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An Audit Report on Certification of the Permanent School Fund's Bond Guarantee Program for Fiscal Year 2011

April 2012

Report Number 12-029

Overall Conclusion

The State Auditor's Office certifies that, for the fiscal year ended August 31, 2011, the amount of school district bonds guaranteed by the Permanent School Fund's (Fund) Bond Guarantee Program (Program) was within all three limits applicable to the Program. As of August 31, 2011, the total principal of the 2,536 outstanding bond issues guaranteed by the Program was $52.7 billion. Also as of that date, the bond guarantee capacity of the Program under the State Board of Education (Board) limit was $74.4 billion, and the Board held in reserve $3.7 billion of that capacity. The bond guarantee capacity under the Internal Revenue Service (IRS) limit was $117.3 billion.

The statutory limit prescribed by Texas Education Code, Sections 45.053(a) and (d), protects the Fund by minimizing the risk of loss to the Fund. The Board's rules set another limit by allowing the Board to hold guarantee capacity in reserve, as permitted by Texas Education Code, Section 45.0531(a), which the Board may use to award guarantees to school districts with emergencies that require renovation or replacement of school facilities. IRS Notice 2010-5, issued on December 16, 2009, establishes a third limit, which 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 rates paid on tax-exempt bonds).

The guarantee saves school districts money by enhancing their bond ratings to the highest possible rating. Without the guarantee of this Program, school districts would need to (1) purchase private bond insurance or (2) pay higher interest rates on the bonds they sell.

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