DALLAS – The Houston Independent School District will issue its largest-ever deal next week after voters decide how to settle a $77.5 million financial obligation to the state.
The $838 million of bonds are expected to price May 10 through negotiation.
The deal includes about $415 million of refunding, expected to produce savings in excess of $50 million or 8.7%, according to HISD treasurer Rick Fairman.
“We do try to combine refunding and new issuance when possible,” said Fairman, who confirmed that this will be the largest single bond sale in the district’s history.
The district’s second-largest issue of $757 million came a year ago and included refunding and new money bonds.
With triple-A ratings guaranteed by the Texas Permanent School Fund, the bonds also carry an underlying Aaa rating from Moody’s Investors Service and AA-plus from S&P Global Ratings.
“We have seen both retail and institutional investor interest in our previous issues,” Fairman said. “We would expect a broad interest in these bonds, and even some foreign interest.”
Senior manager on the deal is Citi, led by managing director Mario Carrasco and director Tatianna Troutman. The syndicate includes six co-managers: Estrada Hinojosa & Co., JPMorgan, Jefferies, Loop Capital Markets, Morgan Stanley, and Siebert Cisneros Shank & Co.
Terrell Palmer, managing director at First Southwest Co., is co-financial advisor with YaCari Consultants. Andrews Kenyon Kurth is co-bond counsel with Burney & Foreman.
With this sale HISD is nearing the end of a record $1.89 billion authorized by voters in 2012. Fairman said the district will have about $100 million of authorization remaining, which he expects to be issued in the next couple of years.
The sale was originally planned for May 2 but was delayed a week so that investors would know the outcome of a May 6 referendum on how the district, classified by the state as “property wealthy,” should share $77.5 million of property value or revenue with “property poor” districts under the state’s school funding formula. The process of transferring property tax value from “property rich” districts to “property poor” districts is known as “recapture.”
With voter approval, the district can purchase attendance credits to pay its recapture obligation. If the election passes, the district anticipates recapture payments this year of $77.5 million and $210 million next year.
If voters reject the purchase of attendance credits, the Texas Commissioner of Education must reduce the district's wealth by detaching property from the district's tax base, which is estimated at $8 billion for fiscal 2018.
Last November, district voters were asked to decide the issue and rejected purchasing attendance credits, which many observers saw as rejection of the state’s school finance law.
Since then, the recapture obligation has been reduced to $77.5 million from the previous $162 million based on rising property values. That led the district to put the issue back on the ballot for the May 6 election.
“We did decide it creates a little less uncertainty by moving the bond pricing date to after the election rather than before,” Fairman said. “Regardless of the outcome, we’ll issue a supplemental disclosure statement.”
The election comes as lawmakers in Austin are deciding how to fund Houston ISD and other districts around the state in a tightening statewide revenue scenario.
In the Texas House, members approved House Bill 21 to increase funding for public schools by $1.6 billion. The bill would also simplify Texas’ complex formulas for allotting money and boost funding for some disadvantaged student groups.
Passage of the bill follows a state Supreme Court ruling in 2016 that the state funding formula was constitutional but in need of major reform.
The HISD board has voiced support for HB 21, which is expected to increase the basic allotment for all schools to $5,350 per student and reduce payments for all Texas schools currently in Recapture.
“I’m pleased the House of Representatives is making an effort to fix an outdated school finance system,” said HISD Board President Wanda Adams. “HB 21 is a step in the right direction for public education and will help provide our students with the resources they need.”
In the state Senate, a budget that cuts $1.8 billion in general revenue for schools and replaces that with local property tax revenue has already won passage. The theory behind the bill is that rising property values across the state would cover the gap.
HISD’S total tax rate adopted for fiscal 2017 was $12.07 per $1,000 of assessed values, well below the $17 statutory limit, according to Moody’s. Of the total, $10.27 was allocated for operations, and $1.80 for debt service.
“The district maintains some flexibility under its operating tax rate, and can increase the levy up to $11.70, with voter approval,” noted Moody’s analyst Adebola Kushimo. “There are currently no plans to approach voters for an increase in the operating levy.”
After this deal, HISD will have $3.2 billion of general obligation limited tax bonds and $170.2 million of lease revenue bonds outstanding, according to Moody’s. The lease revenue debt carries a lower Moody’s rating of Aa1.
Half of the district's debt is expected to be retired in 10 years. Final maturity for current GO debt is 2042. The lease revenue bonds mature in 2031.
“The district's debt profile is significantly elevated when compared to Aaa peers, but is expected to remain manageable given the anticipated assessed value growth,” Kushimo wrote. “Although the debt ratio is elevated, the capital needs will be addressing improvements and expansion to district facilities, which demonstrates the strength of the capital planning.”
HISD’s tax base of $152.9 billion as of fiscal year 2016 has grown 44% since 2012, according to Moody’s. The value of the tax base per capita has risen 28% to $103,277 over the same period.
The largest school district in Texas, Houston ISD serves about half of Houston’s population. Enrollment grew 0.2% in fiscal 2016 to reach 215,627 students, with estimates showing a modest increase in 2017 to 216,106 students.