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State of Texas Debt – An OverviewState of Texas Debt – An Overview
January 27, 2009
Texas Bond Review Board Texas Public Finance AuthorityBob Kline, Executive Director Judith Porras, Interim Executive [email protected] [email protected] 512-463-5681www.brb.state.tx.us www.tpfa.state.tx.us
1.1. IntroductionIntroduction
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BRB vs. TPFABRB 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
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Texas Debt IssuersTexas Debt Issuers1. Texas Public Finance Authority (Universities: MSU, SFA & TSU)2. Texas Department of Transportation3. Texas Water Development Board4. Texas Veteran’s Land Board (General Land Office)5. Texas Department of Housing & Community Affairs6. Texas State Affordable Housing Corp7. Texas Higher Education Coordinating Board8. The University of Texas System9. The Texas A&M University System10. Texas State Technical College System11. Texas State University System12. The Texas Tech University System13. Texas Woman’s University14. University of Houston System15. The University of North Texas16. Texas Agriculture Finance Authority (Dept. of Agriculture)17. Office of Economic Development & Tourism
TPFA Client AgenciesTPFA Client Agencies
1. Midwestern State University2. Stephen F. Austin State University3. Texas Southern University4. Adjutant General5. Department of Agriculture6. Office of the Governor/Texas Dept. of Transportation – Colonias Roadways7. State Preservation Board8. Department of Aging and Disability Services9. Texas Department of Criminal Justice10. Texas Department of Public Safety11. Department State Health Services12. Texas Facilities Commission13. Texas Historical Commission14. Texas Military Preparedness Commission15. Texas Parks and Wildlife Department16. Texas School for the Blind and Visually Impaired17. Texas School for the Deaf18. Texas Workforce Commission19. Texas Youth Commission20. TPFA Charter School Finance Corporation21. Texas State Technical College System*22. Texas Juvenile Probation Commission*23. Texas National Research Laboratory Commission (Superconducting Super Collider)*
*Inactive*Inactive
2. Debt Instruments2. Debt Instruments
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What is a Bond?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
Common TermsCommon 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.”
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Terms - ExampleTerms - Example
Maturity Date
Amount Rate Yield Price
10/15/2017 990,000 3.25% 3.09% 101.209
10/15/2018 1,025,000 3.50% 3.33% 101.271
10/15/2019 1,060,000 3.50% 3.58% 99.290
10/15/2020 1,095,000 3.75% 3.88% 98.782
ExcerptStephen F. Austin State University
Revenue Financing System Revenue Bonds, Series 2009Underwritten 11:30AM 1.14.2009
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Types of State Debt InstrumentsTypes 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
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Commercial PaperCommercial 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
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Municipal Market DataMunicipal Market Data
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Maturity
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Municipal Market Data (01/20/2009)
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Fixed Rates vs. Variable RatesFixed Rates vs. Variable Rates Bond Buyer Index vs. SIFMA Index vs. TPFA CPBond Buyer Index vs. SIFMA Index vs. TPFA CP
(as of 12-31-08)(as of 12-31-08)
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Bond Buyer Index SIFMA TPFA CPBond 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
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TaxationTaxation
• “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
3. Types of Texas Debt3. Types of Texas Debt
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General Obligation (GO) DebtGeneral 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.
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Revenue DebtRevenue 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
TPFA Revenue Lease PurchaseTPFA 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.
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Tax and Revenue Anticipation Tax and Revenue Anticipation Notes (TRANs)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. Speaker is a non-voting member).
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Debt Issued by UniversitiesDebt 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.
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Refunding BondsRefunding 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
4. Bond Sale Mechanics4. Bond Sale Mechanics
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Debt Issuance ProcessDebt Issuance Process
1. Legislative authorization and appropriation
2. Issuer Board approval
3. Bond Review Board approval
4. Bond sale (Negotiated/Competitive)
5. Bond closing – Attorney General approval
6. Ongoing Administration: paying debt service, federal tax law, change in use, arbitrage rebate compliance
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Finance TeamFinance Team
• Financial Advisor
• Bond Counsel/Disclosure Counsel
• Underwriter
• Commercial Paper Transactions:
- Dealer
- Paying Agent
- Liquidity Provider
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Methods of SaleMethods 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
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CompetitiveCompetitive
• 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
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NegotiatedNegotiated
• 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
Pricing/TradingPricing/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.
