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State of Texas Debt – An Overview

State of Texas Debt – An Overview. January 27, 2009 Texas Bond Review Board Texas Public Finance Authority Bob Kline, Executive Director Judith Porras, Interim Executive Director kline@brb.state.tx.us judith . porras@tpfa.state.tx.us 512-463-1741 512-463-5681

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State of Texas Debt – An Overview

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  1. State of Texas Debt – An Overview January 27, 2009 Texas Bond Review Board Texas Public Finance Authority Bob Kline, Executive Director Judith Porras, Interim Executive Director kline@brb.state.tx.usjudith.porras@tpfa.state.tx.us 512-463-1741 512-463-5681 www.brb.state.tx.us www.tpfa.state.tx.us

  2. Introduction

  3. BRB vs. TPFA Bond Review Board – Oversight Agency • Approves state debt issues and lease purchases greater than $250,000 or a term longer than 5 years • Collects, analyzes and reports information on debt issued by state and local entities – on our website • Administers the state's Private Activity Bond Allocation Program Texas Public Finance Authority – Issuing Agency • Issues bonds and other forms of debt as authorized by the Legislature. • Currently - 23 state agencies including 3 universities • Administers the Master Lease Program

  4. Texas Debt Issuers • Texas Public Finance Authority (Universities: MSU, SFA & TSU) • Texas Department of Transportation • Texas Water Development Board • Texas Veteran’s Land Board (General Land Office) • Texas Department of Housing & Community Affairs • Texas State Affordable Housing Corp • Texas Higher Education Coordinating Board • The University of Texas System • The Texas A&M University System • Texas State Technical College System • Texas State University System • The Texas Tech University System • Texas Woman’s University • University of Houston System • The University of North Texas • Texas Agriculture Finance Authority (Dept. of Agriculture) • Office of Economic Development & Tourism

  5. TPFA Client Agencies • Midwestern State University • Stephen F. Austin State University • Texas Southern University • Adjutant General • Department of Agriculture • Office of the Governor/Texas Dept. of Transportation – Colonias Roadways • State Preservation Board • Department of Aging and Disability Services • Texas Department of Criminal Justice • Texas Department of Public Safety • Department State Health Services • Texas Facilities Commission • Texas Historical Commission • Texas Military Preparedness Commission • Texas Parks and Wildlife Department • Texas School for the Blind and Visually Impaired • Texas School for the Deaf • Texas Workforce Commission • Texas Youth Commission • TPFA Charter School Finance Corporation • Texas State Technical College System* • Texas Juvenile Probation Commission* • Texas National Research Laboratory Commission (Superconducting Super Collider)* • *Inactive

  6. 2. Debt Instruments

  7. What is a Bond? A contract between a borrower and a lender, specifying: • When the loan is due (“term” or “maturity”) Example: 20 years • What interest rate the borrower will pay Example: 5% • When the payments will be made Example: Monthly, Semi-annually, annually • What revenue source will be pledged to make the payments

  8. Common Terms • Par – 100% of the face value of a security. - A “par bond” is a bond selling at its face value. • Premium- the amount by which the price paid for a security exceeds par value. • Discount – the amount by which the price paid for a security is less than par value. • Maturity date– the date principal is due and payable to bond owner. • Coupon – now, the term is used as a synonym for the interest rate paid on a security. (Used to be an actual coupon detachable from the physical bond, which was the interest rate on the bond.) • Yield– generally, references the investor’s rate of return: calculated as “yield to maturity” or “yield to call.”

  9. Terms - Example Excerpt Stephen F. Austin State University Revenue Financing System Revenue Bonds, Series 2009 Underwritten 11:30AM 1.14.2009

  10. Types of State Debt Instruments • Bonds: Long term (5+ years), fixed interest rate • Notes: Short Term (<5 years) • Commercial Paper (maximum maturity of 270 days), variable interest rate

  11. Commercial Paper • Can be secured by the state’s general obligation pledge or by a specified revenue source. • Maturity ranges from 1 to 270 days. • As the paper matures, it can be paid off or reissued (“rolled over”) at a new interest rate • Variable interest rate – usually much lower than long term interest rate

  12. Municipal Market Data

  13. Fixed Rates vs. Variable RatesBond Buyer Index vs. SIFMA Index vs. TPFA CP(as of 12-31-08) Bond Buyer Index (BBI-20):  Long-term, fixed rate tax-exempt, revenue debt index; SIFMA: Short-term, variable rate tax-exempt index; TPFA CP: Weighted average rate of TPFA commercial paper

