Proposed Amendment to 19 TAC Chapter 33, Statement of Investment Objectives, Policies, and Guidelines of the Texas Permanent School Fund,
§33.65, Guarantee Program for School District Bonds
(Second Reading and Final Adoption)
May 21, 2010
COMMITTEE ON SCHOOL FINANCE/PERMANENT SCHOOL FUND: ACTION
STATE BOARD OF EDUCATION: ACTION
SUMMARY: This item presents for second reading and final adoption proposed amendment to 19 TAC Chapter 33, Statement of Investment Objectives, Policies, and Guidelines of the Texas Permanent School Fund, §33.65, Guarantee Program for School District Bonds. The proposed amendment would modify the policies for administration of the school district bond guarantee program to comply with requirements related to the recent decision of the Internal Revenue Service to reopen the program and to align with the policies of the intercept program to provide credit enhancement for school district bonds that was established by the Texas Education Code (TEC), Chapter 45, Subchapter I, as added by Section 75 of House Bill (HB) 3646, 81st Texas Legislature, 2009. The proposed amendment would also modify the existing limitations on access to the guarantee and add explanations of the actions that would follow a default by a school district.
STATUTORY AUTHORITY: TEC, §7.102(c)(33) and §45.063.
EFFECTIVE DATE: The proposed effective date of the proposed amendment to 19 TAC §33.65 is 20 days after filing as adopted with the Texas Register in order to implement the latest policy in a timely manner. Under the TEC, §7.102(f), the State Board of Education (SBOE) must approve the rule action at second reading and final adoption by a vote of two thirds of its members to specify an effective date earlier than the beginning of the 2010-2011 school year.
PREVIOUS BOARD ACTION: Section 33.65 was adopted to be effective September 1, 1996, and amended to be effective December 5, 2004; December 25, 2005; and February 22, 2009. The Committee on School Finance/Permanent School Fund discussed the proposed amendment to 19 TAC §33.65 at the January 2010 meeting. The Committee on School Finance/Permanent School Fund met for a work session to further discuss the proposed amendment to 19 TAC §33.65 in February 2010. The SBOE approved for first reading and filing authorization the proposed amendment to 19 TAC §33.65 at its March 2010 meeting.
BACKGROUND INFORMATION AND SIGNIFICANT ISSUES: The TEC, §7.102(c)(33), authorizes the SBOE to adopt rules for the implementation of the bond guarantee program as authorized in the TEC, Chapter 45, School District Funds, Subchapter C, Guaranteed Bonds. The TEC, §45.063, authorizes the SBOE to adopt rules necessary for the administration of the bond guarantee program. Section 33.65 is the rule the SBOE adopted to implement the program.
Section 33.65 sets out the statutory provisions for the bond guarantee program, provides definitions, and explains the requirements of and policies related to the program's application process. The rule also provides limitations on access to the guarantee program and allows for the commissioner to allocate specific holdings of the Permanent School Fund under certain conditions. The rule explains what effect defeasance has on guaranteed bonds and sets out specific program conditions for bonds issued or guaranteed on certain specified dates. The rule also explains program payment conditions and guarantee restrictions.
The proposed amendment to 19 TAC §33.65 would modify the policies for administration of the school district bond guarantee program to comply with requirements related to the recent decision of the Internal Revenue Service to reopen the program and to align with the policies of the intercept program to provide credit enhancement for school district bonds that was established by the TEC, Chapter 45, Subchapter I, as added by Section 75 of HB 3646, 81st Texas Legislature, 2009. The proposed amendment would also modify the existing limitations on access to the guarantee and add explanations of the actions that would follow a default by a school district.
Specifically, the proposed amendment would make the following changes to the existing rule.
Throughout the rule, references to the School District Bond Enhancement Program (SDBEP) and explanations of how bond guarantee program policies relate to SDBEP policies would be added.
The section title would be changed from Guarantee Program for School District Bonds to Bond Guarantee Program to reflect the commonly used name of the program.
In subsection (b), providing definitions, the definition for annual debt service would be modified to explicitly exclude debt that was no longer outstanding. The definition for average daily attendance would be modified to reference the definition used in the TEC. The definition for enrollment growth would be modified to reference the definition used in 19 TAC §129.1025. The definition for refunding issue would be modified to reference notes issued to provide interim financing. Definitions would be added for the terms Bond Guarantee Program, notes issued to provide interim financing, and total debt service. In addition, the list of definitions would be reorganized in alphabetical order. In response to public comments, a definition for financial exigency would also be added.
In response to public comment, references to the state information depository (SID) would be changed in subsections (b) and (c) to references to the Municipal Advisory Council of Texas or its successor.
Subsection (c), on data sources, would be modified so that the subsection lists actual data sources and not definitions of terms already defined in subsection (b).
In subsection (d), on application processing, the number of days between application deadline and prioritization of applications would be changed to 15. Also, throughout subsection (d), references to the modified approval process in subsection (e) would be added.
Subsection (d)(2) would be modified to explain that an applicant school district would be ineligible for consideration for the guarantee if its lowest credit rating from any credit rating agency was the same as or higher than that of the bond guarantee program.
Subsection (d)(3) would be modified to change certain requirements for refunding bonds.
Subsection (d)(4) would be modified to reference added provisions in subsection (e) and to specify a multiplier of three as the multiplier used to determine Permanent School Fund (PSF) capacity.
Subsection (d)(7) would be modified to change the number of business days within which a district would be notified of its application status from 10 to 15.
Subsections (d)(7) and (d)(9) would be modified to change the length of time before the expiration of approval for the guarantee from 120 days to 180 days.
