September 2015 Committee on School Finance Permanent School Fund Item 4
Proposed Amendment to 19 TAC Chapter 33, Statement of Investment Objectives, Policies, and Guidelines of the Texas Permanent School Fund, Subchapter A, State Board of Education Rules, §33.67, Bond Guarantee Program for Charter Schools
(Second Reading and Final Adoption)
September 11, 2015
COMMITTEE ON SCHOOL FINANCE/PERMANENT SCHOOL FUND: ACTION
STATE BOARD OF EDUCATION: ACTION
SUMMARY: This item presents for second reading and final adoption proposed amendment to 19 TAC Chapter 33, Statement of Investment Objectives, Policies, and Guidelines of the Texas Permanent School Fund, Subchapter A, State Board of Education Rules, §33.67, Bond Guarantee Program for Charter Schools. The proposed amendment would modify the definition of nationally recognized investment rating firm and exclude student and teacher housing from the projects eligible for a guarantee under the definition of new money issue. The proposed amendment would also require the commissioner to maintain a 5.0% reserve so that charter school guarantees do not exceed capacity as the value of the fund changes and new guarantees in process are issued. In addition, the proposed amendment would specify additional requirements for a charter district relating to the fulfillment of financial obligations.
STATUTORY AUTHORITY: Texas Constitution, Article VII, §5, and Texas Education Code (TEC), §§7.102(c)(33), 45.053, 45.0531, 45.0532, 45.0541, 45.055, 45.056, and 45.063.
Texas Constitution, Article VII, Section 5, authorizes the legislature to use the permanent school fund to establish a bond guarantee program that has been enacted under the TEC, Chapter 45, Subchapter C. TEC, §7.102(c)(33), requires the State Board of Education (SBOE) to adopt annual reports on the status of the guaranteed bond program and authorizes the SBOE to adopt rules as necessary to administer the bond guarantee program.
TEC, §45.053, authorizes the SBOE to increase the limit of bonds that may be guaranteed within certain parameters established by the statute. TEC, §45.0531, authorizes the SBOE to set aside a reserve fund in addition to the limitation established under TEC, §45.053. TEC, §45.0532, describes the calculation of capacity for the guarantee of charter district bonds, which includes prohibitions against guaranteeing charter school bonds in an amount that exceeds the percentage of the total available capacity of the guaranteed bond program that is greater than the percentage of students enrolled in open-enrollment charter schools compared to the number of students enrolled in all public schools in the state and against guaranteeing charter district bonds if doing so would jeopardize the bond rating of the fund, even if capacity remains. TEC, §45.0541, requires charter district bonds to be rated as investment grade by a nationally recognized investment rating firm to be considered for the guarantee. This statute also requires that the bonds be issued under TEC, Chapter 53, which limits bonds to educational facilities. TEC, §45.055, requires an application that meets certain parameters to receive the guarantee. TEC, §45.056, requires an applicant to be investigated and only upon satisfaction that the bonds should be guaranteed may the guarantee be issued. TEC, §45.063 authorizes the SBOE to adopt rules to administer the bond guarantee program.
EFFECTIVE DATE: The proposed effective date of the proposed amendment to 19 TAC §33.67 would be 20 days after filing as adopted with the Texas Register in order to implement the latest policy in a timely manner. Under the TEC, §7.102(f), the State Board of Education (SBOE) must approve the rule action at second reading and final adoption by a vote of two-thirds of its members to specify an effective date earlier than the beginning of the 2016-2017 school year.
PREVIOUS BOARD ACTION: Section 33.67 was adopted effective March 3, 2014, and last amended effective January 8, 2015. A discussion item regarding proposed amendment to 19 TAC §33.67 was presented to the committee during its April 2015 meeting. The proposed amendment was approved for first reading and filing authorization at the July 2015 SBOE meeting.
BACKGROUND INFORMATION AND SIGNIFICANT ISSUES: Section 33.67 is the rule the SBOE adopted to implement the Permanent School Fund (PSF) Bond Guarantee Program for Charter Schools. The rule sets out the statutory provisions for the Bond Guarantee Program for Charter Schools, provides definitions, explains bond eligibility requirements, and describes how PSF capacity to guarantee bonds is determined. The rule also establishes the requirements of and policies related to the program's application and approval process. In addition, the rule allows for the commissioner to allocate specific holdings of the PSF under certain conditions, explains what effect defeasance has on guaranteed bonds, and sets out specific program payment conditions and guarantee restrictions.
The proposed amendment to 19 TAC §33.67 would update the rule as follows.
Section 33.67 defines nationally recognized investment rating firm for the purpose of administering the TEC, §45.0541, which requires a charter district to receive an investment grade rating from a nationally recognized statistical rating organization (NRSRO) to be eligible for the guarantee. The current definition in subsection (b)(16) of a nationally recognized investment rating firm is set to expire on September 1, 2015. The board requested that the agency develop a request for qualifications (RFQ) to select NRSROs that are eligible for use. This proposal would amend the bond guarantee program rule for charter schools to reference the qualifications that the agency developed during the RFQ process. This proposal would also add new language in subsection (e)(2)(A)(vii) to require that charters must not have violated a covenant relating to a financial obligation in the immediately preceding three years to be eligible for the guarantee.
