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January 2015 Texas Bond Review BoardTexas Public Finance Authority Bob Kline, Executive Director Lee Deviney, Executive Director

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Presentation on theme: "January 2015 Texas Bond Review BoardTexas Public Finance Authority Bob Kline, Executive Director Lee Deviney, Executive Director"— Presentation transcript:

1 January 2015 Texas Bond Review BoardTexas Public Finance Authority Bob Kline, Executive Director Lee Deviney, Executive Director

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3 3 Debt Issuance is a discretionary financing tool Conserve current revenue Match capital project costs to useful life of the asset Manage cash flow

4 4 State Debt Outstanding Texas Debt Outstanding as of August 31, 2014* (millions) Self-Supporting Not Self-SupportingTotal General Obligation $10,446$4,643$15,088 Revenue $23,377$186$23,563 Conduit/Component** $5,676$0$5,676 Total $39,498$4,828$44,327 *Does not include the TRAN **Not a legal liability of the state, secured by third party entities

5 Texas Department of Transportation A. A.Texas Private Activity Bond Surface Transportation Corp. B. B.Grand Parkway Transportation Corp Texas Public Finance Authority A. A.TPFA Charter School Finance Corp Texas Department of Housing & Community Affairs 4. 4.Texas Veterans Land Board 5. 5.Texas Higher Education Coordinating Board 6. 6.Texas State Affordable Housing Corp Texas Water Development Board 8. 8.Office of Economic Development & Tourism 9. 9.Texas Agriculture Finance Authority (Department of Agriculture) The University of Texas System The Texas A&M University System University of Houston System Texas State University System The Texas Tech University System The University of North Texas Texas Southern University Stephen F. Austin State University Midwestern State University Texas Woman’s University Texas State Technical College System AgenciesHigher Education Institutions

6 6 Bond Review Board – Oversight Agency Board: Governor, Lt. Governor, Comptroller and Speaker (non-voting) Approves state debt and lease purchases that are more than $250,000 or have a term longer than 5 years (excludes university revenue debt rated AA- or higher, TRAN and PUF debt) Collects, analyzes and reports information on state and local debt Administers the state's Private Activity Bond Allocation Program Texas Public Finance Authority – Issuing Agency Board: Appointed by the Governor Issues state debt as authorized by the legislature Issues for 24 state agencies including 4 universities Administers the Master Lease Purchase Program

7 1.Adjutant General’s Department (formerly Texas Military Facilities Commission) 2.Cancer Prevention and Research Institute of Texas 3.Midwestern State University 4.Texas Agriculture Finance Authority 5.Texas Commission on Environmental Quality (formerly Texas Low-Level Radioactive Waste Disposal Authority) 6.Texas Department of Aging and Disability Services 7.Texas Department of Agriculture 8.Texas Department of Criminal Justice 9.Texas Department of Insurance 10.Texas Department of Public Safety 11.Texas Department of State Health Services 12.Texas Department of Transportation (Governor’s Office – Colonia Roadway Grant Program) 13.Texas Facilities Commission 14.Texas Health and Human Services Commission 15.Texas Historical Commission 16.Texas Juvenile Justice Department 17.Texas Military Preparedness Commission (Texas Military Value Revolving Loan Fund) 18.Texas Parks and Wildlife Department 19.Texas School for the Blind and Visually Impaired 20.Texas School for the Deaf 21.Texas Southern University 22.Texas State Preservation Board 23.Texas Windstorm Insurance Association 24.Texas Workforce Commission Optional Use of TPFA As An Issuer Stephen F. Austin State University Texas State Technical College System General Academic Teaching Institutions as defined by Section of the Texas Education Code

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9 9 A debt instrument is a contract for a loan between a lender and a borrower specifying: –Term or maturity for debt security is the due date for the loan (e.g., years, months, days) –Interest rate on the bond (e.g., 5%); –Debt service or repayment schedule, (e.g., monthly, semi-annually or annually); –Revenue source pledged to repay the loan

10 Par – Face value of a security Coupon – Interest rate paid on a security Discount or Premium – Amount the price of a security is less than or exceeds par value Fixed rate – Interest rate that does not fluctuate during the life of the security Variable Rate – Interest rate that resets at fixed intervals based on a predetermined index or formula Yield – Investor rate of return Liquidity Provider – Financial intermediary that facilitates the remarketing of variable-rate debt at reset dates 10

11 11 Bonds: Long Term (5+ years) Fixed or Variable Interest Rate Notes: Short Term (<5 years) Fixed or Variable Interest Rate Commercial Paper: Days (max. maturity of 270 days) Variable Interest Rate

12 12 Secured by general obligation pledge or a specified revenue source Variable interest rate – usually much lower than long term interest rate Maturity ranges from 1 to 270 days Rolled-over (reissued) or refunded (repaid) with long- term debt at maturity

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15 15 Rates are for 20 Year Tax Exempt Municipal Bonds.

