An Audit Report on Certification of the Permanent School Fund's Bond Guarantee Program
April 2004
Report Number 04-030
Overall Conclusion
We certify that the amount of bonds guaranteed by the Permanent School Fund's (PSF) Bond Guarantee Program (Program) is within the limit prescribed by Section 45.053(a) of the Texas Education Code. This limit protects the PSF by minimizing the risk of loss to the fund. However, the Program is approaching a second guarantee limit established by an Internal Revenue Service (IRS) letter ruling, a ruling intended to prevent reductions in federal tax receipts due to bond arbitrage (issuing tax-exempt bonds for the purpose of investing the proceeds at higher rates than the tax-exempt bonds).
Based on current trends, the remaining Program capacity of $4.1 billion at August 31, 2003, could be depleted within one year. Therefore, the Texas Education Agency (Agency) will have to prioritize the districts' bond guarantee requests, rejecting some requests in favor of others, resulting in additional fees or interest costs for the school districts denied guarantees. In addition, if the PSF were to guarantee bonds in excess of the IRS letter ruling limitation, school districts could be assessed penalties.
We continue to recommend that the Agency discuss with appropriate parties the applicability of the arbitrage tax laws to the program and determine whether the IRS letter ruling limitation can be re-evaluated.
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