DALLAS -- Facing the uncertainty of a new school finance system, two Texas districts have established $20 million, municipal-style lines of credit to meet short-term borrowing needs.
Advisers to the Pasadena and Lubbock Independent School Districts say the borrowing arrangement with Fidelity Investments is a unique twist on the old practice of borrowing from the local bank to solve cash flow problems.
However, they say it is more flexible and potentially more cost efficient cient than a straightforward tax and revenue anticipation note sale because it will only be used when needed.
"A district can draw on it as they need it," said Dale Henderson, senior vice president and manager of public finance at Rauscher Pierce Refsnes Inc. in Dallas. "They have virtually everything in place at no cost. But with a Tran they have to borrow the money on the expectation that they will need it.
"It's another alternative," he said.
Traditionally, a district will sell one-year notes based on projected cash flow needs. But this new structure lets the district agree to a negotiated sale that will be made in increments only if needed.
For instance, if a district only needs $1 million in funds for December, they will draw down on their line of credit and ultimately repay the money at a lower overall cost because they borrowed less money for a shorter period of time than with a Tran sale.
So far, the Pasadena Independent School District has used $8 million of its $20 million credit line established in late October. It is the only one of the two district to tap the credit line.
The Fidelity Tax-Exempt Money Market Trust and Fidelity Institutional Tax Exempt Cash Portfolio, with combined assets of $5 billion, have agreed to purchase the notes at an aggressive short-term rate.
Robert Orr, a portfolio manager for Fidelity, said the fund was familiar with the credits and was interested in the transaction because the fund could buy the whole deal. "It's supply that only we see," he said.
For school officials, the innovative structure is appealing because of its flexibility and potential lower overall borrowing costs. For instance, schools do not have to pay for an official statement -- it is not needed -- or seek a short-term rating because fidelity was familiar with the local credits.
Further, while the cost of issuance is the same as a regular note sale, investment bankers and bond lawyers only get paid a percentage of every draw down rather than up ront.
For the investor, the transaction is legally the same as a note sale.
"I would characterize this as a tax-exempt standby line of credit," said Ray Hutchinson, bond lawyer at Hutchinson, Boyle, Brooks & Fisher in Dallas, the counsel in the Lubbock deal. "The security is the same as a school district would tender on Trans sold for cash."
Larry Throm, assistanct superintendent for business in Lubbock, said the district has sold notes in the past five years or used more costly short-term arrangements at a local bank.
"Three years ago, we just went down to the bank and borrowed money at prime," he said, noting the new line of credit is below 5%. "But with this there is no cost ... You can make enough money on the spread to pay the interest and the cost of issuance without an arbitrage problem."
More importantly, he said, the municipal-style line of credit is flexible. Like many of the state's 1,054 districts, Lubbock officials were uncertain when they might have cash flow problems this year because of a new school finance law.
Under the so-called Robin Hood plan, districts rely on a majority of their property tax revenues from one of 188 newly formed County Education Districts to collect and disburse funds.
"Since it is really the first year of the program, the schools cannot really judge when they will receive a full payment," said Will Carney, an associate at Rauscher Pierce. "There is really no precedent."
Mr. Throm agrees, saying the new structure could be used by most any district in the state.
"There is a new ballgame in Texas," he said. "We knew we were going to be short, but we didn't know by how much. As long as the uncertainty exists, I think it's a viable tool."
