Austin American-Statesman: Texas school districts face higher bond costs as state fund program reaches federal limit

A Texas Permanent School Fund bond program this month rejected an Austin school district request to act as its guarantor for school bonds the district scheduled to sell Wednesday, in its first of several planned sales over the next six years to pay for projects voters approved in a $2.4 billion bond package in November.

The rejection could be one of many for the fund, which is this year nearing its federally set cap on how much public school bond money it can back. For Texas school districts, rejection from the fund's bond guarantee program could mean higher interest rates, insurance fees and costs.

School districts in Texas must get insurance to back their bond sales, which guarantees to investors that the district will pay back the money. For years, the Permanent School Fund has acted as school districts' guarantor, but the state-run program is nearing its $117.3 billion federally set limit.

Without the Permanent School Fund's backing, the Austin district could pay up to $20 million in insurance and interest to guarantee its bond sales for projects from the November bond proposition.

“We’ve been watching it over several years,” said Eduardo Ramos, the Austin district's chief financial officer. “As school districts continue to grow over several years and continue to build and renovate old buildings, the amount of debt we were issuing was reaching the" Permanent School Fund's ceiling.

The $56 billion school fund gives Texas districts a nontax form of revenue. But the program is running out of backing capacity, according to a December report from the Texas Education Agency. The IRS has historically set the $117.3 billion limit.

U.S. Rep. Lloyd Doggett, D-Austin, last week filed federal legislation to eliminate the Texas school fund's cap. The bill tweaks some definitions in the IRS code, essentially removing any limit for the fund's bond guarantee program.

“Without a corrective course, we’re currently barreling toward sinking hundreds of millions of education dollars into needlessly high financing costs,” Doggett said. “After overwhelming recent voter approval of much-needed school bonds in Austin, I am particularly concerned about the impact on AISD.”

'Outdated limit'

Rapid growth statewide and more expensive bond packages have pushed the school fund program to its limit, officials said.

The fund only had $410 million available, according to a December Texas Education Agency report. That's less than a quarter of the Austin district’s 2022 bond.

“Texas has grown so much that this outdated limit is already in the rearview mirror,” Doggett said. The limit was set in 2009.

Bobby Ott, Temple school district superintendent, said growth, inflation and aging facilities have spurred districts statewide to seek more and more expensive bonds.

The Temple district passed a $164.8 million bond in May. Without the state program, Temple will have less money to spend on its projects.

Eliminating or raising the state’s guarantee capacity wouldn’t cost Texas anything, Ott said.

“You couldn’t find a safer investment than a school bond because they always get paid back,” he said.

Austin district officials knew when they called the November bond election that the district might face higher costs because of the state school fund’s limit, Ramos said.

“We are hoping we will minimize the increased interest rate cost,” he said.

The Austin district isn’t scheduled to sell bonds again until next year, and Ramos hopes that by then, the state bond guarantee program will have been changed or have had its limit increased or eliminated, he said.