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5. General Revenue Impact5. General Revenue Impact
Self-Supporting vs. Not Self-Supporting
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Self-SupportingSelf-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
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Not Self-SupportingNot 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.)
6. Questions and Answers6. Questions and Answers
7. Texas State Debt7. Texas State Debt
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State Debt OutstandingState Debt Outstanding
Texas Debt Outstanding as of August 31, 2008* (millions)
Self-Supporting
Not
Self- Supporting Total
General Obligation $8,439 $2,339 $10,778
Revenue** $19,967 $509 $20,476
Total $28,406 $2,848 $31,254
*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 $2.1 billion of Tuition Revenue Bonds
Historical State Debt Historical State Debt As of 8/31/08 (billions)As of 8/31/08 (billions)
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Texas Debt Service Texas Debt Service as of 8/31/08 (millions)as of 8/31/08 (millions)
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Constitutional Debt LimitConstitutional 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.
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Constitutional Debt LimitConstitutional Debt Limit
Debt service payable by GR as a % of the previous three years of unrestricted GR average.
Fiscal Year Issued Debt Issued + Authorized but Unissued
2008 1.30% 4.09%2007 1.32% 1.82%2006 1.33% 1.87%2005 1.51% 2.21%2004 1.51% 2.31%2003 1.51% 2.37%2002 1.42% 2.22%2001 1.47% 1.91%2000 1.51% 2.03%1999 1.58% 2.20%
College & University Debt Outstanding College & University Debt Outstanding
As of 08-31-08 (billions)As of 08-31-08 (billions)
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College & University Debt Service College & University Debt Service as of 08-31-08 (millions)as of 08-31-08 (millions)
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8. Texas’ Credit Ratings, Debt 8. Texas’ Credit Ratings, Debt Affordability and SwapsAffordability and Swaps
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Texas’ Credit RatingsTexas’ 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
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Moody's StandardTier Investors & Fitch
Ranking State Service Poor's Ratings
1Delaware, Georgia, Maryland, Missouri, North Carolina, Utah, Virginia
Aaa AAA AAA
2 Minnesota Aa1 AAA AAA2 South Carolina Aaa AA+ AAA3 Florida Aa1 AAA AA+3 Vermont Aaa AA+ AA+4 Nevada, Ohio, Tennessee Aa1 AA+ AA+4 New Mexico Aa1 AA+ **5 TEXAS Aa1 AA AA+5 Washington Aa1 AA+ AA6 Alaska Aa2 AA+ AA
