
"Some can postpone sales in the hopes the PSF comes back but it appears some high-growth districts have to pay whatever they have to pay regardless of the PSF and seek possible savings from a refunding later," McGuire said.
The Fort Bend Independent School District plans to offer $269.6 million of unlimited-tax school building bonds at some point this week. Southwest Securities is the financial adviser to the growing suburban district southwest of Houston that carries underlying ratings of AA from both Fitch Ratings and Standard & Poor's.
"They'll forgo a refunding because of no PSF, but they've got to issue and get schools built for the new kids coming on line," O'Hara said, adding that one problem in forgoing the PSF on an issue is the inability to ever have the enhancement back that series of bonds.
"Once you forgo the PSF, you can't get it back, at least, as it's written now," he said. "As an FA you want to preserve as much flexibility as possible, but there isn't a lot of momentum to wait right now, especially some of the districts that continue to see enrollment growth."
The fiscal 2009 taxable-assessed value of the Fort Bend ISD is nearly $23.1 billion, which is up 13% from a year earlier and an increase of 176% since the $8.3 billion for fiscal 1998.
The district began the decade with a total enrollment of about 50,000 students. It now serves nearly 66,000 students and projections show enrollment climbing to about 71,000 for the 2011-2012 school year.
