The Internal Revenue Service needs to modify its regulations to permit the Texas Permanent School Fund to guarantee twice as much debt, Gov. Rick Perry urged in a letter sent to the agency last month.

In May, Perry signed a bill that permitted the state education board to more than double the amount of debt the PSF can currently back, which would be up to five times the fund's market value or its cost value. However, the bill remains reliant on whether or not the IRS will endorse a broader guarantee, which has been used to provide a majority of Texas local school districts with a triple-A credit rating since 1983.

As it stands, the IRS is yet to address the matter, though it is reported to be considering it, according to Treasury officials.

In his letter addressed to Treasury Secretary Henry Paulson, Perry said the IRS' failure to authorize the increased capacity already has and could continue to force school districts to issue bonds without the PSF guarantee, resulting in increased costs across the board, which would come at a time where economic troubles are already tightening budgets.

"Local school bond elections have already exceeded the IRS limit by $1 billion and these bonds will not be guaranteed [by 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. School districts also need the PSF guarantee now more than ever because of the current problems in our nation's credit markets."

Treasury officials met with Texas education officials in November to discuss the proposed changes, but no official decision has been made.

In 2005, the IRS granted the state an extra $10 billion in expanded PSF capacity, making it capable of backing up to $53 billion of debt. Refunding bonds do not count against PSF's total, and Texas school debt is constantly being defeased, freeing up new capacity for the fund.

Nonetheless, the vast majority of $8 billion of bond proposals, from about 60 school districts, were approved last year, which finally drove the total beyond the PSF's ability to guarantee debt. At the time, the fund only had about $4.7 billion of available capacity.

However, the PSF's capacity only applies to bonds that are outstanding, meaning that debt that has been authorized but not yet issued still could potentially be guaranteed by the fund if and when it gains IRS approval.

The agency did place the PSF issue on its list of items to consider for calendar year 2007, but 2008 came without a decision on the matter. Treasury officials said yesterday the department is considering Perry's comments, but has not established a timeline for a decision.

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