DALLAS — As Texas school districts finalize plans to put billions of dollars of new bonds to a vote in November, Fitch Ratings affirmed its triple-A rating on the state’s Permanent School Fund.
The credit enhancement enables schools in the state to issue voter-approved debt with the highest-possible rating at a fraction of the cost of private bond insurance. The Texas Education Agency administers the bond guaranty program, which costs school districts just $2,300 per issue.
“Obviously, it enhances our credit rating, and with everything that’s gone on in the market lately, especially with private bond insurers, it’s a huge benefit for districts,” said Richard Koonce, assistant superintendent for business services at the Mesquite Independent School District.
The suburban Dallas district plans to issue about $13.2 million of unlimited-tax refunding bonds, wrapped by the PSF, this week or next. Koonce said the district has a 3% present-value savings threshold for any refunding and the sale will get to market when that can be achieved.
Both Standard & Poor’s and Fitch assigned a AA underlying rating to the Mesquite deal.
Kevin Sellers, superintendent of the Keene Independent School District, said the PSF also may make Texas school debt more attractive to investors.
“It allows for a level of security for the folks interested in purchasing the bonds,” he said. “It’s not a significant amount of money for us to get the PSF backing … it’s minimal as opposed to going out and securing insurance on our own.”
Keene ISD, which is about 28 miles south of Fort Worth, is bringing $15 million of unlimited-tax school building bonds to market this week.
The district’s underlying credit isn’t rated by any of the three major agencies, so securing the PSF guarantee provides the small district with access to the market that otherwise would be hard to gain.
Fitch analysts said the highest-possible rating reflects “the significant amount of PSF resources available to cover unexpected school district defaults, and the low risk of the participating districts, many of which are rated investment grade.”
The outlook is stable, and “no Texas school district has defaulted on a bond since the Great Depression,” analysts said.
Standard & Poor’s said its AAA rating on the PSF “is based on the fund’s large, high-quality, and liquid assets, adequate asset-to-guaranteed debt ratio and strong legal provisions that limit the maximum amount of school district debt, and sound program operations, including very good underlying credit quality in the participating school districts and no default history.”
The state’s substantial oversight of the districts enhances the guarantee program, according to Standard & Poor’s.
Moody’s Investors Service last affirmed its Aaa on the PSF in August 2005.
Last year, Texas 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 roughly $7 billion of new-money issuance for schools, and there is billions more set to be on the November ballot.
The current PSF capacity is set at about $56 billion. 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 — currently about $22 billion — was passed and Gov. Rick Perry signed the bill.
Texas legislators and school districts continue to await a final decision from the U.S. Treasury Department, which had the matter on its 2007 agenda but has yet to render a ruling. One Dallas bond lawyer recently said the delay may in part be due to the collapse of the auction-rate securities market, which has shifted the focus of federal regulators from other issues.
Fitch said the state Board of Education may decide “to increase the fund’s capacity by only small increments,” and the PSF’s triple-A rating won’t be threatened by any increases to the leverage ratio to the new cap.
In 1854, the Texas Legislature created the 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 PSF backing.