In subsection (e), on application for the guarantee, the amount of the program application fee would be specified as $2,300. Also, the provisions setting out the approval process would be altered to make having a final approval process contingent on the PSF capacity's dropping to 10 percent or less.
Subsection (f), on limitations on access to the guarantee, would be modified to allow the commissioner to limit approval based on annual debt service or total debt service and to clarify provisions relating to enrollment growth and the application of the limitation.
In response to public comments, a new subsection (g), on financial exigency, would be added to explain program policies as they relate to a district that has declared a state of financial exigency. Subsequent subsections would be relettered accordingly.
Subsections (n) through (r), relettered as subsections (o) through (s), would be added to include statutory requirements related to notice of default, payments from the PSF, whether bonds are accelerated on default, reimbursement of the PSF, and repeated failure of a district to make bond payments. At the advice of agency legal counsel, subsection (o), relettered as subsection (p), would be modified to reference the interest rate and interest accrual provisions specified in the Texas Government Code, §2251.025, instead of referencing an interest rate based on the treasury pool rates published by the comptroller of public accounts.
FISCAL IMPACT: The proposed rule action would have fiscal implications for school districts, but not any beyond what is provided for by the authorizing statute. Any costs to school districts to participate in the guarantee program are outweighed by the program's benefits.
Administration of the bond guarantee program provides school districts with access to low-cost bonds. Potential savings to school districts are impossible to estimate at this time. Districts that are approved to issue bonds with the benefit of the guarantee provided by the bond guarantee program experience a savings in two ways. First, the guarantee is provided at a cost lower than that for private bond insurance. Second, districts are able to get lower interest rates on bonds that have a guarantee than they can otherwise get. Actual savings are influenced by the unique circumstances of each school district that proposes to issue bonds, including the market's assessment of the district's financial condition and the cost and availability of private bond insurance.
The Texas Education Agency has determined that there are no additional costs to the state or persons required to comply with the proposed rule action. In addition, there is no direct adverse economic impact for small businesses and microbusinesses; therefore, no regulatory flexibility analysis, specified in Texas Government Code, §2006.002, is required.
PUBLIC AND STUDENT BENEFIT: The proposed amendment to 19 TAC §33.65 would incorporate modifications for the bond guarantee program that provides low-cost bond insurance to school districts in Texas. The program also ensures that the bonds issued by school districts under the program are rated competitively in the bond market. A competitive bond rating allows districts to market their bonds at lower interest rates and thus reduces the long-term costs of the bonds for school districts and taxpayers.
PROCEDURAL AND REPORTING IMPLICATIONS: The proposed amendment would have no reporting implications but would have minor procedural implications. Specifically, districts would have 180 days instead of 120 days to get approval for the bonds from the Office of the Attorney General. Also, districts would be notified of application status within 15 days of the application deadline instead of within 10 days.
LOCALLY MAINTAINED PAPERWORK REQUIREMENTS: The proposed amendment would have no locally maintained paperwork requirements.
PUBLIC COMMENTS: Following the March 2010 SBOE meeting, notice of the proposed amendment was filed with the Texas Register, initiating the official public comment period. Following is a summary of public comment received at the time this item was prepared and corresponding agency response. Any additional public comments received and corresponding agency responses will be provided to the SBOE during the May 2010 meeting.
Comment. Several financial advisers, school business officials, and bond counsels commented that the rule does not include provisions related to school districts that have declared a state of financial exigency.
Agency response. The agency agrees that program policies related to financial exigency should be provided in the rule and proposes additional language to this amendment that provides a definition of financial exigency and policies related to financial exigency.
Comment. A bond counsel commented that references to the SID in subsections (b) and (c) should be changed because, as a result of changes in U.S. Securities and Exchange Commission rule, that name will no longer be applicable to the entity that reports bond information to the Texas Education Agency for bonds issued on or after July 1, 2009.
Agency response. The agency agrees and recommends changing references to the SID to references to the Municipal Advisory Council of Texas or its successor.
OTHER COMMENTS AND RELATED ISSUES: The meeting of the Committee on School Finance/Permanent School Fund held in conjunction with the May 2010 SBOE meeting will be held earlier on April 30, 2010. As a result, the public comment period on the proposed amendment to 19 TAC §33.65 will still be open following the April 30 meeting. Any written public comments received after April 30 will be provided to the SBOE at its general meeting on May 21, 2010.
In accordance with SBOE operating rule §2.10(d)(1), no oral public testimony will be taken on this item before the SBOE at its May 21, 2010, general meeting. Oral public testimony on this item will be taken at the April 30, 2010, Committee on School Finance/Permanent School Fund meeting.
COMMISSIONER'S RECOMMENDATION: I recommend that the State Board of Education:
By an affirmative vote of two-thirds of the members of the board, approve for second reading and final adoption the proposed amendment to 19 TAC Chapter 33, Statement of Investment Objectives, Policies, and Guidelines of the Texas Permanent School Fund, §33.65, Guarantee Program for School District Bonds, with an effective date of 20 days after filing as adopted with the Texas Register.
Commissioner of Education
Staff Members Responsible:
Shirley Beaulieu, Associate Commissioner
Finance/Chief Financial Officer
Lisa Dawn-Fisher, Deputy Associate Commissioner
Helen Daniels, Director
I. Statutory Citations
II. Text of Proposed Amendment to 19 TAC Chapter 33, Statement of Investment Objectives, Policies, and Guidelines of the Texas Permanent School Fund, §33.65, Guarantee Program for School District Bonds