Texas Permanent School Fund Bond Guarantee Program

Committee of School Finance/Permanent School Fund September 2013

Bond Guarantee Program

Mission

To guarantee bonds issued by school districts or by the state for the purpose of making loans to or purchasing the bonds of school districts for the purpose of acquisition, construction, or improvement of instructional facilities including all furnishings thereto. State of Texas Constitution, Article VII, Section V (2)(d)

Bond Guarantee Program

Overview

Established 1983 by Texas Constitutional Amendment Bonds are fully guaranteed by the corpus of the Permanent School Fund Guarantee Capacity is Limited

IRS Limit Statutory Limit

Since inception TPSF has guaranteed 5,227 issues Currently there are 2,796 bonds outstanding *07/31/2013 No district has ever defaulted
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Bond Guarantee Program

Regulatory Highlights

1989 IRS 1.148-11(d)(1)(vi) allows the fund to guarantee bonds up to 250% lower cost or fair market value of the TPSF. 1994 SEC makes amendments to Rule 15c2-12. 2003 78th Regular Session of the Legislature increased the State Capacity to 250% lower cost or fair market value of the TPSF. 2007 80th Regular Session of the Legislature authorized the Board to increase the limit up to 500% of the cost value of the TPSF, as long as increase is consistent with federal requirements and does not prevent the bonds to be guaranteed from receiving the highest available credit rating (AAA). Dec 2009 IRS increases capacity limit to 500% of the total cost of the assets held by the TPSF as of December 16, 2009. May 2010 State Capacity Limit is increased by the State Board of Education to 300% the cost value of the TPSF.
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Bond Guarantee Program

BGP Participation Requirements

District must be accredited by the State Have at least one credit rating below a AAA Bonds must be for the purpose of constructing, renovating, acquiring, and equipping school buildings Applications must be approved by the Commissioner of Education Bonds must be approved by the Office of the Attorney General
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Bond Guarantee Program

What the Program Guarantees

If a participating District cannot make the next principal or interest payment on a guaranteed bond, the amount needed to pay will be transferred from the TPSF to the Districts paying agent. The Commissioner of Education will direct the Comptroller of Public Accounts to withhold the amount paid, plus interest, from the first State money payable to the District, regardless of source. Unmatured bond payments are not accelerated upon default by a District.
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Bond Guarantee Program

Guarantee Process Flow
School District determines it will be unable to pay the next interest and/or principal payment due on a guaranteed bond. Bond holders are paid by the paying agent. The Commissioner directs the Comptroller to withhold the amount paid, plus interest, from the first State money payable to the District, regardless of source, including the ASF.

District immediately notifies the Commissioner of Education on inability to pay.

Commissioner instructs the Comptroller to transfer amount necessary to pay defaulted amount from the PSFs State Treasury account to the Districts paying agent.

The Comptroller transfers the amount paid plus interest back to the PSF.

Commissioner notifies the PSF to generate cash for transfer.

PSF generates the required amount of cash and transfers it to State Treasury.

Since inception of the Program, no District has defaulted on guaranteed debt.

Bond Guarantee Program

Program Growth
Bond Guarantee Program Growth
Billions Number 8 60 3000

50

2500

40

2000

30

1500

20

1000

10

500

Amount Outstanding

Issues Outstanding

Bond Guarantee Program

Program Limits
Amount of Bonds Guaranteed Compared with State Limitation and IRS Limits 1996 - 2013

Billions

140.00

120.00

100.00

80.00 Balance IRS Limitation State Limitation 40.00

60.00

20.00

0.00

Bond Guarantee Program

Program Growth Compared to TPSF Growth
Growth of TPSF Net Assets Compared to Growth of Bond Debt Guaranteed Since Inception of Bond Guaranteed Program
Billions $60

$50

$40

$30

TPSF Net Assets BGP Debt Guaranteed

$20

$10

$-

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Bond Guarantee Program

Guaranteed Debt at 7/31/2013
Payment Profile, All Debt vs. CAB Debt Guaranteed by the Bond Guarantee Program at 7/31/2013
Millions Total Debt Guaranteed $4,500 $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047 2048 2049 11 2050 2051

