DALLAS — The Houston Independent School District will tap a record $1.89 billion bond authorization Wednesday with a $301 million issue expected to be followed in two weeks with another $150 million deal.
This week’s HISD bonds will come in two series, with the $204.2 million Series A backed by the Texas Permanent School Fund for triple-A ratings.
Even without PSF backing, the $97.2 million Series C carries ratings of AA-plus from Standard & Poor’s and Aaa from Moody’s Investors Service.
The Series C bonds are not eligible for PSF backing because they refund bonds issued when the fund was sidelined by capacity limits, according to Terrell Palmer, senior vice president at First Southwest Co., financial advisor to the district.
“If the original issue was not backed by PSF, you can’t use PSF when you refund those bonds,” Palmer said.
PSF capacity has since been raised with approval from the Internal Revenue Service.
The district expects net present-value savings of at least 10% on the refunding portion of the issue.
“I think in December things were kind of tight and it was a good thing we didn’t go out then,” said Kenneth Huewitt, chief financial officer for HISD. “From what we’re hearing now, the market’s looking pretty good for us. We’re optimistic.”
The $150 million issue coming in two weeks will be Series B bonds, Palmer said. The Series A and C will be issued as fixed-rate bonds. The Series B will be issued as variable-rate debt.
The Series A bonds reach final maturity in 2038, while the Series C bonds mature serially through 2032.
JPMorgan is senior manager on this week’s deal with co-managers Bank of America Merrill Lynch, Jefferies & Co., Ramirez & Co., Raymond James | Morgan Keegan, RBC Capital Markets and Siebert Brandford Shank & Co.
The Series 2013B variable-rate bonds are subject to mandatory tenders at the end of each of the three initial rate periods. However, the bonds do not have a liquidity facility, and the district doesn’t have the obligation to purchase the bonds on the initial mandatory tender dates.
A failed conversion or remarketing does not constitute an event of default, according to S&P. Instead, a failed remarketing at the end of each of the initial rate periods will cause the district to pay interest on the bonds at a higher rate. The bond ordinance establishes an annual stepped rate of 7.5%.
HISD’s total $327.9 million of variable-rate debt represents about 14.6% of the district’s limited-tax debt.
“Over the past decade, we’ve had about 10% to 18% of variable-rate debt,” Huewitt said. “So that’s something that’s worked for us in the past.”
The district has just opened several new schools funded by its 2007 bond authorization of $805 million. That program funded 134 renovation projects and 25 new schools.
With those construction projects underway, voters in the state’s largest school district approved $1.89 billion on Nov. 6 to upgrade 38 schools, including 20 new campuses for aging high schools. The bond proposal also called for three new elementary school campuses and $100 million in technical improvements across the district.
The HISD bond issue gained support from nearly 70% of the voters, despite the fact that it shared the ballot with more than $700 million of overlapping debt from the city of Houston and Houston Community College District.
Huewitt said that district officials feel a sense of urgency from the community to get work underway.
“There’s always room for improvement, which is what we’ve promised to do,” he said. “At some point we’ll have to go out for bond approval again, which is what makes this program so important.”
HISD last week said it is reorganizing its bond oversight committee as it prepares to issue the first bonds from its new authorization.
Administrators decided in December to revise the committee charter to give the group of up to nine members a more active role in monitoring the district’s bond program and keeping the public informed on new construction and renovation projects.
“The new committee will work in conformance with the program approved by the board and make recommendations to maximize available resources to achieve construction goals in the most effective and cost-efficient manner,” said Leo Bobadilla, HISD’s chief operating officer. “Its focus will be oversight.”
He said the goal is to have a committee that can actively serve as a watchdog over bond activities.
“We’ve promised a program that is responsible and accountable to HISD taxpayers,” Bobadilla said. “This committee is one more way for the district to ensure quality and transparency.”
HISD serves about half of the city of Houston and is the nation’s seventh largest school district with 201,594 students enrolled.
After experiencing a healthy 8.3% average annual growth rate in taxable values between fiscal 2005 and 2010, fiscal 2011 values fell 4.2% in the wake of the recession, which was comparatively mild in Houston.
Fiscal 2012 values stabilized and were $106 billion, up 1.6% over the year before. However, fiscal 2013 values increased a more impressive 6% over yielding a total $112 billion full valuation, according to Moody’s.
The increase was driven by new commercial and retail construction, Moody’s said. The district’s top 10 taxpayers comprise 4.9% of the tax base based on fiscal 2013 values.
“The district’s financial position should continue to exhibit stability over the long term given strong management policies and conservative budget practices,” said Moody’s analyst Kristin Button. “The district has historically maintained reserves well in excess of its relatively narrow policy level equal to 5% of annual operations.”
The district’s fiscal 2012 budget suffered $78 million in state aid cuts through expenditure reductions, including 300 layoffs. Further Texas aid cuts in fiscal 2013 drove a projected budget gap of $41 million, which will be closed with additional budget cuts and use of the general fund balance. HISD will not make a $17 million transfer to the debt service fund as it has done historically to offset the debt service levy, according to Moody’s.
As the Texas Legislature meets in Austin, Republican leaders in the state House and Senate have proposed budgets that do not restore the lost education funds, despite rising revenues.
A major lawsuit in state district court in Austin is expected to lead to some resolution of per-pupil spending disparities across the state, but some education leaders doubt that a ruling will come out before the Legislature closes at the end of May.
