January 2015
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
Lee Deviney, Executive Director
lee.deviney@tpfa.state.tx.us
512-463-5544
www.tpfa.state.tx.us
1. Introduction
Why issue Governmental Debt?
Debt Issuance is a discretionary
financing tool
• Conserve current revenue
• Match capital project costs to useful life of the
asset
• Manage cash flow
3
State Debt Outstanding
Texas Debt Outstanding as of August 31, 2014* (millions)
Self-Supporting
Not
Self-Supporting
Total
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
4
Texas State Debt Issuers
Agencies
1. Texas Department of Transportation
A.
Texas Private Activity Bond Surface Transportation Corp.
B.
Grand Parkway Transportation Corp.
2. Texas Public Finance Authority
A.
Higher Education Institutions
10. The University of Texas System
11. The Texas A&M University System
12. University of Houston System
13. Texas State University System
TPFA Charter School Finance Corp.
3. Texas Department of Housing & Community Affairs
4. Texas Veterans Land Board
5. Texas Higher Education Coordinating Board
6. Texas State Affordable Housing Corp.
7. Texas Water Development Board
8. Office of Economic Development & Tourism
9. Texas Agriculture Finance Authority
14. The Texas Tech University System
15. The University of North Texas
16. Texas Southern University
17. Stephen F. Austin State University
18. Midwestern State University
19. Texas Woman’s University
20. Texas State Technical College System
(Department of Agriculture)
5
BRB compared to TPFA
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
6
TPFA Client Agencies
1. Adjutant General’s Department
(formerly Texas Military Facilities Commission)
15. Texas Historical Commission
2. Cancer Prevention and Research Institute of
Texas
16. Texas Juvenile Justice Department
3. Midwestern State University
17. Texas Military Preparedness Commission
4. Texas Agriculture Finance Authority
18. Texas Parks and Wildlife Department
5. Texas Commission on Environmental Quality
19. Texas School for the Blind and Visually Impaired
(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
(Texas Military Value Revolving Loan Fund)
20. Texas School for the Deaf
21. Texas Southern University
22. Texas State Preservation Board
23. Texas Windstorm Insurance Association
24. Texas Workforce Commission
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
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 61.003 of the Texas
Education Code
2. Debt Instruments
What is a Debt Instrument?
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
9
Common Terms
•
•
•
Par – Face value of a security
•
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
Coupon – Interest rate paid on a security
Discount or Premium – Amount the price of a security is less than or
exceeds par value
Liquidity Provider – Financial intermediary that facilitates the
remarketing
of variable-rate debt at reset dates
10
Types of Debt Instruments
•
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
11
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
12
Municipal (Tax-Exempt) Yield Curve – AAA Rating
13
Long Term vs. Short Term Rates
14
Credit Ratings Effect On Interest Rates
Rates are for 20 Year Tax Exempt Municipal Bonds.
15
Taxation on Interest Earnings
•
Taxable: Earnings are taxed at the federal and possible
•
Tax-Exempt: Exempt from taxation
state and local levels

Investors will accept a lower interest rate because their earnings
are exempt from taxation
 5% Coupon Bond @ 25% Tax Rate = 3.75% After Tax Return

Federal tax law limits the issuance, investment and use of proceeds
of tax-exempt debt instruments
16
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
•
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)
18
Revenue Debt
•
Secured by a specific revenue source
•
Does not require voter approval
•
Examples: College and university debt,
certain water development bonds
19
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
20
Tax & Revenue Anticipation Notes (TRAN)
•
•
•
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
21
Refundings
•
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
22
4. General Revenue Impact
Self-Supporting and 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 for water and wastewater projects
o Revenue: University revenue financing system
debt, Texas Dept. of Housing and Community
Affairs single family mortgage debt
24
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
25
5.
State Debt Issuance Process
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
27
Finance Team
Bonds and Notes:
 Financial Advisor
 Bond Counsel
 Underwriter
 Rating Agencies
Commercial Paper Transactions also include:
 Dealer
 Paying Agent
 Liquidity Provider
28
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
Private Placement
•
•
•
Unique financial or legal structure
Sold directly to purchaser
Not underwritten
29
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
30
6. State Debt
Texas Debt Issuers
Agencies
1. Texas Department of Transportation
A.