16 16 Taxable: Earnings are taxed at the federal and possible state and local levels Tax-Exempt: Exempt from taxation  Investors will accept a lower interest rate because their earnings are exempt from taxation  5% Coupon 25% Tax Rate = 3.75% After Tax Return  Federal tax law limits the issuance, investment and use of proceeds of tax-exempt debt instruments

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18 18 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 Requires the Approval:  2/3 vote of both houses of the legislature and  Majority of Texas Voters Examples: Debt for mental health facilities (HHS), prisons (TDCJ), parks (TPWD)

19 19 Secured by a specific revenue source Does not require voter approval Examples: College and university debt, certain water development bonds

20 TPFA issues revenue debt to finance a purchase of personal property or equipment under its Master Lease Program (MLPP) TPFA holds the title to the property and leases the property to the client agency Client agency makes lease payments to TPFA from general revenue appropriated to the client agency TPFA uses the lease payments to pay debt service 20

21 21 Issued by the Comptroller to address the State’s cash flow needs (i.e. mismatch between state revenues and expenditures) Must be repaid before the end of the biennium; usually issued and repaid each fiscal year Repaid from General Revenue

22 22 Used to:  Refinance – Issue new debt to pay off old debt  Lower interest rates  Change bond terms  Change repayment schedule (“Restructure”) Can be a current refunding or an advance refunding Federal tax law permits tax-exempt bonds to be advance refunded only once

23 4. General Revenue Impact Self-Supporting and Not Self-Supporting

24 24 Self-Supporting Repaid with revenues other than general revenues, can be either GO or revenue debt Examples: o GO: Water Development Board debt repaid from loans for water and wastewater projects o Revenue: University revenue financing system debt, Texas Dept. of Housing and Community Affairs single family mortgage debt

25 25 Not Self-Supporting Repaid with state general revenues, can be either GO or revenue debt Examples: o GO: HEAF debt, most TPFA debt, CPRIT debt o Revenue: TPFA MLPP, Building Revenue Bonds

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27 27 1.Legislative authorization and appropriation 2.Issuer Board approval 3.Bond Review Board approval 4.Sale (Negotiated/Competitive/Privately Placed) 5.Attorney General approval 6.Closing 7.Ongoing Administration/Reporting

28 28 Bonds and Notes:  Financial Advisor  Bond Counsel  Underwriter  Rating Agencies Commercial Paper Transactions also include:  Dealer  Paying Agent  Liquidity Provider

29 29 Negotiated Unusual financial or legal structure Issuance timing important (e.g., refunding) Requires more pre-marketing effort Competitive Straightforward structure Well-known credit and security pledge Size and ratings often attract bidders Private Placement Unique financial or legal structure Sold directly to purchaser Not underwritten

30  Timely debt service payments  Monitor expenditure of bond proceeds  Comply with federal tax law use of facility investment of bond proceeds arbitrage rebate compliance  Legislative appropriations for debt service, if required  Continuing Disclosure 30

31 6. State Debt

32 Texas Department of Transportation A. A.Texas Private Activity Bond Surface Transportation Corp. B. B.Grand Parkway Transportation Corp Texas Public Finance Authority A. A.TPFA Charter School Finance Corp Texas Department of Housing & Community Affairs 4. 4.Texas Veterans Land Board 5. 5.Texas Higher Education Coordinating Board 6. 6.Texas State Affordable Housing Corp Texas Water Development Board 8. 8.Office of Economic Development & Tourism 9. 9.Texas Agriculture Finance Authority (Department of Agriculture) The University of Texas System The Texas A&M University System University of Houston System Texas State University System The Texas Tech University System The University of North Texas Texas Southern University Stephen F. Austin State University Midwestern State University Texas Woman’s University Texas State Technical College System AgenciesHigher Education Institutions

33 33 State Debt Outstanding Texas Debt Outstanding as of August 31, 2014* (millions) Self-Supporting Not Self-SupportingTotal General Obligation $10,446$4,643$15,088 Revenue $23,377$186$23,563 Conduit/Component** $5,676$0$5,676 Total $39,498$4,828$44,327 *Does not include the TRAN **Not a legal liability of the state, secured by third party entities