The current definition in subsection (b)(17)(A) of a new money issue that is eligible for a guarantee does not explicitly exclude student and teacher housing from the projects that can be guaranteed. The proposed amendment would exclude these projects from being eligible for a guarantee, consistent with a proposed change to the bond guarantee rule for school districts. Charter district bond eligibility requires bonds to be issued in accordance with the TEC, Chapter 53, which limits bonds that may be issued to educational facilities.
The proposal would also add language in subsection (d)(1) to require the commissioner to maintain a 5.0% reserve when issuing charter school guarantees to prevent fluctuations in the value of the fund and new money issuances from causing the charter school guaranteed debt to exceed charter school capacity. The proposed language would prevent charter school guarantees from exceeding capacity as the value of the fund changes and new guarantees in process are issued. Statute authorizes the board to set limitations on the amount of bonds that may be granted in addition to the limits that result from the multiplier established by the board.
Attachment II reflects the proposal as approved for first reading and filing authorization at the July 2015 SBOE meeting. At the time this item was prepared, staff was in the process of gathering input regarding the prohibition against using the Bond Guarantee Program to guarantee bonds to construct student and teacher housing, the prohibition of violating a covenant related to a financial obligation, and the requirement for a 5.0% reserve, as directed during the July meeting of the Committee on School Finance/Permanent School Fund. Possible revisions to the proposal will be provided as a separate exhibit at the September 2015 meeting for consideration by the SBOE for second reading and final adoption.
FISCAL IMPACT: The proposed rule action would have fiscal implications for open-enrollment charter schools, but not any beyond what are provided for by the authorizing statute. Any costs to open-enrollment charter schools to participate in the guarantee program would be outweighed by the program's benefits.
Administration of the program would provide open-enrollment charter schools with access to low-cost bonds. Potential savings to charter schools are impossible to estimate at this time. Charter schools approved to have bonds issued with the benefit of the guarantee provided by the guarantee program would experience a savings in two ways. First, the guarantee would be provided at a cost lower than that for private bond insurance. Second, charter schools would be able to get lower interest rates on bonds that had a guarantee than they could otherwise get. Actual savings would be influenced by the unique circumstances of each open-enrollment charter school that proposed to have bonds issued, including the market's assessment of the school's financial condition and the cost and availability of private bond insurance.
The Texas Education Agency has determined that there are no additional costs to the state or persons required to comply with the proposed rule action. In addition, there is no direct adverse economic impact for small businesses and microbusinesses; therefore, no regulatory flexibility analysis, specified in Texas Government Code, §2006.002, is required.
PUBLIC AND STUDENT BENEFIT: The proposed amendment would incorporate modifications to the Bond Guarantee Program for charter schools, which provides low-cost bond insurance to open-enrollment charter schools in Texas. The program also ensures that the bonds issued on behalf of charter schools under the program are rated competitively in the bond market. A competitive bond rating allows open-enrollment charter schools to market their bonds at lower interest rates and thus reduces the long-term costs of the bonds for the charter schools.
PROCEDURAL AND REPORTING IMPLICATIONS: The proposed amendment would have no procedural and reporting implications.
LOCALLY MAINTAINED PAPERWORK REQUIREMENTS: The proposed amendment would have no locally maintained paperwork requirements.
PUBLIC COMMENTS: Following the July 2015 SBOE meeting, notice of the proposed amendment to 19 TAC §33.67 was filed with the Texas Register, initiating the official public comment period. A summary of public comments received regarding the proposal will be provided to the SBOE at the September 2015 meeting.
ALTERNATIVES: None.
OTHER COMMENTS AND RELATED ISSUES: None.
MOTION TO BE CONSIDERED: The State Board of Education:
By an affirmative vote of two-thirds of the members of the board, approve for second reading and final adoption proposed amendment to 19 TAC Chapter 33, Statement of Investment Objectives, Policies, and Guidelines of the Texas Permanent School Fund, Subchapter A, State Board of Education Rules, §33.67, Bond Guarantee Program for Charter Schools, with an effective date of 20 days after filing as adopted with the Texas Register.
Staff Members Responsible:
Von Byer, General Counsel
Legal Services
Lisa Dawn-Fisher, Associate Commissioner
School Finance / Chief School Finance Officer
Attachments:
I. Statutory Citations (PDF, 30KB)
II. Text of Proposed Amendment to 19 TAC Chapter 33, Statement of Investment Objectives, Policies, and Guidelines of the Texas Permanent School Fund, Subchapter A, State Board of Education Rules, §33.67, Bond Guarantee Program for Charter Schools (PDF, 76KB)