WASHINGTON — Federal lawmakers from Texas are pushing for the Treasury Department to change tax rules that are forcing the state’s school districts to forego, or pay more for, the bond financing of infrastructure projects because they cannot access the Texas Permanent School Fund’s bond guarantee program.
Thirty-two representatives — the entire Texas delegation in the U.S. House — told President Obama in a recent letter that school districts are being forced to choose between not financing needed facilities or paying significantly higher costs because the Treasury has failed to modify its rules to accommodate the recently increased capacity of the PSF. The letter is dated Sept. 14, but was not released until this week.
“We believe that expeditious approval of the contemplated regulatory revisions would have an immediate stimulative effect by helping to create construction and teaching jobs as well as improving educational facilities for Texas students,” the lawmakers told the president.
At issue is the fact that although Texas law permits the PSF to guarantee up to five times its cost value, Treasury regulations limit its capacity to just 2.5 times the lower of the cost or market value of the PSF.
The state education board was permitted to double the amount of debt the PSF can currently back under a bill signed into law by Gov. Rick Perry in May 2008. However, that additional capacity remains untapped because Treasury has not endorsed the broader guarantee.
The PSF guarantee has been used to provide a majority of Texas local school districts with a triple-A credit rating since 1983. Refunding bonds do not count against the PSF’s total, and Texas school debt is constantly being defeased, freeing up new capacity for the fund.
Nevertheless, the inability to tap the newly approved capacity meant the Texas PSF had to shut its doors to new deals in March because it had reached the Treasury-approved limit, a move the lawmakers said is inhibiting “billions of dollars in infrastructure projects” for public elementary and secondary schools in the state.
Since the PSF reached capacity in March, school districts issuing bonds have had to rely on their own underlying bond ratings, or pony up for private insurance, resulting in higher issuance costs.
Last month, the Bushland Independent School District sold $9.1 million of unlimited-tax school building bonds. Although it received a three-notch upgrade to A-plus from BBB-plus by Standard & Poor’s, it would have been able to rely on a triple-A wrap from the PSF if the Treasury had approved the capacity expansion.
The lawmakers’ concern echoes that expressed by Perry in a March 2008 letter to the Treasury.
“Local school bond elections have already exceeded the IRS limit by $1 billion and these bonds will not be guaranteed” by the PSF, Perry said in the letter. “As a result, school districts are facing higher costs to finance and insure these bonds and will have to raise the taxes levied on local property owners to pay for these costs. The situation will worsen with each successive district bond election, further increasing property taxes for Texans.”
Although Treasury officials have said they have been looking into changing the regulations since 2007, no action has been taken thus far. Treasury officials met with Texas education officials to discuss the matter last November.
The PSF, which was created by the Texas Legislature in 1854, 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 Texas Education Agency. The fund has been used to guarantee school district debt since 1985.
Officials with the TEA could not be reached for comment on the letter.