DALLAS -- Texas officials say the scope of a long-awaited $750 million school bond bank program is tied to a provision that congressional negotiators have restored to the final urban aid tax bill.
The provision, to let issuers keep their bank-qualified privileges in pool financings, is the key to whether hundreds of Texas school districts will have a financial incentive to use the bond bank program, state officials say.
On Monday evening a conference committee voted to reinstate the proposal, which had been dropped over the weekend. The full urban aid measure passed the House early yesterday, but the bill's fate will ultimately depend on the outcome of a Senate filibuster or whether President Bush votes the legislation.
"The bill is here to stay and it's not going to change because there's not time," a Senate Finance Committee aide said yesterday. "It's either going to pass or it's going to die."
Wardaleen Belvin, special assistant to Texas Lieut. Gov. Bob Bullock, said that because of the seesaw movement of the so-called pass-through provision, she is not predicting the outcome.
"I thought [Monday night] was good news when it was in the House version, but then today the filibuster is not good news," Belvin said yesterday. "Even then, there's always the threat of a veto."
The pass-through measure would allow issuers already able to sell bank-qualified bonds to use that privilege when participating in a pool program such as the Texas bond bank -- something they now cannot do.
At present, an issuer can sell bank-qualified debt if it issues $10 million or less of tax-exempts annually. Such bonds carry lower interest rates because banks are allowed to deduct 80% of the cost of buying and carrying the debt.
Texas officials have said that allowing issuers to sell bank-qualified debt through a pool is important because it would likely increase the number of school districts that could participate in the $750 million bond bank.
"Allowing the smallest issuer to participate in the pool and keep their bank-qualified eligibly minimizes their costs of issuance," said Tom Pollard, executive director of the Texas Bond Review Board, which is overseeing the bond bank. "It also maximizes participation in the pool."
In Texas, nearly half the 141 school deals sold this year have been bank-qualified issues. The deals accounted for 16% of the record $1.61 billion of volume sold by schools so far this year, according to Securities Data Co.
Because the tax package would raise the bank-qualified threshold to $20 million a year, the number of Texas schools that could use the bond bank would grow. So far in 1992, 80% of the issuers and nearly half the school dollar volume of bonds sold in the state were issued by districts selling $20 million or less, statistics show.
Chris Evangel, assistant vice president at Moody's Investors Service, said many Texas schools schedule bond sales under the current $10 million limit so they can take advantage of the bank-qualified privilege.
Whether districts flock to the bond bank will depend on economics, he said, adding, "If it saves them money, they are willing to consider it. But I don't think many of them fully understand how it will work."
The revenue bond program, authorized by Texas lawmakers in 1989, has yet to be structured because of the pending final vote in Congress and a separate ruling sought from the Internal Revenue Service.
After more than a year of discussions, lawyers at Johnson & Gibbs in Dallas recently submitted a formal request for a private letter ruling to the IRS seeking clarification that the massive Texas Permanent School Fund can be used to provide triple-A backing from local districts that use the bond bank.
The IRS has previously ruled that the fund, created in 1854, was exempt from arbitrage rebate restrictions and can secure debt sold by local schools. Because virtually every district is now eligible for the no-cost backing, officials say the bond bank must have the permanent-fund backing to be an alternative financing vehicle for Texas schools.
"I am optimistic," said Richard Kornblith, the tax lawyer who submitted the letter on Aug. 17. "Our argument is that economically, using the Permanent School Fund to support a local bond sold through this program is the same as a direct guarantee of a local bond."
The IRS does not comment on pending requests, but state officials said they expect a formal ruling by year's end.
While work on structuring the bond bank continues, Texas officials are planning to market the program to schools by next spring and are studying proposals that would ultimately broaden the use of the bond bank.
"Once we get a ruling from the IRS, we can begin to firm things up," said Sonja Suessenbach, director of the bond bank, which is overseen by the Texas Bond Review Board. "We have a limited program with just [a favorable] IRS ruling. We would have a larger program with the [congressional] pass-through."
Already, she said the board is studying legislative changes that would enable the program to be used to help school districts finance equipment leases or address cashflow borrowings. At present, the $750 million bond program can only be used for voter-approved projects.
The bond bank program has been strongly opposed by Texas bond firms, which see it as a threat to their financial advisory business. But state officials insist the only goal is to lower the cost of borrowing for schools.
"How much we can lower that cost is going to be a function of how large the pool is going to be," said Suessenbach. "That's something we don't know yet."