An Audit Report on Certification of the Permanent School Fund's Bond Guarantee Program for Fiscal Year 2005
March 2006
Report Number 06-025
Overall Conclusion
The State Auditor's Office certifies that, as of August 31, 2005, the amount of school district bonds guaranteed by the Permanent School Fund's (Fund) Bond Guarantee Program (Program) was within the two limits applicable to the Program. One limit, prescribed by Section 45.053(a) of the Texas Education Code, protects the Fund by minimizing the risk of loss to the Fund. The other limit, which was established by an Internal Revenue Service (IRS) letter ruling, is 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).
As of August 31, 2005, the bond guarantee capacity of the fund was $46.2 billion. The total principal debt guaranteed by the Program on 2,189 outstanding bond issues was $35.2 billion. The guarantee saves school districts considerable money by eliminating the need for them to (1) purchase private bond insurance or (2) pay higher interest rates on bonds they sell. (Without the guarantee, the bonds would trade at the districts' underlying credit quality, which is typically not as favorable as the Fund's Aaa rate.)
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