7Alabama, Hawaii, Massachusetts, New Hampshire, Pennsylvania, Oregon,Montana
Aa2 AA AA
7 Arkansas Aa2 AA **8 Oklahoma Aa3 AA+ AA
9Connecticut, Illinois, Maine, Mississippi, Rhode Island
Aa3 AA AA
10 New Jersey, Wisconsin, New York Aa3 AA AA-11 Michigan, West Virginia Aa3 AA- AA-12 California, Louisiana A1 A+ A+
** Not ratedSources: Moody’s Investors Service, Standard & Poor’s, and Fitch Ratings.
STATE GENERAL OBLIGATION BOND RATINGSAugust 2008
Texas’ State & Local DebtTexas’ State & Local Debt
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Total State and Local Debt State Debt Local Debt
StatePopulation (thousands)
Per Capita Rank
Amount (millions)
Per Capita
Amount
Per Capita Rank
Amount (millions)
% of Total Debt
Per Capita
Amount
Per Capita Rank
Amount (millions)
% of Total Debt
Per Capita
AmountNew York 19,306 1 $241,407 $12,504 1 $105,306 43.6% $5,455 1 $136,101 56.4% $7,050Illinois 12,832 2 110,788 8,634 2 53,655 48.4% 4,181 6 57,133 51.6% 4,452Pennsylvania 12,441 3 106,041 8,524 5 32,121 30.3% 2,582 3 73,920 69.7% 5,942California 36,458 4 299,535 8,216 3 109,417 36.5% 3,001 4 190,118 63.5% 5,215Texas 23,508 5 165,571 7,043 10 24,501 14.8% 1,042 2 141,070 85.2% 6,001Michigan 10,096 6 70,826 7,015 4 28,986 40.9% 2,871 7 41,840 59.1% 4,144Florida 18,090 7 119,674 6,615 8 29,312 24.5% 1,620 5 90,362 75.5% 4,995Ohio 11,478 8 63,658 5,546 6 24,713 38.8% 2,153 8 38,945 61.2% 3,393North Carolina 8,857 9 43,937 4,961 7 17,749 40.4% 2,004 10 26,188 59.6% 2,957Georgia 9,364 10 42,086 4,494 9 10,493 24.9% 1,121 9 31,593 75.1% 3,374
MEAN $126,352 $7,355 $43,625 34.3% $2,603 $82,727 65.7% $4,752
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: 2005-2006, the most recent data available.
TOTAL STATE AND LOCAL DEBT OUTSTANDING: TEN MOST POPULOUS STATES
Texas Local Government DebtTexas Local Government Debt(as of 8/31/2007)(as of 8/31/2007)
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Texas Bond Review BoardTexas Bond Review Board
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BRB Online DatabaseBRB 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
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Debt Affordability Study (DAS)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.
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DAS of January, 2008DAS 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%)
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What is an Interest Rate Swap?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
Pay-Fixed, Receive-Variable SwapPay-Fixed, Receive-Variable Swap
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Swap Financial Group51
Swap ComparisonSwap Comparison
Long-term, fixed-rate bonds 5.88% (coupon)
+ 0.05% (amortized COI)
5.93% (all-in cost)
Swap VR% (floating bond rate)
+ 0.60% (remarketing and liquidity)
+ 2.58% (fixed swap rate)
– VR (floating swap rate)
3.18% (all-in cost)
Major Swap RisksMajor Swap Risks• Termination Risk – swap could terminate before scheduled
termination date.
• Credit Risk – swap counterparty fails to fulfill its financial obligations.
• Basis Risk – variable-rate payment received doesn’t cover interest payment owed on underlying debt.
• Rollover Risk – underlying variable-rate debt becomes un- hedged if either party terminates the swap.
• Tax Risk – changes in federal or state tax codes.
• Fair Value – sum of net settlement payments based on yield curve; if negative, the issuer pays counterparty
at termination.52
Texas Swap ExamplesTexas Swap Examples
53
PAY-FIXED, RECEIVE VARIABLE (Synthetic Fixed Rate) Fixed-Rate Paid Variable-Rate Received TDHCA Single Family Variable Rate Mortgage Revenue Bonds Series 2006A 3.86% 63% of LIBOR +.30%UT Revenue Financing System Bonds, Series 2008B 3.61% SIFMAVeterans Housing Fund II Bonds Series 2008A 3.19% 68% of 1M LIBORPAY-VARIABLE, RECEIVE FIXED (Synthetic Floating Rate) Variable-Rate Paid Fixed-Rate ReceivedVeterans Land Tax Refunding Bonds Series 2006B 4.61% 100% of 6M LIBORPAY-VARIABLE, RECEIVE-VARIABLE (Basis Swap) Variable-Rate Paid Variable-Rate Received Veterans Land Tax Bonds Series 2000A/2002A 131.25% of SIFMA 100% of 1M LIBORTTC General Obligation Mobility Series 2006A SIFMA 69.42% of 10 yr LIBOR
