DALLAS – The Texas Permanent School Fund that guarantees more than $70 billion of public school construction bonds retains top credit ratings despite its increasing support for riskier charter school debt, analysts said.
At its Feb. 2 meeting, the State Board of Education is expected to increase the amount of charter school bond coverage from the PSF by $566 million. The charter school industry is also seeking legislative approval to increase PSF backing for its bonds to $4 billion.
Texas charter schools, which receive state funding for enrollment, must cover the cost of facilities. With PSF backing, the larger charter operators are able to lower borrowing costs for construction bonds.
"No guarantee payments have been required in the history of the program," said Moody's Investors Service analyst John Nichols, who warned that "significant increase" in charter school guaranteed debt could lead to a downgrade.
As of Nov. 30, the PSF guaranteed payments on 3,374 issues from more than 800 school districts, and 36 issues from 19 eligible charter school districts, according to S&P Global Ratings. Of the $71.5 billion of bond principal outstanding, charter school districts accounted for $1.06 billion.
"Combined principal and interest payments, for school districts and charter schools, through 2051 approaches $100 billion," S&P analyst James Breeding noted in a Jan. 25 report. "Since 2014, the net amount of issues that the PSF guaranteed increased by 400, or 13.9%, while the net par amount of guarantees increased by $9.9 billion, or 17%."
Karalei Nunn, chief operating officer of Meridian charter school in Round Rock, told the SBOE in November that the school could have saved $14 million in interest cost on a recent $30 million bond sale with backing from the PSF.
To qualify for PSF backing, charter schools must secure an investment grade rating on their own, with most at the lowest rung of the investment grade.
For traditional school districts, property tax revenue secures the bonds with a secondary guarantee from the PSF. Charter schools do not have a property tax base.
According to the Texas Education Agency that oversees the PSF, expanding charter school bond coverage will not deprive traditional schools of coverage.
Under a new formula expected to be approved at the February meeting, the SBOE plans to increase the PSF leverage multiple to 3.5 times the combined current cost value of the fund on March 1, 2017, and again to 3.75 times on September 1, 2017.
"Although this will increase the guarantee capacity of the fund, including capacity for charter schools which tend to maintain weaker credit profiles, the program's substantial assets continue to provide strong coverage and default tolerance, which is reflective of the Aaa rating," Nichols said.
Currently, charter school guarantee capacity is limited to a percentage of total available guarantee capacity equal to charter enrollment as a percent of statewide enrollment.
House Bill 467 proposes to make charter school capacity a percentage of the bond guarantee program's total capacity instead of available capacity, which would result in an increase from $1 billion to roughly $4 billion.
"Passage of House Bill 467 would be a credit negative for the PSF, as it could potentially weaken the overall credit quality of the program's participants as the PSF extends its guarantee to a growing number of charter schools over time," Nichols said.
Based only on the $24.3 billion liquid portion of the PSF at fiscal year-end 2016, coverage on the program's guaranteed maximum annual debt service is strong at 4.24 times, according to Nichols.
Seven school districts have at least $1 billion guaranteed by the PSF, according to S&P. The top three are Dallas Independent School District with $2.8 billion, Houston ISD with $2.32 billion, and Cypress-Fairbanks ISD in suburban Houston with $2.09 billion.
The annual principal and interest amount guaranteed by the PSF peaks at $5.7 billion in 2017 before gradually decreasing.
"This schedule will certainly change as additional bonds are issued and guaranteed," Breeding noted. "The largest exposure for the PSF remains in February of each year."
