SWS Bond Program Over View Sept 2013

Texas Permanent School Fund

Bond Guarantee Program

Committee of School Finance/Permanent School Fund September 2013

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“To guarantee bonds issued by school districts or by the state for the purpose of making loans to or purchasing the bonds of school districts for the purpose of acquisition, construction, or improvement of instructional facilities including all furnishings thereto.” – State of Texas Constitution, Article VII, Section V (2)(d)

2

Bond Guarantee Program Mission

Established 1983 by Texas Constitutional Amendment

Bonds are fully guaranteed by the corpus of the Permanent School Fund

Guarantee Capacity is Limited IRS Limit Statutory Limit

Since inception TPSF has guaranteed 5,227 issues Currently there are 2,796 bonds outstanding *07/31/2013

No district has ever defaulted 3

Bond Guarantee Program Overview

1989 – IRS §1.148-11(d)(1)(vi) allows the fund to guarantee bonds up to 250% lower cost or fair market value of the TPSF.

1994 – SEC makes amendments to Rule 15c2-12. 2003 – 78th Regular Session of the Legislature increased the State

Capacity to 250% lower cost or fair market value of the TPSF. 2007 – 80th Regular Session of the Legislature authorized the Board to

increase the limit up to 500% of the cost value of the TPSF, as long as increase is consistent with federal requirements and does not prevent the bonds to be guaranteed from receiving the highest available credit rating (AAA).

Dec 2009 – IRS increases capacity limit to 500% of the total cost of the assets held by the TPSF as of December 16, 2009.

May 2010 – State Capacity Limit is increased by the State Board of Education to 300% the cost value of the TPSF.

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Bond Guarantee Program Regulatory Highlights

District must be accredited by the State Have at least one credit rating below a AAA Bonds must be for the purpose of constructing,

renovating, acquiring, and equipping school buildings

Applications must be approved by the Commissioner of Education

Bonds must be approved by the Office of the Attorney General

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Bond Guarantee Program BGP Participation Requirements

If a participating District cannot make the next principal or interest payment on a guaranteed bond, the amount needed to pay will be transferred from the TPSF to the District’s paying agent.

The Commissioner of Education will direct the Comptroller of Public Accounts to withhold the amount paid, plus interest, from the first State money payable to the District, regardless of source.

Unmatured bond payments are not accelerated upon default by a District.

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Bond Guarantee Program What the Program Guarantees

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Bond Guarantee Program Guarantee Process Flow

School District determines it will be unable to pay the next interest and/or principal payment due on

a guaranteed bond.

District immediately notifies the Commissioner of Education on

inability to pay.

Commissioner notifies the PSF to generate cash for transfer.

PSF generates the required amount of cash and transfers it to

State Treasury.

Commissioner instructs the Comptroller to transfer amount

necessary to pay defaulted amount from the PSF’s State

Treasury account to the District’s paying agent.

Bond holders are paid by the paying agent.

The Commissioner directs the Comptroller to withhold the

amount paid, plus interest, from the first State money payable to

the District, regardless of source, including the ASF.

The Comptroller transfers the amount paid plus interest back to

the PSF.

Since inception of the Program, no

District has defaulted on

guaranteed debt.

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Bond Guarantee Program Program Growth

0

500

1000

1500

2000

2500

3000

0

10

20

30

40

50

60

Num

ber

Bill

ions

Bond Guarantee Program Growth

Amount Outstanding Issues Outstanding

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Bond Guarantee Program Program Limits

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

Billi

ons

Amount of Bonds Guaranteed Compared with State Limitation and IRS Limits 1996 - 2013

Balance

IRS Limitation

State Limitation

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Bond Guarantee Program Program Growth Compared to TPSF Growth

$-

$10

$20

$30

$40

$50

$60

Bill

ions

Growth of TPSF Net Assets Compared to Growth of Bond Debt Guaranteed Since Inception of Bond Guaranteed Program

TPSF Net Assets

BGP Debt Guaranteed

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Bond Guarantee Program Guaranteed Debt at 7/31/2013

$-

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

2013

20

14

2015

20

16

2017

20

18

2019

20

20

2021

20

22

2023

20

24

2025

20

26

2027

20

28

2029

20

30

2031

20

32

2033

20

34

2035

20

36

2037

20

38

2039

20

40

2041

20

42

2043

20

44

2045

20

46

2047

20

48

2049

20

50

2051

Tot

al D

ebt G

uara

ntee

d

Mill

ions

Payment Profile, All Debt vs. CAB Debt Guaranteed by the Bond Guarantee Program at 7/31/2013

Total Principal Total Interest CAB Principal CAB Interest

Capital Appreciation Bond (CAB) – Bond that is issued at a discount, bears no stated rate of interest, and accretes in value from the date of issuance to the date of maturity. At maturity, the investor receives the original par amount plus all the accreted interest.

