Texas Schools' Capital Needs Will Hold Firm As State's Growth Is Expected to Continue

DALLAS -- While it is unlikely that the state's record year for school debt issuance will be repeated soon, Texas districts will continue to spend $1 billion a year for capital needs into the next century, a state official said.

"We will be a building state and a growing state for the next six to 10 years," said Joe Wisnoski, director of planning for the Texas Education Agency. "Right now, we are adding about 45,000 new kids a year .... We would need about 100 elementary schools to just meet that growth."

Already this year, Texas schools have sold a record $1.8 billion of debt in their rush to finance projects and warehouse capital before the state's controversial wealth-sharing school finance law took effect this fall.

Many investment bankers and bond lawyers believe debt issuance will be sluggish for a few years before it resumes. While Mr. Wisnoski agrees, he said he sees strong continued demand for debt programs.

"For a while, it's going to be a mixed picture," he said. "The new school finance law didn't improve the access to funds for all districts. It worsened it for some."

But, he added, "As districts adjust to the new financing mechanism, you're likely to see them ready to go out with a new building program."

For the long term, the outlook for new programs is good. Mr. Wisnoski and others expect Texas to continue the high growth that has made it the third most populous state in the nation.

Mr. Wisnoski's staff has just completed the first-ever survey of every Texas school building, and it could become a blueprint for expansion and a guide for investment bankers looking for school debt restructurings, refundings, or new money issues.

The $5 million study will link information about some 7,000 buildings in Texas -- from size to condition -- with demographic trends to help state and local officials better plan for capital needs.

While it is difficult to predict where the growth will occur, the research does confirm that many poor districts, which have shunned capital programs because they could not afford them, will be able to pursue bond programs under the so-called Robin Hood law.

Of course, the study alone is not likely to persuade local officials to seek bond elections. Many Texas schools have been choosy about which debt programs to put before voters -- a fact that many believe is the reason for a 90% approval rate of referenda.

"The fact that TEA says a district has X-dollars in need doesn't mean the board is going to do it," said Chuck Kobdish, a bond lawyer at Dallas-based McCall, Parkhurst & Horton, the state's top bond counsel.

For instance, voters in Waco were asked a few years ago to approve several million dollars in bonds to install air conditioning in all Central Texas school buildings. Even though the region is known for its hot weather, voters rejected it.

At the same time, districts have been known to readily ask voters to approve bonds for sports projects -- such as a new football stadium -- because they are often widely accepted.

"It's a matter of priorities," said a San Antonio financial adviser who did not wish to be named. "You can live without some things, but football is not one of them."

But investment bankers say that voters may be less likely to approve future issues, at least for a couple of years, because the new school finance law forces some districts to share tax wealth with neighboring schools.

"It's going to be difficult to impossible to get voters to approve bonds when they may already be sending tax dollars to another school district," said a Houston investment banker. "Even if you have a necessary project, the average guy is going to look at it differently than he does now."

Mel Schonhorst, first vice president at Rauscher, Pierce, Refsnes Inc. in Dallas, the leading underwriter of school bonds this year, said that some districts use current revenues for capital needs rather than ask voters to approve bonds.

In southern Texas, the Pasadena Independent School District has completed some $30 million in capital plans from available cash in recent years.

They are not alone. Mr. Wisnoski said trends show that as much as $400 million of the $1 billion in annual capital needs is paid out of current revenues, while the remainder is financed with long-term debt.

Of course, many districts may be forced to use long-term debt to pay for projects as the new school finance law affects their available cash and flexibility.

"Part of it is trying to balance between going for a bond election and knowing when to bite the bullet right now," said Mr. Schonhorst.

The agency's study will not only benefit school districts and investment bankers. Texas lawmakers also would get their first comprehensive picture of the facilities used by the state's 3.38 million students.

The new information may help lawmakers better design a school aid system to help the state's 1,054 districts pay for more than just operating costs.

The state has authorized a $750 million school bond bank to help districts finance projects, but debt service will be paid by participating districts -- not Texas.

State Treasurer Kay Bailey Hutchison and others have advocated that the state aid formula include facilities needs. Whether the Legislature is willing to include facilities in its funding of education remains to be seen.

"It's too early to know if school facilities are going to be a significant element in the legislative agenda next time," said Lynn Moak, a former top education official now affiliated with Masterson, Moreland, Sauer, Whisman Inc. in Houston. "This study could be a very powerful selling tool."

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