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An Audit Report on Certification of the Permanent School Fund's Bond Guarantee Program for Fiscal Year 2012

March 2013

Report Number 13-027

Overall Conclusion

The State Auditor's Office certifies that, for the fiscal year ended August 31, 2012, 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, 2012, the total principal of the 2,634 outstanding bond issues guaranteed by the Program was $53.6 billion (see the attachment for a summary of the Program's activity during fiscal year 2012). Also as of that date, the bond guarantee capacity of the Program under the State Board of Education (Board) limit was $75.5 billion, and the Board held in reserve $3.8 billion of that capacity. The bond guarantee capacity under the Internal Revenue Service (IRS) limit was $117.3 billion.

The Board's rules set a limit by allowing the Board to hold guarantee capacity in reserve, as permitted by Texas Education Code, Section 45.0531(a). The Board may use the reserve to award guarantees to school districts with unforeseen catastrophes or emergencies that require renovation or replacement of school facilities as described in the Title 19, Texas Administrative Code, Section 33.65 (d)(5). IRS Notice 2010-5, issued on December 16, 2009, establishes a 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.

Recent changes have been made to Program statutes and rules.

The 82nd Legislature passed Senate Bill 1, which contained a provision that called for the inclusion of charter schools in the Program. That provision went into effect on September 28, 2011. In October 2011, the State of Texas requested an IRS ruling on whether the inclusion of charter schools in the Program might cause the Program to violate current arbitrage laws, which could result in the loss of the Program's tax-free status. The Fund will not make any guarantees for charter schools until the State receives assurance from the IRS that the inclusion of charter schools will not change the Program’s current tax-exempt status.

In addition, Texas Education Code, Section 45.0532, stipulates that the State's commissioner of education may not approve charter school bonds for guarantee if that guarantee would result in a lower bond rating for the Program. Based on this stipulation, the Program has indicated that it will obtain updated rating letters from the bond rating agencies to determine whether the Program will maintain its current bond rating if charter schools are included in the Program.

The Program's remaining statutory capacity, net of the Board's $3.8 billion reserve, was $18.1 billion at the end of fiscal year 2012.

The attachment provides additional information on the Program's fiscal year 2012 activity. As of August 31, 2012, the Program could guarantee an additional $18.1 billion in bonds before reaching the limit imposed by the Board's reserve of 5 percent of the Program's total statutory limit.

Auditors identified issues that were not directly related to the objective of this audit and communicated those issues to Texas Education Agency management separately in writing.

Contact the SAO about this report.

Download the Acrobat version of this report. (.pdf)