Premium Capital Appreciation Bond (PCAB) – A type of CAB that has a stated yield or accretion rate that is higher than its actual (market) current yield to investors. This difference results in a lower initial stated par amount which preserves debt capacity.

Compound Interest Bond – Bond that is issued at a stated interest rate, the interest is compounded over the life of the bond and not paid until maturity.

Premium Compound Interest Bond – A type of compound interest bond sold to investors for more than the face amount of the bond. Generally this occurs when the market interest rate at the time of sale falls below the stated interest rate.

Current Interest Bond (CIB) – a bond on which interest payments are made to bondholders on a periodic basis.

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Bond Guarantee Program Types of Bonds Guaranteed by the Texas Permanent School Fund

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Bond Guarantee Program Principal and Interest Payments, 7/31/2013 to Maturity

Principal

Interest $-

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

Capital Appreciation

Bonds Compound Interest

Bonds Premium Capital Appreciation

Bonds Premium

Compound Interest Bonds

Current Interest Bonds

Mill

ions

Capital Appreciation Bonds Compound Interest Bonds Premium Capital Appreciation Bonds

Premium Compound Interest Bonds Current Interest Bonds

Principal 1,340,032,329.30 12,270,000.00 1,075,274,037.54 6,000,247.25 52,458,003,194.05 Interest 3,010,884,091.04 25,470,000.00 3,181,119,551.88 4,804,752.75 30,459,138,362.81

Used by districts where immediate development is needed due to rapidly expanding population. This effectively defers payment to a future tax base generally anticipated to be larger and more established.

In certain interest rate environments, PCABs are necessary on refunding issues in order to meet the par-to-par sizing constraint.

Used to cope with the 50 cent test, a limitation of schools districts maximum Interest & Sinking Fund tax rate.

A debt management tool for school districts to lower the tax impact of bond programs and manage bond payments by transferring the payment to a larger and more established future tax base.

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Bond Guarantee Program Why are CABs/PCABs used?

Interest to principal ratio is total interest paid over life of debt divided by total principal paid.

A lower ratio indicates a debt portfolio mix more heavily weighted towards more traditional debt categories, such as current interest bonds.

A higher ratio indicates a debt portfolio mix more heavily weighted towards instruments with interest payments at or towards the end of the debt term, such as CABs, or other deferred principal structure.

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Bond Guarantee Program Interest to Principal Ratio

Bond Guarantee Program CAB Characteristics

BGP CAB Participation 427 out of 806 participating Districts use CABs Principal Outstanding $2.415 Billion at 7/31/2013 Interest Outstanding $6.192 Billion at 7/31/2013 40 participating Districts have interest to principal ratios >1

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Districts With Highest CAB Debt

0.00

200.00

400.00

600.00

800.00

1,000.00

1,200.00

1,400.00

Mill

ions

Leander ISD Wylie ISD Ennis ISD Denton ISD Irving ISD Frisco ISD Schertz-Cibolo-Universal City ISD

Galena Park ISD Rockwall ISD DeSoto ISD

Principal 378,673,177.20 133,453,355.95 97,926,786.90 59,342,910.61 62,722,376.53 20,408,493.40 49,695,201.55 31,675,211.50 24,268,254.70 38,617,323.65

Interest 1,317,556,822.80 203,586,644.05 199,478,213.10 134,597,089.39 129,582,623.47 156,796,506.60 116,644,798.45 130,049,788.50 133,541,745.30 111,682,686.34

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Bond Guarantee Program Analysis – Districts with High Interest to Principal Ratios (>1)

0

500

1000

1500

2000

2500

3000

3500

Capital Appreciation Bonds Premium Capital

Appreciation Bonds Premium Compound Interest Bonds Current Interest Bonds

Mill

ions

Capital Appreciation Bonds Premium Capital Appreciation Bonds

Premium Compound Interest Bonds Current Interest Bonds

Principal 708,721,105.15 427,235,125.07 5,130,247.25 3,291,520,000.00 Interest 1,862,237,705.92 1,577,143,681.01 2,914,752.75 2,491,792,528.10

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Bond Guarantee Program Analysis – Districts with Interest to Principal Ratios >1

