State of Texas Debt – An Overview January 2011 Texas Bond Review Board Texas Public Finance Authority Bob Kline, Executive Director kline@brb.state.tx.us 512-463-1741 www.brb.state.tx.us Dwight Burns, Executive Director dwight.burns@tpfa.state.tx.us 512-463-5544 www.tpfa.state.tx.us 1. Introduction BRB vs. TPFA Bond Review Board – Oversight Agency • Board: Governor, Lt. Governor, Comptroller and Speaker (nonvoting) • Approves state debt and lease purchases greater than $250,000 or a term longer than 5 years • Collects, analyzes and reports information on state and local debt website • 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 23 state agencies including 3 universities • Administers the Master Lease Purchase Program 3 Texas Debt Issuers 4 TPFA Client Agencies 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. Adjutant General/Military Facilities Commission Cancer Prevention and Research Institute of Texas Department of Aging and Disability Services Department of Agriculture/Texas Agricultural Finance Authority Department of Public Safety Department of State Health Services Health and Human Services Commission Midwestern State University School for the Blind and Visually Impaired School for the Deaf State Preservation Board Stephen F. Austin State University Texas Department of Criminal Justice Texas Department of Transportation/Office of the Governor (Colonias Roadway Grant Program) Texas Facilities Commission Texas Historical Commission Texas Military Preparedness Commission (Texas Military Value Revolving Loan Fund) Texas Parks and Wildlife Department Texas Southern University Texas Windstorm Insurance Association Texas Workforce Commission Texas Youth Commission TPFA Charter School Finance Corporation *TPFA gained authority by the 81st Legislature to issue debt on behalf of TAFA 2. Debt Instruments What is a Bond? A bond is a contract for a loan between a lender and a borrower specifying: • the due date for the loan called the term or maturity, e.g., 20 years; • the interest rate on the bond, e.g., 5%; • the debt service (repayment) schedule, e.g., monthly, semi-annually or annually; and • the revenue source pledged to repay the loan. 7 Common Terms for Debt Securities • 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 8 remarketing of variable-rate debt at reset dates Terms - Example General Obligation Refunding Bonds, Series 2010 Underwritten on 7/1/2010 Maturity Date Amount Rate Yield Price 10/01/2027 $10,025,000 5.00% 3.910% 109.100 C 10/01/2028 $10,025,000 5.00% 3.980% 108.486 C 10/01/2029 $10,025,000 5.00% 4.050% 107.876 C 10/01/2030 $10,025,000 5.00% 4.120% 107.270 C Debt Maturities • Bonds: Long term (5+ years), fixed or variable rate • Notes: Short Term (<5 years), fixed or variable rate • Commercial Paper: (maximum maturity of 270 days), variable interest rate 10 Commercial Paper • • • • 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 longterm debt at maturity 11 Municipal (Tax-Exempt) Interest Rates 6.00% 5.00% Rate (%) 4.00% 3.00% 2.00% 1.00% 0.00% 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Maturity Municipal Market Data (10/19/2010) Municipal Market Data (11/15/2010) Municipal Market Data (12/15/2010) 12 Fixed Rates vs. Variable Rates Bond Buyer Index vs. SIFMA Index vs. TPFA CP (as of 11/30/10) 13 Taxation on Interest Earnings • • Taxable - On federal (and some state and local) tax returns Tax-Exempt – Exempt from taxation o Investors will accept a lower interest rate because earnings are exempt from taxation o $1.00 (taxable) - $.25 (taxes) = $0.75 (tax-exempt) o Federal tax law limits issuance, investment and use of proceeds of tax-exempt debt 14 3. Types of Texas Debt 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 • Approvals: Requires 2/3 vote of both houses of the legislature