Texas Bond Review Board
DEBT PRIMER
Prepared by staff of the
Texas Bond Review Board
January 2003
Jim Buie, Executive Director
TABLE OF CONTENTS
INTRODUCTION
3
MUNICIPAL BOND BASICS
3
TYPES OF DEBT USED BY THE STATE OF TEXAS
4
SELF SUPPORTING DEBT VERSUS NON-SELF SUPPORTING DEBT
6
OUTSTANDING STATE OF TEXAS DEBT
7
TEXAS' CONSTITUTIONAL DEBT LIMIT
8
COMPARING TEXAS' DEBT LIMIT TO OTHER STATES
8
POLICY IMPLICATIONS OF DEBT ISSUANCE
10
CONCLUSION
12
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Introduction
The Texas Bond Review Board (BRB) consists of the Governor, the Lieutenant Governor, the
Speaker of the House of Representatives, and the Comptroller of Public Accounts. The BRB is
responsible for the approval of all state bond issues and lease purchases with an initial principal
amount of greater than $250,000, or of a term longer than five years. The BRB also is responsible
for the collection, analysis, and reporting of information on the debt of local political
subdivisions in Texas. Lastly, the BRB is charged with the responsibility of administering the
state’s private activity bond allocation program.
This Debt Primer is intended to serve as an orientation tool for government officials and other
interested parties. It is meant to provide a foundation of basic knowledge relevant to debt
issuance issues examined by the BRB. The Debt Primer covers topics such as types of debt
issued by the state of Texas, the state's constitutional debt limit, and policy implications of debt
issuance.
Municipal Bond Basics
A municipal bond is an interest-bearing certificate issued by a governmental entity as evidence
that money was borrowed (although most municipal bonds issued today are in book
entry/electronic form). When an investor buys a municipal bond, they are loaning money to a
governmental agency to finance a public project. In return, the issuer of the bond promises to
repay the principal amount plus a specified rate of interest during the life of the bond. Interest
earned on municipal bonds is normally exempt from federal taxes, as well as some state taxes.
Some municipal bonds are, however, taxable.
Prior to issuing the bonds, a governmental entity will normally hire a financial advisor and a
bond counsel. The role of the former is to advise the bond issuer of the most advantageous means
to structure and sell the issue. The role of the bond counsel is to assure that the issuer is meeting
all state and federal tax laws and to assure that the bonds qualify for exemption from taxation.
Another important decision a governmental unit must make when selling bonds is what type of
sale to have. Municipal bonds are sold to underwriting firms through a competitive, negotiated or
private placement process. When using the competitive process, sealed bids are submitted by
underwriting firms. The underwriting firm that submits a bid meeting all specifications outlined
in the Notice of Sale, and with the lowest true interest costs (TIC), wins the bonds.
The advantages of selling bonds competitively include the bidding process, which assures that
the lowest possible TIC is achieved. The disadvantages of a competitive sale include less
flexibility on the part of the issuer to change the terms and/or conditions of the sale. Competitive
bonds sales are best reserved for bonds that are well-known and well-received by the market.
Recent developments in the competitive bid market include the introduction of electronic bidding
over the Internet.
In a negotiated sale, an issuer chooses the underwriting syndicate prior to pricing the bonds, and
works with them to obtain the best possible price for the bonds. The advantages of a negotiated
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sale are that the issuer of the bonds is allowed more flexibility in regard to the size or structure of
the bond issue.
Negotiated sales are best used for bonds that have special features, bonds that may be unfamiliar
to "the market", or bonds that may require additional selling effort.
Types of Debt Used by the State of Texas
General Obligation (GO) Bonds
Legally secured by a constitutional pledge of the first monies coming into the State Treasury that
are not constitutionally dedicated for another purpose.
Must initially be approved by a 2/3 vote of both houses of the legislature and by a majority of the
voters; after this approval they may be issued in installments as determined by the issuing agency
or institution.
Usually have a 20-year final maturity, but may be shorter or longer depending upon the project
being financed.
Examples
GO bonds issued by the Texas Public Finance Authority (TPFA) to finance correctional and
mental health facilities.
GO bonds issued by the Veterans Land Board to finance land and housing loans to veterans.
Revenue Bonds
Legally secured only by a specified revenue source.
Do not require voter approval.
Usually have a 20-year final maturity, but may be shorter or longer depending on the project
being financed.
Examples
Revenue bonds issued by the Texas Water Development Board to finance wastewater projects.
