AUSTIN - The deteriorating value of the Texas Permanent School Fund will increase costs of issuance for many school districts trying to bring debt to market this year.

The current value of the PSF's investments of about $18 billion is down from $25 billion last summer, according to David Anderson, legal counsel to the Texas Education Agency, which administers the triple-A rated credit-enhancement program.

"We declined applications in November and again in December and aren't confident we can issue a guarantee until February, at least, as there is a substantial amount of bonds to be retired in February," which will free up some capacity, Anderson said Thursday at The Bond Buyer's 13th Annual Texas Public Finance Conference here.

He said officials will look at the wealth of prospective districts in determining which possible issues will come to market with the triple-A wrap next month. Once that's designated, the TEA "will likely stop the guarantee at that point."

Anderson expects more Texas school debt will be retired in September and the PSF may be able to back bonds again then, but it's unclear how many.

Jim Brooks, senior vice president with Southwest Securities, estimates lower-rated school districts that come to market without the credit enhancement may see "spreads some 250 basis points more" than if the issuers had the backing of the PSF.

"We can always sell bonds, it just depends on price," Brooks said. "It's clear we're in a very unusual market, and with the PSF essentially on hiatus, [issuers] are going to pay a good deal more for bonds than [they] would with the PSF."

He said the current "flight to credit quality" means issuers with underlying ratings of double-A or triple-A should still sees rates of 4.5% to 5.5%.

But school districts rated around the triple-B category will need to get private bond insurance, which is significantly higher than the $2,300 school districts pay the TEA for the PSF, or try to get ratings upgrades ahead of sales, which "can be a hard process that requires building fund balances" among other factors, Brooks said.

Tyler Independent School District recently sold $125 million of unlimited-tax school building bonds without the PSF and the deal resulted in a true-interest cost of 4.74%, according to superintendent Randy Reid.

"We were able to get the AA rating from [Standard & Poor's and Fitch Ratings]which enabled us to get the great rate," Reid said.

Karen Wilson, chief financial officer of Spring Branch Independent School District, said she was glad her district was able to sell nearly $200 million when it did with the PSF backing.

The suburban Houston district issued the first tranche of a $597 million bond package approved by voters in November 2007 at the end of February. That sale began the district's 10-year plan to replace 12 aging schools that were built between 1938 and 1967.

The PSF's bond-guarantee program can back up to two-and-a-half times the lower of the cost value or market value of the fund. A state law passed in the 2007 Legislature calls for an increase in capacity to five times the value, but the change requires approval from the Internal Revenue Service.

The federal agency had the item on its 2007 agenda, but didn't issue a ruling that year or the next.

Anderson said the IRS still has the matter under consideration, although it's unclear when it may be addressed. He also stressed that all bonds outstanding that are backed by the PSF will remain so.

Unaudited TEA data as of Oct. 31 showed $51.35 billion of Texas school bonds outstanding guaranteed by the program and a capacity of $57.58 billion. Anderson said the state mandates a 5% reserve fund for the program, but officials plan to maintain an 8% reserve fund for the next few years.

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