Texas PSF Offers The Best Muni Bond Guarantee Program

The $46 billion in Permanent School Fund (PSF) assets is held to secure debt service on the $84 billion principal ($133 billion including interest) of outstanding PSF bonds as of December 31st, 2019. We note that the PSF has consistently demonstrated solid growth as the value increased by about 73% from 2008 to 2018. School Districts and Charter Schools applying for PSF guarantee must meet certain accreditation and financial standards as required by the Texas Commissioner of Education. PSF is framed by strong state oversight of school districts, ample state support for K-12 education and the minimum credit quality standards for participating districts. To date, no district has called upon the guarantee, largely due to the overall credit quality of the underlying districts and sound PSF programmatic features.

Moody’s notes that the weighted average credit quality of guaranteed districts is “Aa3”, and “A1” when adjusted for charter school credit quality. The top 10 participants (median rating “Aa1”) account for 22.3% of par outstanding. PSF triple - A ratings are also supported by very strong program mechanics that hold if a district is unable to make a debt service payment, it is then required to notify the PSF five days prior to the payment’s due date. The enabling legislation provides for a funding intercept mechanism that applies to both school district and charter district bond guarantees. The intercept feature obligates the Commissioner of Education to instruct the State Comptroller to withhold the amount paid under the guarantee program, plus interest, from the first State money payable to a district that fails to make a guaranteed payment on its bonds.

The Commissioner of Education has the authority to order a school district to establish a tax rate sufficient to reimburse the PSF and pay future debt service, appoint a new board of managers, or merge the distressed district into a performing district. Where repeated defaults occur, the Commissioner can request that the Attorney General of Texas initiate legal action to ensure reimbursement. The PSF portfolio consists of a well-diversified mix of assets including real estate, infrastructure, energy/metals investments, state owned land and mineral rights, as well as large cash deposits. Sophisticated and responsive portfolio management with periodic stress testing is, in our view, essential to preserving triple-A ratings on the PSF.

For a comprehensive portfolio evaluation of your municipal holdings, please contact your Oppenheimer Financial Advisor.