Texas Private Activity Bond Surface Transportation Corp.
B.
Grand Parkway Transportation Corp.
2. Texas Public Finance Authority
A.
Higher Education Institutions
10. The University of Texas System
11. The Texas A&M University System
12. University of Houston System
13. Texas State University System
TPFA Charter School Finance Corp.
3. Texas Department of Housing & Community Affairs
4. Texas Veterans Land Board
5. Texas Higher Education Coordinating Board
6. Texas State Affordable Housing Corp.
7. Texas Water Development Board
8. Office of Economic Development & Tourism
9. Texas Agriculture Finance Authority
14. The Texas Tech University System
15. The University of North Texas
16. Texas Southern University
17. Stephen F. Austin State University
18. Midwestern State University
19. Texas Woman’s University
20. Texas State Technical College System
(Department of Agriculture)
32
State Debt Outstanding
Texas Debt Outstanding as of August 31, 2014* (millions)
Self-Supporting
Not
Self-Supporting
Total
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
33
State Debt Outstanding
As of 8/31/14 (billions)
$45.0
$40.0
$35.0
$30.0
$25.0
$20.0
$15.0
$10.0
$5.0
$0.0
2005
2006
2007
Conduit & Component
GO Not Self-Supporting
2008
2009
2010
Revenue Self-Supporting
Revenue Not Self- Supporting
2011
2012
2013
2014
GO Self Supporting
34
Debt Service on State Debt
as of 8/31/14 (billions)
$4.5
$4.0
$3.5
Billions
$3.0
$2.5
$2.0
$1.5
$1.0
$0.5
$0.0
REV/SS
REV/NSS
GO/NSS
GO/SS
35
Debt Issued by Universities
• 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)
36
College & University Debt Outstanding
$10.00
$9.00
$8.00
$7.00
$6.00
$5.00
$4.00
$3.00
$2.00
$1.00
$0.00
2006
2007
2008
PUF
2009
2010
2011
Non-TRB
2012
2013
2014
TRB
As of 08/31/14 (billions)
37
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
38
7. Credit Ratings
Texas Credit Ratings
State Credit Ratings:
o Moody’s
o Standard and Poor’s
o Fitch
Aaa
AAA
AAA
Factors Considered:
o
o
o
o
Economy
Financial condition
Debt burden
General management practices
40
States With AAA Ratings
SELECTED DEBT MEASURES FOR TEXAS AND STATES RATED AAA
State
Alaska
Delaware
Georgia
Maryland
Missouri
North Carolina
TEXAS
Utah
Virginia
Rating*
AAA
AAA
AAA
AAA
AAA
AAA
AAA
AAA
AAA
Mean of AAA States
Median of AAA States
Net Tax-Supported
2013
Debt as a % of 2012
Net Tax-Supported
Personal Income
Personal Income Rank Debt Per Capita Rank
Per Capita
3.2%
5.7%
2.9%
3.4%
1.7%
2.1%
1.5%
3.4%
2.7%
19
8
22
18
36
32
40
16
24
3.0%
2.9%
$1,573
2,485
1,064
1,791
668
806
614
1,187
1,302
$1,277
$1,187
16
8
25
14
36
33
38
21
19
$50,150
44,815
37,845
53,826
40,663
38,683
43,862
36,640
48,838
$43,925
$43,862
* Rated Aaa by Moody's, and AAA by Standard & Poor's and Fitch Ratings.
