Bond Buyer: IRS raises limit on Texas school bond guarantee program

A capacity crunch facing a popular school bond guarantee program in Texas has been resolved by an Internal Revenue Service proposed regulation that boosts the limit to about $218 billion. 

In a notice of intent this week, the federal agency proposed changing a formula that has capped the amount of school district bonds guaranteed by the Texas Permanent School Fund at $117.3 billion.

The increased limit will make the program once again widely available to all eligible school and charter districts, according to a state board of education statement.

U.S. Representative Lloyd Doggett, a Texas Democrat who introduced legislation to eliminate the IRS cap, called the move "effectively a permanent exemption for the PSF."

"This will allow the PSF to guarantee new bonds for construction," he said in a statement. "Every dollar that goes into fostering our children's public education should be cost-effective for school districts and the taxpayers who approve these bonds." 

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

As a result, projected available capacity fell as low as $26.6 million at the end of 2022, but rebounded after the state board of education lowered the program's reserves to 0.25% from 5% effective March 1. As of March 31, capacity stood at $5.18 billion.

The fund's dwindling capacity forced many districts to sell debt based on their own underlying ratings or with bond insurance as the Texas Education Agency prioritized the guarantee for school systems with the lowest property wealth per average daily attendance.

The IRS notice, which "may be relied upon for bonds sold on or after May 10, 2023," acknowledged "certain perpetual trust funds that otherwise could provide credit enhancement under the special exception to the arbitrage restrictions for eligible pledged funds … will soon be limited in their capacity to provide guarantees for tax-exempt bonds at a time when there is a significant need for such guarantees."

The IRS set a July 31 deadline for comments on any questions related to Notice 2023-39.