DALLAS -- The Texas Education Agency has adopted a rule change that makes more local school bond issues eligible for backing by the low-cost state Permanent School Fund -- a move expected to greatly reduce the demand for private bond insurance.
The change, adopted by the state's Board of Education over the weekend, allows districts to restructure their debt with the st3ate guarantee. While that is expected to help small issuers, it means less opportunity for companies selling private credit enhancement.
Two other changes adopted by the agency are deletion of the $6 million limit on the amount any district can have guaranteed annually and inclusion of Fitch Investors Service as a nationally recognized bond rating service that districts can use.
While 13 other states have some sort of guarantee program for school bonds, the Texas program is unique because it guarantees a triple-A rating to all but a handful of districts -- those with stand-alone triple-A ratings and wealthy schools known as budget-balanced districts.
"They're chipping away," said Henri Gourd, vice president and manager of the southern region for MBIA Corp., the nation's leading bond insurer. "The Texas school market has of late gone with the Permanent School Fund. Only in a few instances have [schools] gone with traditional bond insurance."
The changes, which take effect immediately, were mandated by H.B. 2885, passed this spring. "We resisted the change [until] there was a statutory charge that required us to" act, said Kevin O'Hanlon, general counsel to the education agency.
Private bond insurers have seen their market share shrink since the state began developing its triple-A rated guarantee program in the mid-1980s. Today, the state fund backs an estimated 95% of new school isues.
"Our school district bond business [in Texas] has been greatly reduced," said Morris Matson, first vice president for AMBAC Inc., the top bond insurer in the state. "It has been a matter of cutting the dog's tail a little bit at a time."
Texas schools have sold an estimated $1.3 billion of bonds in 1991, but Mr. Matson estimated that as few as 10 issues totaling $92 million have purchased bond insurance. That number could grow even smaller under the new rules. In fact, now only 90 of the state's 1,054 districts are ineligible to use the bond guarantee program.
Asked if there might be others, Mr. O'Hanlon said, "Pretty much, this is it."
Private bond insurers have been especially squeezed since the Internal Revenue Service ruled in 1990 that arbitrage rebate requirements do not apply to the state's massive Permanent School Fund, a multi-billion-dollar trust created in 1854.
The IRS determined that the fund could guarantee up to $18.5 billion of debt with the fund -- or about 2.5 times its assets. As of May 31, the fund had guaranteed 391 issues totaling $2.4 billion.
The districts that cannot have their bonds guaranteed by the Permanent School Fund are the state's two stand-alone triple-A rated schools -- Dallas and Highland Park -- and 88 of the so-called budget-balanced districts.
These are the districts wealthy enough not to receive foundation payments from the state. Because the Permanent School Fund guarantees payment of the bonds with the foundation payments given districts, those that do no receive any of the funding cannot participate.
"The budget-balanced schools are very wealthy districts," said Liz Caskey, who oversees the state guarantee program. "If we cannot recover the funds [from foundation payments], the program won't work for them."
Ironically, the number of budget-balanced districts could as much as double next year under a controversial new school finance law that will shift funds from wealthy to poor districts. Ms. Caskey said the so-called Robin Hood plan would also create a larger number of districts that do not receive foundation funding.
Investment bankers and bond lawyers familiar with the rule change say it would provide the guarantee to bonds sold through negotiated sale and for refunding bonds that do not provide total savings -- a major shift in policy.
"Obviously, it opens the market for those refundings to be done," Ms. Caskey said. "As far as how much that could mean, I can't say yet."
Market watchers have estimated that the rule change could prompt as much as $100 million in refundings that previously were not eligible for the Permanent School Fund guarantee.
"It's going to mean a pretty substantial savings," said Mel Schonhorst, first vice president at Rauscher Pierce Refsnes Inc. of Dallas, who pushed the rule changes. "It could save any district between $50,000 and $200,000."
One district that could benefit from the rule change is Crowley Independent School District, which is southwest of Fort Worth. It had planned a $40 million negotiated offering on Thursday, but will now wait until August in hopes of securing a guarantee from the school fund.
The district originally planned to use the Financial Guaranty Insurance Co. for its $21 million refunding. An official at Southwest Securities Inc. in Dallas, the underwriter, said the state guarantee could amount to a savings of five to 10 basis points, or $900,000 over the 25-year life of the new-money and refunding deal.
"We do have a commitment for insurance, but we won't use it if we can get the PSF guarantee," said an investment banker at Southwest Securities. "If we could save $900,000 by waiting a week, or two weeks, we would wait."
However, state officials yesterday were discussing how to apply the new rules and it was not clear of the agency would decide on the Crowley issue by Thursday.
While formal guidelines are still under draft, but a July 13 letter to the board from the education agency's interim commissioner, Thomas Anderson, outlines a broad criterion for a refunding to receive a state guarantee.
"The proposed amendment would ... permit the guarantee of refunding bonds without total interest savings, if the district is able to demonstrate to the commissioner of education that the refunding would be beneficial," he wrote. "This amendment would provide districts with flexibility in restructuring their debt.