and majority of the voters • Examples: Debt for prisons (TDCJ), mental health facilities (TDSHS), parks (TPWD) 16 Revenue Debt • Legally secured by a specific revenue source • Does not require voter approval • Examples: Veterans Land Board bonds, some Water Development bonds, college and university debt 17 Lease Purchase • • • • 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 18 Tax and Revenue Anticipation Notes (TRAN) • • • Issued by the Comptroller (CPA) to address the cash flow mismatch between tax revenues and expenditures from the general revenue Repaid by the end of the biennium but are usually repaid by the end of the fiscal year Repaid with tax receipts and other general revenue 19 Debt Issued by Universities • • • • Revenue Debt: Revenue financing system 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: Pursuant to the Texas Constitution, only institutions within The University of Texas and Texas A&M Systems may issue obligations backed by income from the Permanent University Fund (PUF) HEAF: Pursuant to the Texas Constitution, certain institutions, including some within The University of Texas and Texas A&M Systems, may issue Higher Education Assistance Fund debt (called HEAF or Constitutional Appropriation Bonds) 20 College & University Debt Outstanding As of 08-31-10 (billions) 7.0 6.0 Billions 5.0 4.0 3.0 2.0 1.0 0.0 2004 2005 2006 PUF 2007 Non-TRB 2008 2009 2010 TRB 21 Refundings • Used to: o Refinance – Issue new debt to pay off old debt o Lower interest rates o Change bond covenants o 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 22 4. Debt Sale Mechanics Debt Issuance Process 1. Legislative authorization and appropriation 2. Issuer Board approval 3. Bond Review Board approval 4. Sale (Negotiated/Competitive) 5. Attorney General approval 6. Closing 7. Ongoing Administration 24 Debt Administration • 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 25 Finance Team Bonds and Notes: o Financial Advisor o Bond Counsel o Underwriter Commercial Paper Transactions also include: o Dealer o Paying Agent o Liquidity Provider 26 Methods of Sale 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 27 Negotiated • • • • Pool of underwriters usually selected through issuer’s RFP process Price, interest rates and other terms of the securities negotiated with underwriter on sale date Advantages: Flexibility in timing, structure and composition of underwriting syndicate Disadvantages: lack of competition in pricing, wider fluctuations in spreads 28 Competitive • • • • Underwriter selected on sale date through competitive bid based on lowest True Interest Cost Winning underwriter determines structure of underwriting syndicate – not the issuer Advantages: competition in pricing, usually lower spreads and open process Disadvantages: limited flexibility, limited pre-selling, minimum control over bond distribution and risk premium 29 Pricing/Trading • • • • • Underwriter, financial advisor and issuer closely check the market to agree on preliminary pricing scale Preliminary scale is forwarded to the market for a “pricing period” during which orders are received Preliminary scale may be revised depending on orders received At the end of pricing period, the underwriter buys the debt at specific rates, terms and maturity structure Debt trades in the secondary market based on issuer’s credit and prices related to relevant market indices 30 5. General Revenue Impact Self-Supporting vs. Not Self-Supporting 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 made to communities for water and wastewater projects o Revenue: University revenue financing system debt, Housing and Community Affairs debt 32 Not Self-Supporting • • Repaid with state general revenues, can be either GO or revenue debt Examples: o GO: HEAF Bonds, most