DALLAS — School districts in Texas are seeing some green shoots after weathering nearly an entire year without the state’s Permanent School Fund backing for their bonds.

Though still not back to its peak of $25 billion, the PSF has recovered about $6 billion from its low of $16 billion last spring amid steadily improving financial markets.

“Given the market conditions of the last year when many asset classes fell 25 to more than 40%, the Permanent School Fund has turned in a better than anticipated return,” said Gail Lowe, chair of the State Board of Education.

A recent analysis shows that for the past 12 months, ending Sept. 30, the PSF’s total return was 2.55%. It was 4.74% annualized for the past five years.

“This was a solid return for a year in which the capital markets experienced the worst decline since the Great Depression with a high degree of volatility,” said Holland Timmins, chief investment officer of the fund. “In addition, the fund outperformed its policy benchmark by 84 basis points.”

Despite the PSF’s strong recovery, the fund remains at capacity for debt guarantees and because of that has been unable for months to offer its triple-A backing for school district bonds in the state.

Two years ago, the Texas ­Legislature approved an increase in the bond guarantee program, but the measure needs Internal Revenue Service approval before it can take effect.

Texas Education Agency officials who oversee the PSF have said that they will not issue any new bond guarantees until the IRS approves the expansion, even with a rebound in investment results.

Faced with growing demands on their facilities, school districts with ratings strong enough to attract investors have pressed ahead with deals.

A flood of issuance is coming to market in the last two months of the year, as districts seek to take advantage of favorable rates that also make debt refundings feasible.

The Houston Independent School District, the state’s largest, is preparing to issue $183 million of taxable Build America Bonds for construction and refurbishing of schools.

The bonds carry strong enough ratings that a guarantee is not seen as necessary, with Standard & Poor’s affirming the district’s AA-plus and Moody’s Investors Service affirming its Aa2 rating.

Districts are finding that without PSF backing a rating in the double-A category is needed to attract risk-averse investors.

The Decatur Independent School District, about an hour’s drive from Fort Worth, attained that rating last week as Standard & Poor’s raised the district to AA-minus from A-plus ahead of its $16 million general obligation bond issue.

Standard & Poor’s also lifted the Fairfield Independent School District south of Dallas to AA-minus from A-plus ahead of its $5 million refunding deal.

The large and growing Carroll Independent School District in Fort Worth’s northern suburbs got a boost to AA-plus from AA ahead of this month’s $58 million BAB issue.

In one of the biggest moves, Standard & Poor’s raised its issuer credit rating on the Zapata County Independent School District three notches to A from BBB based on its solid recent financial performance.

Fitch Ratings, meanwhile, raised the Cedar Hill Independent School District in the southern Dallas suburbs two notches to A-plus from A-minus.

More bonds are in the pipeline after voters approved more than $1 billion of proposed issues for local districts on Nov. 3.

The Arlington Independent School District between Dallas and Fort Worth won approval of $197 million, and voters in the Brazosport Independent School District near Houston authorized $166 million.

Despite the positive news, school finance remains one of the toughest issues facing state leaders.

In this year’s legislative session, lawmakers used most of the nearly $2 billion of stabilization funds from the federal stimulus plan to pay for education-related expenses that normally would have been covered by the Permanent School Fund.

In addition to securing bonds, the PSF spins off some of its income for school districts under the Available School Fund. When the Available School Fund increases, lawmakers traditionally lower appropriations from the general fund, leaving districts at the previous status quo.

While the federal money covered the funding needs for the current fiscal year, Jon Graswich, chief financial office of the Northwest Independent School District outside Fort Worth, wonders: “What are they going to do next time when the stabilization funds aren’t there?”

With 4.4 million students and $35 billion in annual operating costs, the school districts are by far the largest fiscal responsibility of the state.

Joe Smith, an educational consultant and former school superintendent who founded TexasISD.com, sees an education funding crisis hitting during the 2011 legislative session.

“I think that the situation will manifest itself or start manifesting itself in 2011 in an extreme way,” he told the Associated Press. “There’s going to be a whole lot of districts that are going to be up against the wall.”

In a report on Texas’ general obligation bond rating, Standard & Poor’s analysts Horacio Aldrete-Sanchez and Kate Choban cited the school finance issue as stiff challenge facing the growing state.

“Ongoing budgetary pressures, which are primarily related to the growing proportion of school revenues the state is required to fund, as well as the insufficient new sources of recurring dedicated tax revenues to support the increased funding,” they wrote.

“We believe that the greater share of state funding for schools, and the timing of when these disbursements to school districts are made, can drastically increase the pressure on the state’s cash flows and accumulated reserves, particularly if revenue growth continues to wane during the next two years.”

The school finance issue has been a chronic problem in the state since its founding, but the current issues stem from a 2006 court order that forced Texas to fix its funding formula or face closure of schools.

Under the 2006 plan the tax burden shifted partially from local property taxes to a revised business tax and higher cigarette taxes. However, the new business tax has not generated as much money as expected, and voters have shunned tax hikes. Texas has no personal income tax.

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