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IRS Action Increases Bond Guarantee Program Capacity

Rule Change Allows More School Districts and Charters to Access AAA Rating

Austin, TEXAS – May 11, 2023 – The State Board of Education today announced notice of intent, Notice 2023-39 from the Internal Revenue Service (IRS) that will greatly increase the Texas Permanent School Fund (PSF) Bond Guarantee Program’s (BGP) capacity, making the program once again widely available to all eligible school and charter districts.
The IRS, yesterday, posted a notice of intent to update regulatory language which previously has limited the capacity of the Permanent School Fund to guarantee local school district and charter district bonds. This rule change is effective immediately (as of May 10, 2023) and will enable the State Board of Education (SBOE) and Texas Education Agency (TEA) to guarantee bonds approved by voters in elections earlier this month. Without the IRS rule change, requests for a guarantee would have been denied, forcing school districts and charter districts to pay higher interest rates.

The Permanent School Fund has guaranteed school bonds since the program was approved by Texas voters in 1983. The guarantee results in a AAA bond rating and the lowest interest rate available, so more funds are allocated directly to schools rather than financing costs.

The IRS has not updated its regulatory rule language since 2009, so the Bond Guarantee Program capacity was based on a 2009 value of the PSF, which was about half of the current value. The IRS notice essentially aligns the federal limit with the state statutory limit at five times the cost value of the Texas Permanent School Fund, or approximately $218 billion at current levels.

The SBOE has been working to get the language updated for several years. In a period between last November and January, available program capacity was nearly depleted when the program approached the IRS limit, and 56 districts across the state were denied $8.4 billion in applications. Without the guarantee, Texas public schools would pay millions of dollars more per year in higher financing costs. 

"News of this change by the IRS is a welcome victory for Texas students and taxpayers. Instead of paying millions in higher interest costs, school districts can instead use that money for much-needed facility improvements,” said State Board of Education Chairman Keven Ellis (District 9-Lufkin).

The IRS move follows months of bipartisan efforts by the State Board of Education, U.S. Representatives Lloyd Doggett (District 37-Austin) and Jodey Arrington (District 19-Lubbock), the Texas Congressional Delegation, Governor Greg Abbott, Texas legislative leadership, TEA and public school leaders across the state.

“We are gratified by the IRS decision and deeply thankful for the tireless efforts of Congressman Doggett and Chairman Arrington who pursued this matter with the IRS, and all the House members who have co-sponsored the proposed legislative solution. We also thank Senator Cornyn for his efforts with the IRS,” said Tom Maynard (District 10-Florence), who chairs SBOE’s Committee on School Finance and the Permanent School Fund Corporation Board of Directors. “The new capacity will enable Texas schools to get the most out of their investment on behalf of young Texans in our classrooms,” Maynard said.

Background: The Texas Permanent School Fund is an educational fund first established in the 1845 Texas Constitution. The fund became an investment fund in 1854 and was placed under the stewardship of the State Board of Education in 1876. The fund provides support for local districts through an instructional materials and technology allotment, a per capita distribution, and the bond guarantee program. The investment assets of the PSF are managed under the oversight of the Texas Permanent School Fund Corporation.

The Bond Guarantee Program guarantees bonds issued by eligible Texas school districts and charter districts. The PSF’s AAA credit rating means that school and charter districts pay lower interest rates on bonds guaranteed by the PSF, allowing more money to go toward school needs, instead of financing costs. Since the BGP’s inception in 1983, it has guaranteed around $220 billion in school district and charter district debt. Savings to Texas taxpayers are currently estimated at between $300 to $400 million annually.