TPFA Bonds, Water Development Bonds o Revenue: TPFA MLPP, Texas Military Facilities Commission/Adjutant General Bonds 33 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 • At fiscal year-end 2010, Constitutional Debt Limit (CDL) was 1.36% for issued debt and 4.10% including issued and authorized but unissued debt 34 Calculating the Constitutional Debt Limit Maximum Debt Service = 5% of the Average of Unrestricted General Revenue for FY’s ’08, ’09 and ’10 Debt Service Debt Service for all in Peak Year + Unissued Debt 3 year moving average of unrestricted GR 35 Q&A 6. Texas Debt State Debt Outstanding Texas Debt Outstanding as of August 31, 2010* (millions) Self-Supporting Not Self-Supporting Total General Obligation $10,188 $2,713 $12,901 Revenue** $24,535 $381 $24,916 Total $34,723 $3,094 $37,817 *Includes commercial paper and variable rate notes; however does not include TRANs (short-term debt issued by the CPA, Treasury Operations for cash management purposes). **Includes Tuition Revenue Bonds 38 Historical State Debt Outstanding As of 8/31/10 (billions) $40.0 $35.0 $30.0 $25.0 $20.0 $15.0 $10.0 $5.0 $2001 2002 GO Self Supporting 2003 2004 Revenue Self Supporting 2005 2006 2007 GO Not Self Supporting 2008 2009 2010 Revenue Not Self Supporting 39 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047 Millions Debt Service on State Debt as of 8/31/10 (millions) $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 REV/SS REV/NSS GO/NSS GO/SS 40 Local Debt Outstanding ($174.55 billion outstanding as of 8/31/2009) ($54.35 billion) Public School Districts 33.7% ($1.95 billion) Health & Hospital Districts 1.4% ($11.38 billion) Counties 6.8% ($3.24 billion) Community and Junior Colleges 2.1% Source: Texas Bond Review Board ($25.41 billion) Water Districts & Authorities 15.5% ($8.85 billion) Other Special Districts & Authorities 6.9% ($55.13 billion) Cities, Towns, Villages 33.5% 41 State and Local Debt – 10 Most Populous States TOTAL STATE AND LOCAL DEBT OUTSTANDING: TEN MOST POPULOUS STATES Total State and Local Debt Population State (thousands) New York 19,490 Illinois 12,902 Pennsylvania 12,448 California 36,757 Texas 24,327 Florida 18,328 Michigan 10,003 Ohio 11,486 North Carolina 9,222 Georgia 9,686 MEAN Amount (millions) $269,742 124,163 118,611 341,094 215,877 142,129 75,247 68,658 51,202 50,561 $145,728 Per Capita Amount $13,840 9,624 9,529 9,280 8,874 7,755 7,522 5,978 5,552 5,220 $8,317 State Debt Per Capita Rank 1 2 3 4 5 6 7 8 9 10 Amount (millions) $114,240 58,437 40,100 121,930 33,299 42,321 29,065 26,885 19,605 13,072 $49,895 % of Total Debt 42.4% 47.1% 33.8% 35.7% 15.4% 29.8% 38.6% 39.2% 38.3% 25.9% Per Capita Amount $5,861 4,529 3,221 3,317 1,369 2,309 2,906 2,341 2,126 1,350 34.6% $2,933 Per Capita Rank 1 2 4 3 9 7 5 6 8 10 Amount (millions) $155,502 65,726 78,511 219,164 182,578 99,808 46,182 41,773 31,597 37,489 $95,833 Local Debt Per % of Total Capita Debt Amount 57.6% $7,979 52.9% 5,094 66.2% 6,307 64.3% 5,963 84.6% 7,505 70.2% 5,446 61.4% 4,617 60.8% 3,637 61.7% 3,426 74.1% 3,870 65.4% $5,384 Note: Detail may not add to total due to rounding. Source: U.S. Census Bureau, State and Local Government Finances by Level of Government and by State: 2007-2008, the most recent data available. 