Sources: Moody's Investors Service, 2014 State Debt Medians; Bureau of Economic Analysis, State BEAR Facts
41
General Obligation Credit Ratings 10 Most Populous States
RATING
Upgrades
Needed for
AAA Ranking
State
Georgia
North Carolina
Texas
1
Florida
3
Ohio
4
New York
7
Michigan
8
Pennsylvania
13
California
18
Illinois
September, 2014
Moody's
Standard
Investors
&
Service
Poor's
Aaa
AAA
Aaa
AAA
Aaa
AAA
Aa1
AAA
Aa1
AA+
Aa2
AA+
Aa2
AAAa3
AA
Aa3
A
A3
A-
Fitch
Ratings
AAA
AAA
AAA
AAA
AA+
AA+
AA
AAA
A42
Positive Rating Drivers
• Strong Financial Management
• Low Debt
• Growth-Oriented Economy
• Significant Reserve Balances
43
Negative Rating Drivers
• Growth Related Spending Pressures
– Transportation, Water, School Funding
• Unfunded Pension Liabilities
• Sales Tax Dependence
44
8. Local Debt
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
Local Debt Outstanding
($205.27 billion outstanding as of 8/31/2014)
47
Total Debt Outstanding
as of 8/31/14 (billions)
48
State and Local Debt – 10 Most
Populous States
TOTAL STATE AND LOCAL DEBT OUTSTANDING: TEN MOST POPULOUS STATES
Total State and Local Debt
State
New York
Illinois
California
Texas
Pennsylvania
Michigan
Florida
Ohio
Georgia
North Carolina
MEAN
Population
(thousands)
19,607
12,874
38,063
26,094
12,770
9,885
19,355
11,551
9,919
9,748
Amount
(millions)
$340,093
146,233
419,751
270,737
129,428
76,352
146,922
81,238
55,785
50,779
$171,732
Per Capita
Amount
$17,345
11,359
11,028
10,375
10,135
7,724
7,591
7,033
5,624
5,209
$9,342
State Debt
Per Capita
Rank
1
2
3
4
5
6
7
8
9
10
Amount
(millions)
$135,884
64,302
153,529
45,626
46,199
30,824
38,171
33,602
13,401
18,292
$57,983
% of Total
Debt
40.0%
44.0%
36.6%
16.9%
35.7%
40.4%
26.0%
41.4%
24.0%
36.0%
34.1%
Per Capita
Amount
$6,930
4,995
4,034
1,749
3,618
3,118
1,972
2,909
1,351
1,876
$3,255
Per
Capita
Rank
1
2
3
9
4
5
7
6
10
8
Amount
(millions)
$204,209
81,932
266,223
225,110
83,229
45,528
108,751
47,636
42,384
32,488
$113,749
Local Debt Per
% of Total
Capita
Debt
Amount
60.0%
$10,415
56.0%
6,364
63.4%
6,994
83.1%
8,627
64.3%
6,518
59.6%
4,606
74.0%
5,619
58.6%
4,124
76.0%
4,273
64.0%
3,333
65.9%
$6,087
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: 2012, the most recent data available.
49
Per
Capita
Rank
1
5
3
2
4
7
6
9
8
10
Local Debt Issuance Process
1.
2.
3.
4.
5.
Voter and/or Governing Body approval*
Sale (Negotiated/Competitive/Privately Placed)
Attorney General approval
Closing
Issuance data is sent to Bond Review Board for
analysis
6. Ongoing Administration/Reporting
* The BRB does not approve local debt issuances
50
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
Not Voter Approved GO Debt
• Certificates of Obligation
• Tax Notes
• Other types of Bonding Authority
52
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
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
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
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 nonpremium CABs
56
Debt Service/Par for Local Government
4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00
2003
2004
2005
2006
2007
2008
CIB
2009
2010
2011
2012
2013
2014
CAB
57
Local Debt Service Outstanding
$350
$300
Billions
$250
$200
$150
$100
$50
$2003
2004
2005
2006
2007
2008
CAB Debt Service
2009
2010
2011
2012
2013
2014
CIB Debt Service
58
9. Private Activity Bond (PAB)
Allocation Program
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
Private Activity Bond Program for
2014
Sub-ceilings
#1 - Single Family Housing
#2 - State Voted Issues
#3 - Qualified Small Issues
#4 - Multifamily Housing
#5 - Student Loan Bonds
#6 - All Other Issues
Sub Total
Abandoned
Carryforward
Total
Volume Cap
Available
$
740,549,404
211,585,544
52,896,386
581,860,246
277,706,027
780,221,693
$ 2,644,819,300
Volume Cap
Allocated
$ 31,266,000
3,650,000
80,945,000
155,360,000
$ 271,221,000
2,632,133,225
892,560,804
Carryforward
Designated
$ 1,224,590,213
247,358,087
806,650,000
95,000,000
$ 2,373,598,300
347,460,208
1,392,112,213
$ 5,276,952,525
$ 1,163,781,804
$ 4,113,170,721
61