Total Principal

Total Interest

CAB Principal

CAB Interest

Bond Guarantee Program

Types of Bonds Guaranteed by the Texas Permanent School Fund

Capital Appreciation Bond (CAB) Bond that is issued at a discount, bears no stated rate of interest, and accretes in value from the date of issuance to the date of maturity. At maturity, the investor receives the original par amount plus all the accreted interest. Premium Capital Appreciation Bond (PCAB) A type of CAB that has a stated yield or accretion rate that is higher than its actual (market) current yield to investors. This difference results in a lower initial stated par amount which preserves debt capacity. Compound Interest Bond Bond that is issued at a stated interest rate, the interest is compounded over the life of the bond and not paid until maturity. Premium Compound Interest Bond A type of compound interest bond sold to investors for more than the face amount of the bond. Generally this occurs when the market interest rate at the time of sale falls below the stated interest rate. Current Interest Bond (CIB) a bond on which interest payments are made to bondholders on a periodic basis.
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Bond Guarantee Program

Principal and Interest Payments, 7/31/2013 to Maturity

Millions

$60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $Capital Appreciation Bonds Compound Interest Bonds Interest Principal Premium Compound Interest Bonds Current Interest Bonds

Premium Capital Appreciation Bonds

Capital Appreciation Bonds Compound Interest Bonds Principal Interest 1,340,032,329.30 3,010,884,091.04 12,270,000.00 25,470,000.00

Premium Capital Appreciation Bonds 1,075,274,037.54 3,181,119,551.88

Premium Compound Interest Bonds 6,000,247.25 4,804,752.75

Current Interest Bonds 52,458,003,194.05 30,459,138,362.81

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Bond Guarantee Program

Why are CABs/PCABs used?

Used by districts where immediate development is needed due to rapidly expanding population. This effectively defers payment to a future tax base generally anticipated to be larger and more established. In certain interest rate environments, PCABs are necessary on refunding issues in order to meet the par-to-par sizing constraint. Used to cope with the 50 cent test, a limitation of schools districts maximum Interest & Sinking Fund tax rate. A debt management tool for school districts to lower the tax impact of bond programs and manage bond payments by transferring the payment to a larger and more established future tax base.

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Bond Guarantee Program

Interest to Principal Ratio

Interest to principal ratio is total interest paid over life of debt divided by total principal paid. A lower ratio indicates a debt portfolio mix more heavily weighted towards more traditional debt categories, such as current interest bonds. A higher ratio indicates a debt portfolio mix more heavily weighted towards instruments with interest payments at or towards the end of the debt term, such as CABs, or other deferred principal structure.
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Bond Guarantee Program

CAB Characteristics

BGP CAB Participation

427 out of 806 participating Districts use CABs Principal Outstanding $2.415 Billion at 7/31/2013 Interest Outstanding $6.192 Billion at 7/31/2013 40 participating Districts have interest to principal ratios >1

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Districts With Highest CAB Debt

1,400.00 1,200.00 1,000.00 800.00 600.00 400.00 Millions 200.00 0.00

Leander ISD Principal Interest 378,673,177.20

Wylie ISD 133,453,355.95

Ennis ISD 97,926,786.90

Denton ISD 59,342,910.61

Irving ISD 62,722,376.53

Frisco ISD 20,408,493.40

Schertz-Cibolo- Galena Park Universal City ISD ISD 49,695,201.55 116,644,798.45

Rockwall ISD

DeSoto ISD

31,675,211.50 24,268,254.70 38,617,323.65 130,049,788.50 133,541,745.30 111,682,686.34

1,317,556,822.80 203,586,644.05 199,478,213.10 134,597,089.39 129,582,623.47 156,796,506.60

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Bond Guarantee Program

Analysis Districts with High Interest to Principal Ratios (>1)
Millions 3500 3000 2500 2000 1500 1000 500 0 Capital Appreciation Bonds

Premium Capital Appreciation Bonds

Premium Compound Interest Bonds

Current Interest Bonds

Capital Appreciation Bonds Principal Interest 708,721,105.15 1,862,237,705.92

Premium Capital Appreciation Bonds 427,235,125.07 1,577,143,681.01

Premium Compound Interest Bonds 5,130,247.25 2,914,752.75

Current Interest Bonds 3,291,520,000.00 2,491,792,528.10 18

0 Galena Park ISD Crowley ISD Robstown ISD Liberty Hill ISD Mabank ISD Brock ISD Aledo ISD Cedar Hill ISD Hale Center ISD Rockwall ISD Caddo Mills ISD Little Elm ISD Denison ISD Mexia ISD Wylie ISD Corpus Christi ISD Royse City ISD Hutto ISD Aubrey ISD Bastrop ISD Lake Dallas ISD Waxahachie ISD Anna ISD Bland ISD White Settlement Prosper ISD Terrell ISD Lipan ISD Crandall ISD Argyle ISD DeSoto ISD Ennis ISD Sanger ISD Coppell ISD Weatherford ISD Leander ISD City View ISD West ISD Sanford-Fritch ISD Gatesville ISD 19