Revenue bonds issued by institutions of higher education, secured by tuition and fees, are used to
finance projects such as classroom facilities, dormitories, and other university buildings.
Lease Purchases
Lease purchases are the purchase of an asset over time through lease payments that include
principal and interest.
Lease purchases are typically financed through a private vendor, or through one of the state's pool
programs, such as TPFA's Master Lease Purchase Program.
Examples
State private prisons and office buildings have been financed using lease-purchasing from
nonprofit corporations.
Automobiles, computers, and data/telecommunications equipment.
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Commercial Paper
Can be secured by the state's general obligation pledge or by a specified revenue source.
Commercial paper secured by the state's general obligation pledge must be initially approved by
2/3 vote of both houses and a majority of the voters.
Maturity ranges from 1 to 270 days.
When the paper matures, it can be paid off or rolled over (reissued).
Examples
The TPFA issues commercial paper to finance its Master Lease Purchase Program.
The Texas Agricultural Finance Authority issues commercial paper to purchase and guarantee
loans made to agricultural businesses.
Tax and Revenue Anticipation Notes (TRANs)

TRANS are issued by the Comptroller of Public Accounts, Treasury Operations to address
cash flow shortages caused by the mismatch in the timing of revenues and expenditures in the
general revenue fund.

They must be repaid by the end of the biennium in which they are issued, but are usually
repaid by the end of each fiscal year.

TRANS are repaid with tax receipts and other revenues of the general revenue fund.

TRANS must be approved by the Cash Management Committee, which is composed of the
Governor, the Lieutenant Governor, and the Comptroller of Public Accounts, as voting
members, and the Speaker of the House (as a non-voting member).
Variable Rate Notes
 Variable rate notes may be either general obligation or revenue obligations.
 The notes generally have a stated maturity, similar to a bond.
 The interest rate paid on the notes are reset at different intervals, such as daily, weekly,
monthly or annually.
Who Owns Municipal Bonds? – 2002
(billions of dollars)
Households
Mutual Funds
Money Market Funds
Closed-end Funds
Bank Personal Trusts
Nonfinancial Corporate
Businesses
Nonfarm Noncorporate
Businesses
Government-sponsored
Enterprises
State & Local Government
Page 5 of 12
$554.8
246.0
267.1
62.4
106.7
34.9
3.8
12.1
2.1
General Funds
Commercial Banks
Savings Institutions
Life Insurance Companies
Property & Casualty Insurance
Companies
State & Local Government
Retirement Funds
Brokers and Dealers
Total
117.9
4.1
20.7
185.1
1.6
16.0
$1,635.3
Source: Federal Reserve Board
Self Supporting Debt versus Non-Self Supporting Debt
Self-Supporting Debt
Debt that is classified as "self-supporting" is designed to be repaid with revenues other than state
general revenues. Self-supporting debt can be either general obligation debt or revenue debt.
Examples
GO bonds issued by the Veterans Land Board are repaid with loan payments made by veterans
and related interest earnings.
GO bonds issued by the Texas Water Development Board are repaid with loans payments made
by political subdivisions for water projects and related interest earnings.
Revenue bonds issued by the Texas Department of Housing and Community Affairs are repaid
with mortgage payments made by homeowners of very low, low, and moderate income.
Not Self-Supporting Debt
Debt that is classified as "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.
Examples
General obligation bonds issued by the TPFA to finance correctional and mental health facilities.
Revenue bonds issued by the TPFA to finance state office buildings.
Revenue commercial paper issued by the TPFA to finance the Master Lease Purchase Program.
Page 6 of 12
Outstanding State of Texas Debt
Texas Bonds Outstanding
As of August 31, 2002*
(in millions)
Self-Supporting
General Obligation Bonds
Revenue Bonds
Total
$3,302
$10,589
$13,891
Not
Self-Supporting
$2,517
$870
$3,386
Total
$5,819
$11,459
$17,278
* Includes commercial paper and variable rate notes; however, does not include short-term debt issued by the Comptroller of Public Accounts,
Treasury Operations for cash management purposes or lease purchases that have been financed through means other than state commercial paper
or bonds.
General Revenue Debt Repayment Growth
As of August 31, 2002
Texas had approximately $3.4 billion in state debt outstanding that is expected to be paid from
general revenues. This is more than 4.9 times the amount of debt outstanding at the end of fiscal
1988 that was to be paid with general revenues.
