DALLAS - With the Texas Permanent School Fund sidelined by capacity limits and tumbling financial markets, school districts in the state are being forced to postpone bond sales, issue debt on their own credit ratings, or seek costly outside insurance.
PSF backing confers triple-A ratings on local bond issues, obviating the need for insurance or the risk of high interest payments based on an underlying credit.
However, the fund operated by the Texas Education Agency has finally reached its legal capacity due to soaring school bond debt in recent years and a 31% decline in the value of the fund. At its peak in October 2007, the PSF was worth about $26 billion, but has fallen to about $17.6 billion a year later.
"When you get equity markets down 40% or 50%, it hits everybody hard," said Holland Timmons, chief investment officer at the TEA.
Districts seeking PSF backing in November recently received letters telling them that the program was suspended.
"I'm sitting here looking at a denial letter right now," said David Tiffin, a vice president at RBC Capital Markets who works as financial adviser for about 20 Texas districts.
One of the districts Tiffin works for, Tyler Independent School District, plans to proceed in January with $125 million of general obligation bonds approved by voters in November.
The district's double-A credit rating should raise the district's interest cost about 25 basis points higher than it would have paid with PSF backing, Tiffin estimates.
"While it would be nice to have PSF, we plan to go ahead and issue," he said. "Our desks tell us that that kind of credit is being well received in the market."
For districts with lower ratings, the decisions could be tougher, he said.
"The lower the credit rating, the more analysis ought to go into issuing the debt to meet near-term needs or waiting until the economy improves and PSF support is available," Tiffin said. "We've got a BBB-minus that we're not even thinking of bringing to market."
The San Angelo Independent School District in West Texas is one of about 20 districts with pending bond issues that is reconsidering its options. The district had planned to sell $117 million of GOs for remodeling and expansion of aging buildings but would pay about 100 basis points higher interest than it would under PSF.
The cost could be $4 million to $5 million per year above PSF-backed debt, according to the district, which carries an A-plus underlying rating from Standard & Poor's and an A1 from Moody's Investors Service.
Tiffin figures that a 100 basis-point spread on a 30-year bond would add about $162,000 per million to maturity.
The TEA's Timmons said his agency will reassess the PSF's ability to back debt in January.
"The requests that are still pending will be reconsidered in January," he said. "We were close to capacity for several weeks and it's been an issue for a while. With the recent declines in the market, there has been added complexity. Part of the capacity issue has to do with illiquid assets."
Created in 1854 to help finance the state's public school system, PSF assets include state land, income from land leases, mineral royalties, and leases of off-shore oil lands.
In the current school year, the fund will provide about $1.2 billion for public education while guaranteeing school bonds. Under Internal Revenue Service limitations, the fund has backed $80 billion since 1983.
The TEA is seeking an IRS ruling that would allow the PSF to raise its leverage, but does not know when it might come down. The Legislature in 2007 approved raising the leverage from a ratio of 2.5 times the PSF to five times, but the new law cannot take effect without IRS approval.