Texas Swaps OutstandingTexas Swaps Outstanding
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PAY-FIXED, RECEIVE-VARIABLE (Synthetic Fixed-Rate)Notional Amount as of 8/31/08
(in thousands) Texas Department of Housing and Community Affairs $359,930 University of Texas System $1,042,960 Veterans Land Board $1,457,920Total $2,860,810 PAY-VARIABLE, RECEIVE-FIXED (Synthetic Floating Rate) Veterans Land Board $22,990 PAY-VARIABLE, RECEIVE-VARIABLE (Basis Swap) Veterans Land Board $211,580 Texas Transportation Commission $400,000Total $611,580 Total Swaps Outstanding $3,495,380
9. The State of Texas 9. The State of Texas Private Activity Bond Private Activity Bond Allocation Program in 2009Allocation Program in 2009
John Barton
Financial Analyst & Program Administrator
Texas Bond Review Board
512-463-9891
www.brb.state.tx.us
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Private Activity Bond ProgramPrivate Activity Bond Program
A private activity bond is a tax-exempt bond the proceeds of which are used either partially or entirely for non-governmental purposes. General types of private activity bonds are:
– an exempt facility bond (Ex: airports, pollution control)
– a qualified mortgage bond
– a qualified veterans mortgage bond
– a qualified small issue bond
– a qualified student loan bond
– a qualified redevelopment bond
– a qualified 501(c)(3) bond
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PAB - Federal Program PAB - Federal Program
• “State Ceiling” or “Volume Cap” - Each state’s annual limit on the amount of Private Activities financed by tax-exempt bonds
• 2009 Volume Cap $90 per capita = $2.18B for Texas
• 2008 Volume Cap $85 per capita = $2.03B for Texas
• Congress has allocated $15B of PAB authority to be allocated by the U.S. Secretary of Transportation for eligible Highway projects and Rail-Truck Transfer Facilities.
• Housing and Economic Recovery Act of 2008 created $748 million in PAB authority for housing issues.
• Economic Stabilization Act of 2008 created $1.8 billion in authority for areas affected by Hurricane Ike.
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How Texas Administers Its PABHow Texas Administers Its PAB
• Texas Legislature determines Texas’ allocation breakdown
• Bond Review Board (BRB) administers the program in Texas
• Reserved by lottery and priority within each calendar year
• Volume cap divided into six sub-ceilings for the first 8.5 months
• August 15 - Any remaining cap is redistributed to ALL sub-ceilings with remaining applications.
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Sub-ceilings Sub-ceilings
• Sub-ceiling #1 - Single Family Housing – 28%MRBs or MCCs benefiting residents of low to moderate income
• Sub-ceiling #2 - State Voted Issues – 8% Bonds that have been approved by Texas voters
• Sub-ceiling #3 - Qualified Small Issues – 2%Industrial Development Bonds & Empowerment Zone Bonds
• Sub-ceiling #4 - Multifamily Housing – 22%Residential Rental Developments for low to moderate income residents
• Sub-ceiling #5 - Student Loan Bonds – 10.5%
• Sub-ceiling #6 - All Other Issues – 29.5%Exempt Facilities
Private Activity Bond Private Activity Bond 2008 Results2008 Results
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28.00% 8.00% 2.00% 22.00% 10.50% 28.00%SC 1 SC 2 SC 3 SC 4 SC 5 SC 6
TOTAL MRB's State Voted IDBs MF Housing Student Loan All Other2008 STATE CEILING 2,031,872,300$ 568,924,244$ 162,549,784$ 40,637,446$ 447,011,906$ 213,346,592$ 599,402,328$
RESERVATIONS 3,911,865,438$ 469,735,556$ 75,000,000$ 63,000,000$ 463,200,000$ 426,530,886$ 745,518,975$
ALLOCATIONS 970,197,105$ 99,000,000$ 74,997,184$ 30,869,207$ 38,530,714$ 58,500,000$ 668,300,000$
CARRYFORWARD 1,043,014,493$
10. Q & A10. Q & A
