DALLAS — With the Texas Permanent School Fund back in action after a yearlong hiatus, legislators are considering extending the bond guarantee to charter schools for new facilities next year.
PSF backing would lift the charter school bonds out of their below- or low-investment-grade rut to triple-A status and allow the schools to build facilities that they now have to finance without help from the state or local school districts. Under existing law, the program guarantees only tax-supported bonds issued by traditional school districts.
As a relatively new type of school designed to operate independently of public school districts, charter schools do not receive public funds for facilities, though they do receive state and federal funds for per-pupil education costs.
Only the largest and most successful charter schools are able to issue municipal bonds, as the market is not there for lesser credits.
At a meeting of the state Senate Education Committee last month, lawmakers discussed expanding the bond-backing to charter schools as one measure to improve school-choice options in the state. They also considered allowing more charter schools to use buildings that were not needed by the existing school district, as is done often in the Houston Independent School District.
The Senate committee is holding hearings in preparation for the 2011 legislative session, at which school finance is again expected to be a major issue.
Sen. Royce West, D-Dallas, questioned whether charter schools might use up PSF capacity needed by the traditional independent school districts.
Charter school students account for only about 2.5% of total enrollment in the state, Texas Education Agency officials said, so the fund’s capacity to handle the added load would not be a problem.
Sen. Florence Shapiro, R-Plano, said that allowing charter schools into the program would have a minor impact on public school districts.
It has not been determined what minimum credit standards charter schools would have to meet in order to get PSF backing.
Capacity limits became an issue in 2008 when the TEA put the PSF on hold because it had reached the limits of its leverage ratios. Since its inception in 1983, the Bond Guarantee Program has backed more than $83 billion of bonds. It now backs $50 billion of bonds issued by 781 school districts.
With the financial markets in turmoil, investment results at the PSF fell sharply, denting its assets just as growing school districts were issuing bonds at an unprecedented rate and seeking PSF backing.
Last December, however, the Internal Revenue Service allowed the PSF to double the ratio of debt guarantees to fund value. At the same time, the value of the fund was on the rebound in 2009 — it grew at a rate of 25%, to $22.2 billion at the end of 2009 from $18.1 billion a year earlier.
The growth rate put PSF in the top 10% of public funds greater than $1 billion and in the top 10% of endowments greater than $1 billion last year. It was also in the top third of public funds and endowments for the two-year period ending Dec. 31, 2009.
“The PSF had an outstanding year in 2009 as a result of strong performance by each asset class as well as the benefits from rebalancing the portfolio during volatile markets,” said chief investment officer Holland Timmins.
Despite the strong growth, the PSF’s ability to expand its bond backing was contingent on the fund’s retaining its triple-A ratings. All three rating agencies have now confirmed those ratings.
In its report issued last week, Moody’s Investors Service noted that the public school districts are audited by the TEA and must qualify for the bond backing. So far, no district has needed the PSF to pay debt service on a bond issue.
“The size, diversification, and strong credit quality of the underlying school districts’ general obligation debt are important credit considerations,” analysts wrote. “Moody’s maintains public ratings on 92% of guaranteed par and has made internal assessments on the remaining 8%. Underlying credit quality is strong — with a weighted average of A1, which includes non-public ratings.”
So far, there have been no assessments on what impact the charter schools might have on the underlying credit quality. But charter school bond issues are typically small.
One of the larger issues rated last week was a $90 million deal from the Texas Public Finance Authority Charter School Finance Corp. for the Cosmos Foundation. The bonds will be issued in two tranches, including a $39.9 million taxable portion. Standard & Poor’s rated the deal BBB with a stable outlook.
The Cosmos Foundation operates Harmony Science Academy, a tax-exempt nonprofit with eight publicly funded charter schools affiliated with the University of Texas at Austin. Harmony Science Academy emphasizes math, science, and college preparation for K-12 students.
In rating the bonds, analysts James Breeding and Kate Choban noted the foundation’s aggressive expansion plans, the challenges associated with opening schools in new locations throughout the state, and the need and ability to transfer funds from one school to another.
Other factors included an “adequate-to-weak operating liquidity position, the potential to further leverage the secured revenue streams, lack of a long-term operating history at several of the schools, significant use of leased facilities, and lengthy debt-service amortization with final maturity in 2040.”
The analysts said that while projections indicate adequate debt-service coverage, “we believe that expenditures will need to be managed prudently, especially at the new schools with no operating history. Overly aggressive expansion of the foundation’s facilities that results in increased pressure on liquidity and coverage could result in downward rating pressure.”
Since its creation in 2003, the Texas Public Finance Authority Charter School Finance Corp. has issued revenue bonds for six charter schools. The nonprofit corporation is supervised by a board of directors consisting of five members, three of whom were appointed by the Texas Public Finance Authority board, and two by the original board.
For the traditional school districts, the return of the PSF has allowed them to again refund older debt to provide precious debt-service savings as well as lower costs of finance on new money.
At the Daingerfield-Lone Star Independent School District in East Texas, the school board expects to save about $41,000 a year in interest cost with the refunding of $6 million of bonds issued in 2001. Over 11 years, the savings would come to more than $400,000, according to the financial adviser, Coastal Securities.
With the bond insurance industry in turmoil, the PSF so far in 2010 is the third-biggest enhancer of municipal bonds nationally. It has insured more than $1 billion in 53 issues, behind the former FSA Inc. — now Assured Guaranty Municipal Corp. — with $5 billion and Assured Guaranty with about $1.5 billion.