  14. Taxation • “Taxable” – Interest earnings are taxable for federal income tax purposes • “Tax-Exempt” – Interest earnings are exempt from federal income taxes • Lower Interest Rate – Investors will accept a lower interest rate than taxable bonds, such as corporate bonds, U.S. Treasury Bonds, because they don’t pay taxes on the interest • $1.00 (interest) - $.25 (taxes) = $0.75 (tax-exempt) • Federal tax law limits issuance, investment and use of proceeds of tax-exempt bonds

  15. 3. Types of Texas Debt

  16. General Obligation (GO) Debt • Constitutional Pledge: Legally secured by a constitutional pledge of the first monies coming into the State Treasury that are not constitutionally dedicated for another purpose. • Voter Approval: Resolution passed by a 2/3 vote of both houses of the legislature, and by a majority of the voters. • General Government functions: prisons, mental health facilities, parks.

  17. Revenue Debt • Legally secured by a specific revenue source • Does not require voter approval • Enterprise Activities: utilities, airports, toll roads, colleges and universities • Lease Revenue or Annual Appropriation Bonds

  18. TPFA Revenue Lease Purchase • TPFA issues revenue debt to finance a specifically authorized project or a property acquisition under the Master Lease Program (MLPP). • TPFA takes title to the financed project and leases it to a client agency. • The client agency is obligated to make lease payments to TPFA. • The lease payments are usually from general revenue appropriated to the client agency. • TPFA uses the lease payments to pay debt service on the bonds or commercial paper. • Administrative costs assessable to a client agency under MLPP and other related administrative costs, such as property insurance, are also paid by the client agency with general revenue appropriations.

  19. Tax and Revenue Anticipation Notes (TRANs) • Issued by the CPA, Treasury Operations to address the cash flow mismatch between revenues and expenditures in the general revenue fund • Repaid by the end of the biennium in which they are used, but are usually repaid by the end of each fiscal year • Repaid with tax receipts and other revenues of the General Revenue fund • Approved by the Cash Management Committee (Governor, Lt. Governor, CPA. Speakeris a non-voting member).

  20. Debt Issued by Universities • Revenue Bonds: Universities may issue revenue bonds or notes to finance permanent improvements for their institution(s), and pledge all system-wide revenue (Revenue Financing System Bonds), except legislative appropriations, to the repayment of the revenue bonds or notes. • Tuition Revenue Bonds: The Legislature may also authorize “tuition revenue bonds”, usually for specific purposes or projects and appropriate general revenue to offset the institution’s debt service; legislative appropriations made directly for debt service would be unconstitutional. • PUF/HEAF: The University of Texas and Texas A&M Systems may issue obligations backed by income from the Permanent University Fund (PUF), in accordance with Texas Constitution, Art. VII, §18. Texas’ other institutions may issue Higher Education Assistance Fund (HEAF) bonds, in accordance with Texas Constitution, Art. VII, §17.

  21. Refunding Bonds • Refinance - Issue new bonds to pay off old bonds • Lower interest rate - BRB recommends 3% • Change Bond Covenants • Change Repayment Schedule (“Restructure”) • One-Time - Federal tax law prohibits tax-exempt bonds issued after 1986 from being advance refunded more than one time. • Can be current refunding or advance refunding

  22. 4. Bond Sale Mechanics

  23. Debt Issuance Process • Legislative authorization and appropriation • Issuer Board approval • Bond Review Board approval • Bond sale (Negotiated/Competitive) • Bond closing – Attorney General approval • Ongoing Administration: paying debt service, federal tax law, change in use, arbitrage rebate compliance

  24. Finance Team • Financial Advisor • Bond Counsel/Disclosure Counsel • Underwriter • Commercial Paper Transactions: - Dealer - Paying Agent - Liquidity Provider

  25. Methods of Sale Competitive • Straightforward structure • Well known credit and security pledge • Size will attract bidders Negotiated • Complex financial or legal structure • Market timing important to structure (e.g., refunding) • Bonds require intensive pre-marketing effort

  26. Competitive • Underwriter determined through competitive bid for the purchase of the bonds, i.e. lowest True Interest Cost • Financial Advisor and Bond Counsel structure transaction and bond documents • The bidder (underwriter) determines structure of underwriting syndicate – not the issuer

  27. Negotiated • Underwriter usually selected through RFP process • Underwriter and underwriter’s counsel work with FA and Bond Counsel to structure transaction, prepare offering documents • Price, interest rates, and other terms of the bonds negotiated with Underwriter on pricing (sale) date • More flexibility in timing of sale, structure of bonds, and composition of underwriting syndicate