Figure 6
N OT S ELF-S U PPORTIN G
TEXAS S TATE B ON D S OU TS TAN D IN G
B ACKED ON LY B Y GEN ERAL REVEN U E
Ge ne ral Obligation
Non-Ge ne ral Obligation
Most of the increase is attributable to:
The issuance of approximately $2.6 billion in bonds and commercial paper for correctional
facilities between 1987 and 1996.
Page 7 of 12
Figure 7
AN N U AL D EB T S ERVICE PAID
FROM GEN ERAL REVEN U E
$400
$350
$300
$250
$200
$150
$100
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Texas' Constitutional Debt Limit
Overview of Debt Limit
The 75th Legislature and Texas voters passed a constitutional debt limit in 1997.
The debt limit applies to debt that is expected to be paid with state general revenues, including:
Debt that has already been issued;
Debt that is authorized but unissued; and,
Lease purchases that have a principal amount greater than $250,000.
The limit states that additional debt that is intended to be paid from general revenues may not be
authorized if the maximum annual debt service on debt payable from the general revenue fund
would exceed five percent of the average general revenue fund revenues for the previous three
years.
Current Status
As of August 31, 2002 the state has outstanding debt as a percentage of unrestricted general
revenue of 1.42 percent. The debt service on outstanding and authorized but unissued debt as a
percentage of general revenue after constitutional dedications is 2.2 percent, as defined by the
constitutional debt limit.
Comparing Texas' Debt Limit to Other States
States in Close Proximity to Texas
New Mexico Limits debt to 1% of assessed property value.
Oklahoma
No debt limit.
Arkansas
No debt limit.
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Colorado
G.O. bonds are constitutionally prohibited. Any other debt must be approved by
the voters and have an
irrevocable cash reserve for debt service in all future fiscal years.
For fiscal years 2003-2004 and after debt service on outstanding tax supported
debt is limited to 6 %.
Louisiana
States Which are Comparable in Population to Texas
California
No debt limit.
New York
No debt limit.
Florida
Some of the G.O. debt is limited. The amount outstanding cannot exceed 50% of
the average tax revenues
from the preceding two fiscal years.
Ten Most Populous States
Of the ten most populous states in 1999-00, Texas ranked ninth in state debt outstanding. In local
debt outstanding for the preceding year, Texas ranked third among these same states. For
combined state and local debt, Texas ranked seventh. A table comparing various debt
outstanding statistics for these states follows.
Total State and Local Debt Outstanding: Ten Most Populous States
Total State and Local Debt
Pop.
(000’s)
State
New York
New Jersey
Pennsylvania
Illinois
California
Florida
TEXAS
Michigan
Ohio
Georgia
MEAN
18,976
8,414
12,281
12,419
33,872
15,982
20,852
9,938
11,353
8,186
Per
Capita
Rank
Amount
(millions)
1
2
3
4
5
6
7
8
9
10
Per
Capita
Amount
$177,550
50,315
73,325
67,573
177,920
78,495
100,175
47,195
42,087
29,948
$9,357
5,980
5,971
5,441
5,253
4,911
4,804
4,749
3,707
3,658
$84,458
$5,383
State Debt
Per
Capita
Rank
1
2
7
3
5
8
9
4
6
10
Amount
of
Per
Capita
Amount
$78,616
28,938
18,595
28,828
57,170
18,181
19,228
19,445
18,087
7,086
44.3%
57.5%
25.4%
42.7%
32.1%
23.2%
19.2%
41.2%
43.0%
23.7%
$4,143
3,439
1,514
2,321
1,688
1,138
922
1,957
1,593
866
$29,417
35.2%
$1,958
(millions)
%
Total
Debt
Local Debt
Per
Capita
Rank
1
9
2
6
5
4
3
8
10
7
Amount
(millions)
%
of
Total
Debt
Per
Capita
Amount
$98,934
21,376
54,730
38,745
120,750
60,314
80,947
27,750
24,000
22,862
55.7%
42.5%
74.6%
57.3%
67.9%
76.8%
80.8%
58.8%
57.0%
76.3%
$5,214
2,541
4,456
3,120
3,565
3,774
3,882
2,792
2,114
2,793
$55,041
64.8%
$3,425
Detail may not add to total due to rounding.
Source: U.S. Census Bureau, State and Local Government Finances by Level of Government and State: 1999-2000
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Policy Implications of Debt Issuance
Potential Uncertainties With Debt-Financed Projects
An agency might underestimate or fail to plan for sufficient operation, maintenance, and repair
costs over the life of the facility.
There may be undisclosed expenditures that will be needed to complete the project, such as costs
associated with the site acquisition process including hazardous waste testing/removal, soil
testing, and eminent domain proceedings.
