The Texas Permanent School Fund Bond Program this month denied a request by the Austin school district to act as its guarantor for school bonds that the district planned to sell on Wednesday, in its first of several planned sales over the next six years to pay for voter-approved projects. $2.4 billion bond package in November.
The rejection may be one of many for the fund, which this year is approaching the federally mandated limit on the amount it can repay on public school bonds. For Texas school districts, ditching the fund’s bond guarantee program could mean higher interest rates, insurance premiums, and expenses.
School districts in Texas must obtain insurance to sell their bonds, which guarantees investors that the district will return the money. For years, the Permanent School Fund has acted as a guarantor for school districts, but the state program is approaching the $117.3 billion federal cap.
Without the support of the Permanent School Fund, Austin County could have paid up to $20 million in insurance and interest to guarantee the sale of its bonds for projects from the November bond offer.
“We’ve been watching this for several years,” said Eduardo Ramos, Austin County CFO. “As school districts continue to grow for several years and continue to build and renovate older buildings, the amount of debt we issued has reached the ceiling of the Perpetual School Fund.
The $56 billion school fund provides Texas counties with non-tax income. But according to a December report from the Texas Education Agency, the program is running out of spare capacity. The Internal Revenue Service has historically set the cap at $117.3 billion.
U.S. Rep. Lloyd Doggett, D-Austin, filed federal legislation last week to remove Texas school fund restrictions. The bill changes some of the definitions in the IRS code, essentially removing any restrictions on the fund’s bond guarantee program.
“Without a corrective course, we are currently moving towards spending hundreds of millions of dollars on education at an unnecessarily high financial cost,” Doggett said. “Following the recent overwhelming voter approval of much-needed school bonds in Austin, I am particularly concerned about their impact on AIDS.”
“Obsolete limit”
Rapid statewide growth and more expensive bond packages have pushed the school funding program to its limits, officials said.
The fund had just $410 million, according to a December report from the Texas Education Agency. That’s less than a quarter of Austin County’s 2022 bond.
“Texas has grown so much that this obsolete limit is already in the rearview mirror,” Doggett said. The limit was set in 2009.
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Bobby Ott, superintendent of the Temple School District, said the opportunities for growth, inflation and aging have prompted districts across the state to look for more and more expensive bonds.
Temple District handed over $164.8 million in bonds in May. Without a government program, Temple would have less money to spend on its projects.
Removing or increasing the state’s guaranteed capacity won’t cost Texas anything, Ott said.
“You can’t find a safer investment than school bonds because they always pay off,” he said.
Austin County officials knew when they called the November bond election, Ramos said, that the district could face higher spending due to the state school fund cap.
“We hope to minimize the increase in the cost of the interest rate,” he said.
Austin County doesn’t plan to sell bonds again until next year, he said, and Ramos hopes that by then the government’s bond guarantee program will have been modified or its limit increased or eliminated.
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