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Q

Do all Texas independent school districts carry the backing of the permanent school fund, i.e., AAA?

A

James A. Klotz responds:

The vast majority of Texas school districts do carry the Permanent School Fund (PSF) guarantee, but not all. The fund, created by the Texas Legislature in 1854 to assist in the funding of public education, has been guaranteeing school district debt since 1985. Since then, approximately 2,600 bond issues worth $80.2 billion have been sold with PSF support.

Issues may not carry PSF backing for several reasons. The fund’s size and present book value limit capacity to guarantee new debt. Based on a complicated formula, the maximum allowable debt stands today at $56.3 billion. The “Bond Buyer,” a trade publication, reported recently that only $371.7 million of capacity remained as of May 31, 2008. The Texas Legislature has passed, and the governor signed, a bill to raise the capacity, but it has yet to be approved by the IRS, which monitors the tax implications of programs like the PSF.
Because of program capacity limits, the Texas Education Agency, which administers the PSF program, has instituted requirements for participation. Districts must have their bond issues approved by referendum, be financially sound, and meet other standards as well.

Demand remains high for PSF support. Over $5.3 billion has been approved or awaiting approval this year, and much of this amount may have to be sold either without the PSF guarantee, or with private bond insurance, unless capacity levels are eased.

The popularity of the PSF program, its financial strength, and “AAA” rating, have combined to provide a high quality investment opportunity for bond purchasers over the years.