42 Per Capita Rank 1 6 3 4 2 5 7 9 10 8 BRB Local Debt Online Database Local government searchable databases and downloadable data available on the Bond Review Board’s web site: http://www.brb.state.tx.us/lgs/lgs.aspx 43 7. State Credit Ratings, Debt Affordability and Swaps Credit Ratings State Credit Ratings: o Moody’s o Standard and Poor’s o Fitch Aaa AA+ AAA Factors Considered: o o o o Economy Financial condition Debt burden General management practices 45 General Obligation Credit Ratings 10 Most Populous States RATING Steps from AAA Ranking State Georgia North Carolina 1 Florida 1 TEXAS 3 Ohio 4 Pennsylvania 6 New York 8 Michigan 12 Illinois 16 California August, 2010 Moody's Investors Service Aaa Aaa Aa1 Aaa Aa1 Aa1 Aa2 Aa2 Aa3 A1 Standard & Poor's AAA AAA AAA AA+ AA+ AA AA AAA+ Fitch Ratings AAA AAA AAA AAA AA+ AA+ AA AAA A- A46 Debt Affordability Study (DAS) • • • • Published in February by the BRB in coordination with the LBB Provides leadership with assessment of the general revenue impact of debt-service requirements for not self-supporting debt (NSS) over the next 5 years Debt Capacity Model calculates five key debt ratios to measure state’s ability to pay annual NSS debt-service Can be used to analyze various debt-service scenarios 47 Interest Rate Swap • • • • • • Form of Derivative Hedge against interest rate risks Does not represent debt 2 parties agree to exchange different forms of interest payments for a definite period Achieves lower cost financing by using short-term interest rates rather than higher, long-term rates Market of multiple $ trillions 48 Pay-Fixed, Receive-Variable Swap Synthetic Fixed-Rate Debt Fixed Rate Swap Provider Issuer Variable Rate Variable Rate Bondholder s ss 49 Pay-Variable, Receive-Fixed Swap Synthetic Floating-Rate Debt Variable Rate Swap Provider Issuer Fixed Rate Fixed Rate Bondholder s ss 50 Major Swap Risks • Termination Risk – Swap could terminate before scheduled termination date • Credit Risk – Swap counterparty fails to fulfill its financial obligations • Basis Risk – Interest payment received doesn’t cover payment owed on underlying debt • Rollover Risk – Underlying debt becomes un-hedged if either party terminates the swap • • Tax Risk – Changes in federal or state tax codes Fair Value – If swap is terminated with net negative settlement payments, the issuer is required to pay counterparty 51 State Swaps Outstanding PAY-FIXED, RECEIVE-VARIABLE (Synthetic Fixed-Rate) Texas Department of Housing and Community Affairs University of Texas System Veterans Land Board Total PAY-VARIABLE, RECEIVE-FIXED (Synthetic Floating Rate) Veterans Land Board Notional Amount as of 8/31/10 (in thousands) $ 377,077 $1,405,526 $1,419,235 $3,201,838 $21,895 PAY-VARIABLE, RECEIVE-VARIABLE (Basis Swap) Texas Transportation Commission University of Texas System Veterans Land Board Total $400,000 $583,570 $241,765 $1,225,335 Total Swaps Outstanding $4,449,068 52 8. Private Activity Bond (PAB) Allocation Program Rob Latsha Senior Financial Analyst & Program Administrator Texas Bond Review Board 512-475-4800 latsha@brb.state.tx.us www.brb.state.tx.us PAB - Federal Program • • • • • “State Ceiling” or “Volume Cap” - Each state’s annual limit on the amount of Private Activities financed by tax-exempt bonds 2011 Volume Cap @ $95 per capita = $2.39B for Texas 2010 Volume Cap @ $90 per capita = $2.23B for Texas 2009 Volume Cap @ $90 per capita = $2.19B for Texas $15B of additional PAB authority available for all states to share for eligible Highway projects and Rail-Truck Transfer Facilities 54 Private Activity Bond Program for 2010 Sub-ceilings: Available Allocated $624,514,010 178,432,574 44,608,144 490,689,580 234,192,754 657,970,118 $116,142,544 95,279,609 3,440,000 5,275,000 85,850,000 445,510,316 Sub Total Carryforward HERA Carryforward $2,230,407,180 2,728,226,243 448,500,000 $751,497,469 859,699,500 398,500,000 Total $5,407,133,423 $2,009,696,969 #1 - Single Family Housing #2 - State Voted Issues #3 - Qualified Small Issues #4 - Multifamily Housing #5 - Student Loan Bonds #6 - All Other Issues 55 Other Bonding Authority Economic Stabilization Act of 2008: $1.8 billion in PAB authority for areas affected by Hurricane Ike. American Recovery and Reinvestment Act 2009: All programs have expired except Qualified Energy Conservation Bonds 56 Q&A