Texas school bond guarantee program capacity rebounds to $5.4 billion

Some capacity was restored to a nearly depleted Texas school bond guarantee program last month after state officials took action, but even more demand for the cost-saving enhancement is expected in the wake of upcoming bond elections.

The latest data for the Permanent School Fund (PSF) program showed projected available capacity of $5.4 billion on March 17 after falling as low as $26.6 million at the end of December and increasing to just $194 million at the end of January.

Dwindling capacity led the state board of education in February to lower the program's reserves to 0.25% from 5% effective March 1 as a way to free up billions of dollars, while remaining under a $117.32 billion cap set by the Internal Revenue Service.

The program has seen a huge demand for the triple-A-rated enhancement from Texas public school districts flush with voter-approved bonds from May and November 2022 elections.

The resulting low capacity forced many districts to sell debt based on their own underlying ratings or with insurance as the Texas Education Agency (TEA) prioritized the guarantee for school systems with the lowest property wealth per average daily attendance.

Nearly $24.7 billion of school bonds are on ballots in the May 6 election, according to a Texas Comptroller database. One of the largest proposals comes from the Denton Independent School District north of Dallas, which is seeking a three-part, $1.4 billion bond authorization for school construction, security improvements, technology, and renovations to an athletic complex. 

There will clearly be a capacity constraint issue for districts seeking the state guarantee, although the new debt will be issued over time, according to Ajay Thomas, head of public finance at FHN Financial Capital Markets in Austin. 

"While I believe the state has now done all it can to create capacity in the PSF, it is now in the federal government's hands to revalue the fund and set new capacity limits," he said in an email.   

After legislation to permanently remove the IRS limit stalled in Congress last fall, U.S. Rep. Lloyd Doggett, D-Texas, in January introduced the Keeping Texas School Construction Costs Down Act of 2023.

The bond guarantee program last reached capacity in 2009, forcing the TEA to stop accepting applications. It reopened in early 2010 after the IRS in December 2009 increased the limit. 

In the event of a default, which has never happened in the history of the program, bondholders are paid by the permanent school fund and that money is then taken out of a district's next state aid payment.