Lawmakers Ask for Federal Help to Stretch Texas School Bond Dollars

Construction at Eastside Early College High School, funded by the 2017 bond (Courtesy of Austin ISD)

If – sorry, when – you went to cast your vote in the 2022 midterm elections, you may have considered the bond propositions in one of our local school districts, including Austin, Dripping Springs, Lake Travis, or Pflugerville. But there's one thing you may not know: If the federal government doesn't raise the ceiling of the Texas Permanent School Fund's $117 billion Bond Guarantee Program, millions of bond dollars will be consumed by high interest rates instead of school renovations. In place of a response from the U.S. Treasury Department and Internal Revenue Service, lawmakers are hearing crickets.

The Texas PSF is the $48.3 billion diversified investment portfolio that supports public and charter schools. It was created in 1854 with $2 million (about $71 million in 2022 dollars) and is currently managed by the State Board of Education and Texas General Land Office. The Bond Guarantee Program allows the PSF to act as a guarantor of up to 3.5 times the value of public school bond debt (calculated monthly) if local districts can't do so. This allows districts to get AAA bond ratings when they go to market, which gets them the lowest interest rates.

But in 2009, federal tax regulations capped the amount the PSF can guarantee, and since this summer, guaranteed school bonds are pushing that limit. Now, only $3.5 billion remains to guarantee new bonds, including the 61 school districts whose voters could approve more than $15 billion in bonds in 2022. (Austin ISD's package alone is $2.4 billion.)

If the program reaches its limit, the PSF can't guarantee new school bond debt, which will leave schools with higher interest rates on their borrowing. (Existing bond debts wouldn't be affected.) U.S. Rep. Lloyd Doggett told the Chronicle it would cost Texas schools $425 million in extra financing costs, expenses that would ideally go directly to renovations of school campuses, new equipment purchases, or electric buses. In 2009, after the Great Recession had shrunk the PSF below its bond guarantee obligations, the IRS intervened and revived the program with a higher guarantee ceiling. A decade later, Doggett, along with Rep. Jodey Arrington, R-Lubbock, and 24 other Texans in Congress, now urges Congress to get involved.

In July, Doggett first sent a letter to the Treasury Department asking for an updated exemption from the IRS. "Texas' public-­school population is growing and the need for additional school facilities and expansions of existing facilities is of great concern to us. But what is more concerning is the possibility that because of inaction, more taxpayer dollars would be used to cover interest costs rather than the facility construction projects themselves that benefit children and families in the State of Texas," he wrote in the letter.

He followed up in September. The Treas­ury finally responded on Nov. 2, informing Rep. Doggett that they still don't know if the program will get the exemption. There's no deadline for the IRS to intervene, but the sooner it does, the better interest rates schools can get for their bond debt. "We need action now," said Rep. Doggett. "Without this update, millions of taxpayer dollars will be needlessly wasted on financing costs instead of new classrooms and updated facilities at a time when we need to be building, soundly, for our future."

AISD Chief Financial Officer Ed Ramos said that district officials have led informational sessions about the 2022 bond program for its community and teachers since the spring, but didn't mention the issue because he thought the IRS would have intervened by now. He says district will keep its renovation promises even if it faces higher interest rates. "If we can't access the bond guarantee program, then it would cost our taxpayers millions in additional interest rate costs. For this [2022] bond, it would be in excess of $20 million," Ramos said. "If the amount is approved, then more will be spent on interest than was planned. It's kind of like you're losing money on the renovation projects. … The ideal solution is for the federal government and the IRS to look at the PSF and Bond Guarantee Program through revised calculations based on 2022 not 2009, and give a new ceiling."