0

1

2

3

4

5

6

7

Gal

ena

Park

ISD

C

row

ley

ISD

R

obst

own

ISD

L

iber

ty H

ill IS

D

Mab

ank

ISD

B

rock

ISD

A

ledo

ISD

C

edar

Hill

ISD

H

ale

Cen

ter

ISD

R

ockw

all I

SD

Cad

do M

ills I

SD

Litt

le E

lm I

SD

Den

ison

ISD

M

exia

ISD

W

ylie

ISD

C

orpu

s Chr

isti

ISD

R

oyse

City

ISD

H

utto

ISD

A

ubre

y IS

D

Bas

trop

ISD

L

ake

Dal

las I

SD

Wax

ahac

hie

ISD

A

nna

ISD

B

land

ISD

W

hite

Set

tlem

ent …

Pr

ospe

r IS

D

Ter

rell

ISD

L

ipan

ISD

C

rand

all I

SD

Arg

yle

ISD

D

eSot

o IS

D

Enn

is IS

D

Sang

er IS

D

Cop

pell

ISD

W

eath

erfo

rd IS

D

Lea

nder

ISD

C

ity V

iew

ISD

W

est I

SD

Sanf

ord-

Fritc

h IS

D

Gat

esvi

lle IS

D

Participating School Districts with Bond Debt Interest to Principal Ratio > 1 at 7/31/2013

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DEBT MATURITY PROFILE OF SELECTED SCHOOL

DISTRICTS

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22

High District Interest to Principal Debt Ratio City View ISD Bond Debt Payment Profile

0.00

100,000.00

200,000.00

300,000.00

400,000.00

500,000.00

600,000.00

Capital Appreciation Bonds

Principal 3,761,350.20

Interest 7,538,649.80

23

High District Interest to Principal Debt Ratio Gatesville ISD Bond Debt Payment Profile

0.00

100,000.00

200,000.00

300,000.00

400,000.00

500,000.00

600,000.00

700,000.00

800,000.00

2/1/2014

2/1/2015

Capital Appreciation Bonds

Principal 243,887.00

Interest 1,591,113.00

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High District Interest to Principal Debt Ratio Sanford-Fritch ISD Bond Debt Payment Profile

-

50,000.00

100,000.00

150,000.00

200,000.00

250,000.00

300,000.00

350,000.00

2/15/2014 2/15/2015

2/15/2016 2/15/2017

2/15/2018

Capital Appreciation Bonds Current Interest Bonds

Principal 120,863.00 290,000.00

Interest 1,544,137.00 36,081.25

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High District Interest to Principal Debt Ratio Leander ISD Bond Debt Payment Profile

- 10.00 20.00 30.00 40.00 50.00 60.00 70.00 80.00 90.00

Mill

ions

Capital Appreciation Bonds Current Interest Bonds Premium Capital Appreciation

Bonds Principal 302,886,146.90 425,100,000.00 75,787,030.30

Interest 1,025,933,853.10 269,169,781.88 291,622,969.70

26

High District Interest to Principal Debt Ratio West ISD Bond Debt Payment Profile

-

200,000.00

400,000.00

600,000.00

800,000.00

1,000,000.00

Capital Appreciation Bonds Current Interest Bonds Premium Capital Appreciation Bonds

Principal 1,380,621.80 2,000,000.00 317,994.60

Interest 10,124,378.20 781,883.10 1,527,005.40

27

High District Overall Outstanding Debt Cypress-Fairbanks ISD Bond Debt Payment Profile

-

20.00

40.00

60.00

80.00

100.00

120.00

Mill

ions

Capital Appreciation Bonds Current Interest Bonds

Principal 18,969,377.00 1,499,075,000.00

Interest 72,885,623.00 812,403,204.00

28

High District Overall Outstanding Debt Dallas ISD Bond Debt Payment Profile

-

50.00

100.00

150.00

200.00

250.00

300.00

Mill

ions

Current Interest Bonds

Principal 2,475,795,000.00

Interest 1,922,069,798.13

29

High District Overall Outstanding Debt Houston ISD Bond Debt Payment Profile

-

20.00

40.00

60.00

80.00

100.00

120.00

Mill

ions

Capital Appreciation Bonds Current Interest Bonds Premium Capital Appreciation Bonds

Principal 4,540,000.00 1,795,205,000.00 34,043,577.25

Interest 32,065,000.00 936,050,996.11 61,736,422.75

30

High District Overall Outstanding Debt North East ISD Bond Debt Payment Profile

-

10.00

20.00

30.00

40.00

50.00

60.00

Mill

ions

Capital Appreciation Bonds Current Interest Bonds Premium Capital Appreciation Bonds Principal 24,325,046.40 1,419,905,000.00 308,383.80 Interest 8,164,953.60 1,006,286,430.90 956,616.20

31

High District Overall Outstanding Debt Northside ISD – Bexar Co. Bond Debt Payment Profile

0.00 5.00

10.00 15.00 20.00 25.00 30.00 35.00 40.00 45.00 50.00

Mill

ions

Current Interest Bonds Premium Capital Appreciation Bonds

Principal 1,702,400,000.00 420,000.00

Interest 951,566,039.41 1,580,000.00