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An Audit Report on Certification of the Permanent School Fund's Bond Guarantee Program for Fiscal Year 2014

March 2015

Report Number 15-026

Overall Conclusion

The State Auditor's Office certifies that, for the fiscal year ended August 31, 2014, the amount of school district bonds guaranteed by the Permanent School Fund's (Fund) Bond Guarantee Program (Program) was within the limits applicable to the Program. In addition, the Fund had sufficient reserves to meet the State Board of Education's (Board) reserve requirements for the same time period.

As of August 31, 2014, the total principal of the 2,879 outstanding bond issues guaranteed by the Program was $58.4 billion (see Section 1 of the attachment for a summary of the Program's activity during fiscal year 2014). In addition, as of that date, the bond guarantee capacity of the Program under the Board limit was $82.8 billion. The Board held in reserve $4.1 billion (5 percent) of that capacity.

The Board's rules in the Texas Administrative Code set a limit on the Program's bond guarantee capacity of three times the cost value of the Fund, as permitted by Texas Education Code, Section 45.053(d). The Board's rules also require the Board to hold guarantee capacity in reserve of no less than 5 percent of the Fund's capacity, 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 Title 19, Texas Administrative Code, Section 33.65(e)(2).

Furthermore, on September 16, 2013, the U.S. Treasury and the Internal Revenue Service (IRS) published proposed rules in the Federal Register (IRS proposed rules) that established another limit on the bond guarantee capacity of no more than 500 percent of the total cost of the assets held by the Fund as of December 16, 2009. That federal limit is intended to provide flexibility to state and local governments to obtain credit enhancement for tax-exempt bonds. The bond guarantee capacity under that limit was $117.3 billion.

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

The Program's remaining statutory capacity, net of the Board's $4.1 billion reserve, was $20.3 billion at the end of fiscal year 2014.

The attachment provides additional information on the Program's fiscal year 2014 activity. As of August 31, 2014, the Program could guarantee an additional $20.3 billion in bonds before reaching the limit imposed by the Board, net of its $4.1 billion reserve. The remaining capacity is equal to 24.5 percent of the Program's statutory capacity.

The Program began to award guarantees to charter district bonds in May 2014.

The Board guaranteed $302.5 million in bonds for six charter districts during fiscal year 2014. That amount is included in the bond amounts discussed in the attachment. Of the $302.5 million in bonds issued to charter districts, $152.5 million were refunding bonds and $150.0 million were non-refunding bonds. All of those amounts were lower than the guarantee limits for charter districts set in Texas Education Code, Section 45.0532. The Texas Education Code limits the available bond capacity for charter districts based on the percentage of the number of students enrolled in open-enrollment charter districts compared to the total number of students enrolled in all Texas public schools. As of August 31, 2014, the Fund's capacity used to guarantee charter district bonds was 3.95 percent of the Fund's capacity, or $801.3 million, of which no more than half can be used for refunding bonds.

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