Unanticipated changes in the occupants or use of the facility could occur which might result in
increased costs.
Evaluating Debt-Financing for State Office Buildings
Why is the building or facility needed?
What would be the consequences of not approving the proposed building or facility? For
example, if a new office building is not constructed, would the state have to pay more in the
long-run as a result of having to rent space?
What types of factors could influence the state's long-term need for the building or facility?
Has there been an analysis conducted of the costs and benefits associated with buying versus
constructing the building or facility? If yes, what were the results of the analysis?
What is the estimated useful life of the proposed building or facility?
Does the useful life of the asset equal or exceed the life of the debt?
What is the most cost-effective way to finance the building or facility? For example, would it be
cheaper to finance a facility through bonds rather than through a lease purchase?
What will be the source of funds that will be used to repay the debt?
Will the debt be backed by the state's general obligation pledge?
Project Costs
How much will it cost to construct or purchase the building or facility?
What are the estimated costs associated with operating and maintaining the facility?
What are the estimated renovation and repair costs that will be needed over the life of the
building or facility?
How much needs to be appropriated during the next biennium to pay debt service?
What are the estimated debt service requirements over the life of the debt?
What types of unexpected costs could be incurred in connection with the project or the debt? e.g.,
costs associated with the site acquisition process, such as hazardous waste testing/removal, soil
testing, and eminent domain proceedings.
If applicable, what will happen if there is a change in the occupants of the building or facility or
the use of the facility?
What alternatives have been considered?
What would be the costs associated with the alternatives?
What is the most cost effective debt instrument or method of finance available to fund
construction or acquisition?
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Evaluating Self-Supporting Debt
What is the revenue source that will be used to repay the debt?
Is the specified revenue source sufficient to cover debt service and any other costs that are
intended to be paid from the revenue stream?
Will any fees or charges need to be increased to support the proposed debt?
How dependable is the revenue source?
What are the historical revenue trends?
How sensitive are the anticipated revenues to changes in the economy or other factors that are
beyond the control of the agency or institution of higher education?
Evaluating Debt-Financed Loan Programs
What is the purpose of the loan program?
Who will be eligible to receive the loans?
What will be the maximum amount of loan per recipient?
What is the estimated future demand for the loans?
What loan default rates are expected?
What have the default rates been historically?
What policies and procedures will be used to minimize the risks associated with loan defaults?
For example, will a debt service reserve fund be established?
What will be the difference between the interest rate paid on the bonds and the interest rate
charged on the loans?
Debt Issuance Policy Development
How much discretion should state agencies or institutions of higher education have in deciding
which specific projects can be debt-financed? For example, should the enabling legislation or
appropriations act identify specific projects or just the aggregate amount of projects to be debt
financed and allow the agency to decide which specific projects to debt finance?
How much flexibility should state agencies or institutions of higher education have in terms of
shifting funds between projects, either before or after project completion?
How much flexibility should state agencies or institutions of higher education have in terms of
transferring money from one type of expenditure to another, such as from operating expenditures
to lease purchases or from debt service to operations?
Has the proposed legislation been reviewed by people with appropriate legal expertise to ensure
that the legislation will enable state agencies or institutions of higher education to implement the
act in accordance with legislative intent?
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Historically Underutilized Businesses (HUB) Participation In State Bond Issuance
House Bill 2626 passed by the 73rd Legislature, established that state agencies shall make a good
faith effort to assist historically underutilized businesses to receive not less than 30 percent of the
total value of all contract awards for the purchase of supplies, materials, services, and equipment
that the agency expects to make during a fiscal year.
In addition, the 74th Legislature passed several bills related to specific authorization of debt
issuance. Included was House Bill 3109, which requires the Bond Review Board (BRB) to
collect and report HUB participation in state bond transactions. Fiscal 1996 was the first year
that the BRB completed this responsibility.
Conclusion
The state's limited resources must be used wisely so that future generations are not burdened with
the debt service of those who came before them. The decision to issue debt should be undertaken
only after rigorous review of the financial, legal, and policy implications of issuing the debt.
Used wisely, however, debt financing can provide facilities and programs that can enrich both
current and future generations.
For more information on debt issuance in the state of Texas, please contact the Texas Bond
Review Board at:
Texas Bond Review Board
300 West 15th Street, Suite 409
P.O. Box 13292
Austin, TX 78711
(512) 463-1741
(512) 475-4802 fax
www.brb.state.tx.us
bonds@brb.state.tx.us
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