Bond Guarantee Program

Participating School Districts with Bond Debt Interest to Principal Ratio > 1 at 7/31/2013

Analysis Districts with Interest to Principal Ratios >1

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DEBT MATURITY PROFILE OF SELECTED SCHOOL DISTRICTS

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High District Interest to Principal Debt Ratio

City View ISD Bond Debt Payment Profile

600,000.00 500,000.00 400,000.00 300,000.00 200,000.00 100,000.00 0.00

Capital Appreciation Bonds Principal Interest 3,761,350.20 7,538,649.80 22

High District Interest to Principal Debt Ratio

Gatesville ISD Bond Debt Payment Profile
800,000.00 700,000.00 600,000.00 500,000.00 400,000.00 300,000.00 200,000.00 100,000.00 0.00 2/1/2014 2/1/2015

Capital Appreciation Bonds Principal Interest 243,887.00 1,591,113.00 23

High District Interest to Principal Debt Ratio

Sanford-Fritch ISD Bond Debt Payment Profile

350,000.00 300,000.00 250,000.00 200,000.00 150,000.00 100,000.00 50,000.00 2/15/2014 2/15/2015

2/15/2016

2/15/2017

2/15/2018

Capital Appreciation Bonds Principal Interest 120,863.00 1,544,137.00

Current Interest Bonds 290,000.00 36,081.25

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High District Interest to Principal Debt Ratio

Leander ISD Bond Debt Payment Profile

90.00 80.00 70.00 60.00 50.00 40.00 30.00 20.00 10.00 -

Millions

Capital Appreciation Bonds Principal Interest 302,886,146.90 1,025,933,853.10

Current Interest Bonds 425,100,000.00 269,169,781.88

Premium Capital Appreciation Bonds 75,787,030.30 291,622,969.70 25

High District Interest to Principal Debt Ratio

West ISD Bond Debt Payment Profile
1,000,000.00 800,000.00 600,000.00 400,000.00 200,000.00 -

Capital Appreciation Bonds Principal Interest 1,380,621.80 10,124,378.20

Current Interest Bonds 2,000,000.00 781,883.10

Premium Capital Appreciation Bonds 317,994.60 1,527,005.40 26

High District Overall Outstanding Debt

Cypress-Fairbanks ISD Bond Debt Payment Profile

Millions

120.00 100.00 80.00 60.00 40.00 20.00 -

Capital Appreciation Bonds Principal Interest 18,969,377.00 72,885,623.00

Current Interest Bonds 1,499,075,000.00 812,403,204.00 27

High District Overall Outstanding Debt

Dallas ISD Bond Debt Payment Profile

Millions

300.00 250.00 200.00 150.00 100.00 50.00 -

Current Interest Bonds Principal Interest 2,475,795,000.00 1,922,069,798.13 28

High District Overall Outstanding Debt

Houston ISD Bond Debt Payment Profile
120.00 100.00 80.00 60.00 40.00 20.00 -

Millions

Capital Appreciation Bonds Principal Interest 4,540,000.00 32,065,000.00

Current Interest Bonds 1,795,205,000.00 936,050,996.11

Premium Capital Appreciation Bonds 34,043,577.25 61,736,422.75 29

High District Overall Outstanding Debt

North East ISD Bond Debt Payment Profile

Millions

60.00 50.00 40.00 30.00 20.00 10.00 -

Principal Interest

Capital Appreciation Bonds 24,325,046.40 8,164,953.60

Current Interest Bonds 1,419,905,000.00 1,006,286,430.90

Premium Capital Appreciation Bonds 308,383.80 956,616.20

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High District Overall Outstanding Debt

Northside ISD Bexar Co. Bond Debt Payment Profile

50.00 45.00 40.00 35.00 30.00 25.00 20.00 15.00 10.00 5.00 0.00

Millions

Current Interest Bonds Principal Interest 1,702,400,000.00 951,566,039.41

Premium Capital Appreciation Bonds 420,000.00 1,580,000.00 31