In 1984, the Texas Public Finance Authority was started with one purpose: to sell state-backed bonds to buy office space in Austin. Eight years later, after surviving one attempt to abolish it, the agency has become the state's single largest issuer of debt.
Today, the agency sells bonds for everything from colleges to prisons to the state's massive workers' compensation program. As the agency's mission has evolved through three administrations, one constant has been its executive director, Glen Hartman. That will change this week when Mr. Hartman retires as the only boss the agency has ever had.
Like many in state government, Mr. Hartman believes Texas is approaching the day when it can no longer write $30 billion-a-year budgets without taxing personal or corporate income. The former San Antonio city councilman also believes state oversight should be extended to local issuers to help them curb issuance costs. During his tenure, the authority has driven down bids by bond lawyers and underwriters for big issues.
Because of the squeeze of fees and philosophical differences, many in the state's bond industry oppose consolidating bond-issuing power. Mr. Hartman could not disagree more.
Last week, Mr. Hartman sat down with Southwest bureau chief John Racine to discuss the agency, state finances, and the future of debt issuance in the nation's third-largest bond market.
Q: The rating agencies have indicated that one thing Texas must do if it expects an upgrade from double-A is to consider diversifying its tax system. How do you feel about that?
A: They say we need to broaden our tax base, but I think there is more to it than that. Beyond the taxes, I think there needs to be a shifting of the burden away from the local [property] taxpayer, with the state taking up a larger share of the burden. This is particularly true about schools.
At the state level, we have one of the lowest tax burdens, but when you look at the per capita tax burden overall in Texas, it's one of the highest. I think that tells the story.
Q: Your agency has saved money by cutting issue costs. Why haven't other state-level issuers adopted similar policies?
A: There hasn't been any effort to emphasize it. I think the bond review board needs to put more emphasis on that idea. I think the cost of issuance at the local level probably runs somewhat higher than what we pay. At the state, we brought down the cost of issuance partly because we have the review process.
Q: Do you think that local issuers could benefit from a formal review system like the one state issuers face before they sell debt?
A: I think so. I think there should be a review prior to bond issuance just so, at the least, we develop standards with regard to how debt is issued.
I think our metropolitan areas, Dallas, Houston, Austin, San Antonio, have good oversight now. But for far too long, I think the state and local entities have existed without much coordination.
Q: Your authority has been criticized by some who believe the state is moving toward more central issuance. Do you think other agencies' bond-issuing powers would be better served by the authority?
A: I see no real need to have entities [selling debt] like the Texas Water Development Board, the Veterans Land Board, and others that now do their own issuance. I think bond issuance is a specialization the TPFA has developed and we have a greater expertise and understanding of the market.
Q: What arguments could you make both for and against centralization?
A: On the pro side, you can better plan the timing of issues, and with the consolidation of some issues you gain economies of scale.
Con, it could be argued that the TPFA is not close enough to the projects it finances to understand the needs.
Q: During your tenure, Texas lost its triple-A rating and endured a severe recession, yet now has one of the nation's soundest economies. How do investors and the market perceive the state?
A: I think there's perhaps a better understanding of the credit now. I think there has been an increase in the popularity of our bonds, and we are trading through the market.
Q: Two years ago, the board declared one of its bond issues in technical default, which triggered legislative threats to abolish the agency. How could that controversy have been avoided?
A: Before the board acted and said there was a default, they should have talked to the [Texas] attorney general's office and the trustee bank, and they would have found that they had a difference of opinion on the matter ... That might have avoided the whole affair.
Q: In the last eight years, the state has grown from virtually no debt outstanding to the point that its debt has doubled every two years. What does the future hold for debt policy in Texas?
A: I think the Legislature and everyone needs to pay more attention to debt management. We have shifted from pay-as-you-go to a pay-as-you use state.
Look at the prisons. If we would have had to pay for all that [nearly $2 billion planned] up front, it would have been a horrendous cost.
The rule is that you should never borrow money unless you really have to. If that's the case and if the debt is managed well, there's no reason I know of not to borrow.