Education
An Audit Report on Certification of the Permanent School Fund's Bond Guarantee
Program
April 2002
Report Number 02-038
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. The Program is saving school districts
millions of dollars in interest and bond guarantee premium costs annually by
enhancing school district bond ratings to the highest possible rating. We identified
three related issues that the PSF must address to ensure that it continues to
comply with Program limits.
Key Facts and Findings
- PSF includes only the principal amount of Capital Appreciation Bonds (CABs)
in its calculation of total bonds guaranteed when monitoring its compliance
with statutory and IRS limits. If PSF included the accretion of all CABs when
calculating the total bonds guaranteed, the total amount guaranteed would
reach current Texas statutory and IRS limits sooner than PSF currently forecasts.
- According to the PSF's analysis, the amount of bonds guaranteed by the Program
could meet the limit set forth in the Texas Education Code within the next
five years. This would compel the Program to reject future bond guarantee
requests and, therefore, increase costs at the school district level. Based
on our risk analysis the statutory limit could be safely increased without
risking the PSF's bond rating or the soundness of the PSF for a variety of
reasons outlined in the report.
- According to the PSF's analysis, the amount of bonds guaranteed by the Program
could meet the IRS limit within the next five years. For the first time ever,
in fiscal year 2001 the IRS limit became more restrictive than the Texas statutory
limit, primarily because of the market decline. However, the IRS ruling that
specifies this limit does not appear to recognize that Texas schools are operated
independently from the State and that arbitrage of interest rates that the
IRS limit seeks to prevent is not possible at the PSF level.
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