  28. Pricing/Trading • The sale of negotiated bonds is through a “pricing” process. • Underwriter, FA, and issuer closely check the market; reference MMD, assessing where the bonds are in relation to the MMD scale (ie, the “spread” to MMD). Spread to MMD dictated by credit quality of security. • Before pricing Underwriter, FA, and issuer review structure and market update, discuss pricing views and agree on a preliminary pricing scale. • The agreed preliminary scale is sent out to the market (via wire) for a “pricing period,” during which orders are received • Depending on orders received, the preliminary scale may be revised up or down if necessary. • At the end of pricing period, the Underwriter makes a formal offer to buy the bonds at specific rates, terms, structure. • Issuer accepts offer, and Bond Purchase Agreement is signed. • Trading on secondary market similar: investor/broker assesses credit factors and spread to MMD.

  29. 5. General Revenue Impact Self-Supporting vs. Not Self-Supporting

  30. Self-Supporting • Self-supporting debt is designed to be repaid with revenues other than state general revenues. Self-supporting debt can be either general obligation debt or revenue debt. • GO: Water Development Board debt repaid from loans made to communities for water and wastewater projects. • Revenue: State Highway Fund debt, Housing and Community Affairs debt

  31. Not Self-Supporting • Not self-supporting debt is intended to be repaid with state general revenues. Not self-supporting debt can be either general obligation debt or revenue debt. • GO: HEAF Bonds, TPFA Bonds, Water Development Bonds • Revenue: TPFA Bonds, TPFA MLPP, armory improvement bonds (TMFC/Adj. Gen.)

  32. 6. Questions and Answers

  33. 7. Texas State Debt

  34. State Debt Outstanding

  35. Historical State Debt As of 8/31/08 (billions)

  36. Texas Debt Service as of 8/31/08 (millions)

  37. Constitutional Debt Limit • The Texas Constitution prohibits the issuance of additional state debt if the percentage of debt service payable by general revenue in any fiscal year exceeds 5% of the average of unrestricted general revenue for the past three years. • For FY2008, this percentage was 1.30% of issued debt and 4.09%, including authorized but unissued debt.

  38. Constitutional Debt Limit

  39. College & University Debt Outstanding As of 08-31-08 (billions)

  40. College & University Debt Service as of 08-31-08 (millions)

  41. 8. Texas’ Credit Ratings, Debt Affordability and Swaps

  42. Texas’ Credit Ratings Texas’ Credit Ratings are: • Moody’s Aa1 • Standard and Poor’s AA • Fitch AA+ Rating agencies consider the following four factors in determining a state’s credit rating: • Economy • Financial condition • Debt burden • General management practices

  43. Texas’ State & Local Debt

  44. Texas Local Government Debt(as of 8/31/2007)

  45. Texas Bond Review Board BRB Online Database Local government searchable databases and down-loadable data available on the Bond Review Board’s web site: http://www.brb.state.tx.us/lgs/lgs.aspx

  46. Debt Affordability Study (DAS) • Annual DAS is the responsibility of BRB in coordination with the LBB. • Purpose is to provide state leadership with metrics to assess the general revenue impact of debt-service requirements for not self-supporting debt over the next 5 years. • Uses an Excel-based model (Debt Capacity Model) to calculate five key debt ratios to measure the state’s debt capacity. • Debt capacity is defined as annual debt-service. • Enables policymakers to run debt-service scenarios to ensure the state’s available revenues are used for the highest priority needs. • Publication is planned for early February.

  47. DAS of January, 2008 • Ratio 1 – Not Self-supporting Debt Service as a Percent of Unrestricted Revenues (T=2%, C=3%, 2.33% by FY2012) • Ratio 2 – Not Self-supporting Debt Service as a Percent of Budgeted General Revenue (historically <1.5%, 1.38% for FY 2009) • Ratio 3 – Not Self-supporting Debt to Personal Income (S&P <3%, 0.69% by FY2012) • Ratio 4 – Not Self-supporting Debt per Capita ($299.38 by FY2012) • Ratio 5 – Rate of Debt Retirement (50% of NSS debt retired in 10 yrs, for Texas: 71.9%)

  48. What is an Interest Rate Swap? • Form of Derivative • Alternate way to access capital • Does not represent debt – interest rate management agreement • 2 parties agree to exchange different forms of interest rates for a definite period • Achieve lower cost financing by using short-term interest rates rather than higher, long-term rates • Huge market: > $150 trillion in notional amount, ~5X > sum of world’s stock markets

  49. Pay-Fixed, Receive-Variable Swap

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