34 State Debt Outstanding As of 8/31/14 (billions) 34

35 Debt Service on State Debt as of 8/31/14 (billions) 35

36 36 Revenue Debt: Revenue financing system (RFS) debt finances permanent improvements and is repaid from system-wide revenue (except legislative appropriations) Tuition Revenue Bonds: Legislature may authorize tuition revenue bonds (TRBs) and appropriate general revenue to offset the institution’s debt service PUF: Certain institutions within The University of Texas and Texas A&M Systems may issue obligations backed by income from the Permanent University Fund (PUF) HEAF: Certain institutions, including some within The University of Texas and Texas A&M Systems, may issue Higher Education Assistance Fund debt (HEAF or Constitutional Appropriation Bonds)

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38 38 Constitutional Debt Limit 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 CDL at FYE: 1.20% for issued debt 2.71% issued and authorized but unissued debt

39 7. Credit Ratings

40 40 Texas Credit Ratings State Credit Ratings: o Moody’sAaa o Standard and Poor’sAAA o FitchAAA Factors Considered: o Economy o Financial condition o Debt burden o General management practices

41 States With AAA Ratings 41

42 42 RATING September, 2014 UpgradesMoody'sStandard Needed forInvestors&Fitch AAA RankingStateServicePoor'sRatings -GeorgiaAaaAAA -North CarolinaAaaAAA -TexasAaaAAA 1FloridaAa1AAA 3OhioAa1AA+ 4New YorkAa2AA+ 7MichiganAa2AA-AA 8PennsylvaniaAa3AAAA- 13CaliforniaAa3AA 18IllinoisA3A- General Obligation Credit Ratings - 10 Most Populous States

43 Positive Rating Drivers Strong Financial Management Low Debt Growth-Oriented Economy Significant Reserve Balances 43

44 Negative Rating Drivers Growth Related Spending Pressures –Transportation, Water, School Funding Unfunded Pension Liabilities Sales Tax Dependence 44

45 8. Local Debt

46 Types of Local Governments School Districts Cities Counties Water Districts & Authorities Community/Junior College Districts Health/Hospital Districts & Authorities Other Special Districts (Road Districts & Authorities and education authorities) 46

47 Local Debt Outstanding ($ billion outstanding as of 8/31/2014) 47

48 Total Debt Outstanding as of 8/31/14 (billions) 48

49 State and Local Debt – 10 Most Populous States 49

50 Local Debt Issuance Process 1.Voter and/or Governing Body approval* 2.Sale (Negotiated/Competitive/Privately Placed) 3.Attorney General approval 4.Closing 5.Issuance data is sent to Bond Review Board for analysis 6.Ongoing Administration/Reporting * The BRB does not approve local debt issuances 50

51 Types of Local Government Long-Term Debt General Obligation Debt (61%) Supported by ad valorem (property) taxes Includes combination tax & revenue debt Usually voter approved Revenue Debt (39%)* Voter approval not needed Secured by a specific revenue source *Includes conduit debt 51

52 Not Voter Approved GO Debt Certificates of Obligation Tax Notes Other types of Bonding Authority 52

53 Not Voter Approved: Certificates of Obligation Issued without voter approval Used for the construction of public works GO debt payable from ad valorem taxes Issuers: cities, counties and some hospital districts Maturity up to 40 years Petition by 5% of the voters requires a voter referendum 53

54 Not Voter Approved: Tax Notes and Other Bonds Tax Notes No opportunity for voter petition Maturity up to 7 years Used for the construction of public works Other types of bonding authority: Time Warrants - Issued mainly by school districts Pension Obligation Bonds (Houston, El Paso, Dallas) 54

55 Repayment Structures Current Interest Bonds - CIBs Most commonly used debt structure Interest paid on a periodic basis Capital Appreciation Bonds - CABs Sold at a discount No current interest payment At maturity investor receives both principal and interest Interest compounds on interest Largely utilized by ISDs to preserve debt capacity 55

56 Characteristics of CABs CABs are issued to: Preserve debt limits – reduced par Help local governments reach tax-rate targets Become more expensive as maturity lengthens due to compounding Premium CABs (PCABs) are CABs sold with a premium raise additional proceeds and still preserve par limits local governments issue more PCABs than non- premium CABs 56

57 Debt Service/Par for Local Government 57

58 Local Debt Service Outstanding 58

59 9. Private Activity Bond (PAB) Allocation Program

60 PAB Summary Private Debt sold like a public security (tax- exempt) Allowable common uses include: –low-income mortgages, –small industry, –low-income housing, –student loans, –waste disposal facilities, etc. 60

61 61 Private Activity Bond Program for 2014


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