DALLAS - The League of United Latin American Citizens' challenge to the way Texas funds its public universities should not affect debt service, thanks to a trust fund that guarantees payment.

The state Permanent University Fund, created by the Texas Constitution of 1876 and with roots going back another 40 years, uses its investment income to guarantee payment of bonds sold by the University of Texas and Texas A&M University systems.

The fund had a book value of $3.526 billion in 1991, with debt sold by the institutions secured by a first lien on investment income only. The corpus of the fund cannot be used and the amount of debt that can be sold is limited by the state constitution to 30% of the fund.

Wall Street analysts say the security of the fund is unparalleled among universities. Moody's Investors Service gives an AA1 to bonds backed by the fund, while Standard & Poor's Corp. assigns an AA-plus.

"It's obviously a very strong security," said Hyman Grossman, managing director at Standard & Poor's.

Texas officials believe the fund should rate triple-A status, though analysts have differed.

"The one thing they come back to is that they do not rate state credits among state agencies higher than the state's general obligation rating," said John Roan, manager of finance for the University of Texas system. Yet, he noted, the ratings on the permanent fund are "already a tick higher."

Still, the bonds get a strong reception in the markets and "will generally price through an insured triple-A rated bond," Mr. Roan said.

Analysts say Permanent University Fund bonds were once rated triple-A, but have lost that distinction largely because of changes in the fund. Mr. Grossman recalled that in the 1970s, the fund was invested primarily in government securities. Because of changes in investment policy, the fund today is a large owner of equities.

"They are going more into stocks and away from the triple-A corporates," he said.

James Dearborn, assistant vice president for state ratings at Moody's, said that unlike the state's Permanent School Fund, a larger trust that enjoys a triple-A rating for local school debt, the Permanent University Fund must support more than debt service.

Income from the fund also goes to the two universities for operations. Under the law, the University of Texas and the A&M systems split revenues and debt capacity by two-thirds and one-third, respectively.

By current estimates, the two have a total of about $110 million of debt capacity remaining, but university officials are not concerned.

"Our standpoint is that it's not going to be a limiting factor," Mr. Roan said, noting that the University of Texas plans to retire about $24 million a year in outstanding debt and has no large-scale capital needs. "The more limiting factor in the future is going to be dealing with interest rates that will affect our income."

In 1991, the fund had investment income equal to a yearly return of about 7.35%.

In the same year, income to the fund from oil and gas royalties slowed significantly as oil production in West Texas all but halted.

With a constitutional amendment giving fund managers broader discretion over investments, the Permanent University Fund today is focused on maintaining the inflation-adjusted value of the fund, with two-thirds invested in taxable securities and the remainder in equities.

"Our critical concerns are that with the decline of the revenues from oil, there will be more pressure on our investments," Mr. Roan said.

Mr. Dearborn felt that "to a certain degree, they've already met that challenge. They've already moved into a modern fund in terms of investment policy."

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