State of Texas Debt – An OverviewState of Texas Debt – An Overview
January 2011
Texas Bond Review Board Texas Public Finance AuthorityBob Kline, Executive Director Dwight Burns, Executive [email protected] [email protected] 512-463-5544www.brb.state.tx.us www.tpfa.state.tx.us
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BRB vs. TPFABRB vs. TPFA
Bond Review Board – Oversight Agency
• Board: Governor, Lt. Governor, Comptroller and Speaker (non-voting)
• 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
TPFA Client AgenciesTPFA Client Agencies1. Adjutant General/Military Facilities Commission 2. Cancer Prevention and Research Institute of Texas 3. Department of Aging and Disability Services 4. Department of Agriculture/Texas Agricultural Finance Authority5. Department of Public Safety 6. Department of State Health Services 7. Health and Human Services Commission 8. Midwestern State University 9. School for the Blind and Visually Impaired 10. School for the Deaf 11. State Preservation Board 12. Stephen F. Austin State University 13. Texas Department of Criminal Justice 14. Texas Department of Transportation/Office of the Governor (Colonias Roadway Grant Program)
15. Texas Facilities Commission 16. Texas Historical Commission 17. Texas Military Preparedness Commission (Texas Military Value Revolving Loan Fund) 18. Texas Parks and Wildlife Department 19. Texas Southern University 20. Texas Windstorm Insurance Association 21. Texas Workforce Commission 22. Texas Youth Commission 23. TPFA Charter School Finance Corporation
*TPFA gained authority by the 81st Legislature to issue debt on behalf of TAFA
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What is a Bond?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.
Common Terms for Debt Common Terms for Debt SecuritiesSecurities• 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 remarketing of variable-rate debt at reset dates8
Terms - ExampleTerms - 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
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Debt MaturitiesDebt 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
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Commercial PaperCommercial 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 long-term debt at maturity
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Municipal (Tax-Exempt) Interest RatesMunicipal (Tax-Exempt) Interest Rates
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
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
Rat
e (%
)
Municipal Market Data (10/19/2010) Municipal Market Data (11/15/2010) Municipal Market Data (12/15/2010)
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Fixed Rates vs. Variable Rates Fixed Rates vs. Variable Rates Bond Buyer Index vs. SIFMA Index vs. TPFA CPBond Buyer Index vs. SIFMA Index vs. TPFA CP
(as of 11/30/10)(as of 11/30/10)
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Taxation on Interest EarningsTaxation 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
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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
• 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)
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Revenue DebtRevenue 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
Lease PurchaseLease 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
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Tax and Revenue Anticipation Tax and Revenue Anticipation Notes (TRAN)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
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Debt Issued by UniversitiesDebt 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)
College & University Debt Outstanding College & University Debt Outstanding
As of 08-31-10 (billions)As of 08-31-10 (billions)
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RefundingsRefundings
• 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
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Debt Issuance ProcessDebt 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
Debt AdministrationDebt 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 Disclosure25
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Finance TeamFinance Team
Bonds and Notes:o Financial Advisoro Bond Counselo Underwriter
Commercial Paper Transactions also include:o Dealero Paying Agento Liquidity Provider
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Methods of SaleMethods 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
NegotiatedNegotiated
• 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
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CompetitiveCompetitive
• 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
Pricing/TradingPricing/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
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Self-SupportingSelf-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
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Not Self-SupportingNot 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
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Constitutional Debt LimitConstitutional 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
Calculating the Constitutional Calculating the Constitutional Debt LimitDebt 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 GR35
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State Debt OutstandingState 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
Historical State Debt OutstandingHistorical State Debt OutstandingAs of 8/31/10 (billions)As of 8/31/10 (billions)
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Debt Service on State DebtDebt Service on State Debtas of 8/31/10 (millions)as of 8/31/10 (millions)
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Local Debt OutstandingLocal Debt Outstanding($174.55 billion outstanding as of 8/31/2009)($174.55 billion outstanding as of 8/31/2009)
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State and Local Debt – 10 Most State and Local Debt – 10 Most Populous StatesPopulous States
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StatePopulation (thousands)
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
Amount
Per Capita Rank
New York 19,490 $269,742 $13,840 1 $114,240 42.4% $5,861 1 $155,502 57.6% $7,979 1Illinois 12,902 124,163 9,624 2 58,437 47.1% 4,529 2 65,726 52.9% 5,094 6Pennsylvania 12,448 118,611 9,529 3 40,100 33.8% 3,221 4 78,511 66.2% 6,307 3California 36,757 341,094 9,280 4 121,930 35.7% 3,317 3 219,164 64.3% 5,963 4
Texas 24,327 215,877 8,874 5 33,299 15.4% 1,369 9 182,578 84.6% 7,505 2Florida 18,328 142,129 7,755 6 42,321 29.8% 2,309 7 99,808 70.2% 5,446 5Michigan 10,003 75,247 7,522 7 29,065 38.6% 2,906 5 46,182 61.4% 4,617 7Ohio 11,486 68,658 5,978 8 26,885 39.2% 2,341 6 41,773 60.8% 3,637 9North Carolina 9,222 51,202 5,552 9 19,605 38.3% 2,126 8 31,597 61.7% 3,426 10Georgia 9,686 50,561 5,220 10 13,072 25.9% 1,350 10 37,489 74.1% 3,870 8
MEAN $145,728 $8,317 $49,895 34.6% $2,933 $95,833 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.
TOTAL STATE AND LOCAL DEBT OUTSTANDING: TEN MOST POPULOUS STATESState DebtTotal State and Local Debt Local Debt
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BRB Local Debt Online Database 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
7. State Credit Ratings, Debt 7. State Credit Ratings, Debt Affordability and SwapsAffordability and Swaps
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Credit RatingsCredit Ratings
State Credit Ratings: o Moody’s Aaao Standard and Poor’s AA+o Fitch AAA
Factors Considered: o Economyo Financial conditiono Debt burden o General management practices
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RATINGAugust, 2010
Moody's StandardSteps from Investors & Fitch
AAA Ranking State Service Poor's Ratings
- Georgia Aaa AAA AAA
-North
Carolina Aaa AAA AAA1 Florida Aa1 AAA AAA1 TEXAS Aaa AA+ AAA3 Ohio Aa1 AA+ AA+4 Pennsylvania Aa1 AA AA+6 New York Aa2 AA AA8 Michigan Aa2 AA- AA-
12 Illinois Aa3 A+ A16 California A1 A- A-
General Obligation Credit Ratings - General Obligation Credit Ratings - 10 Most Populous States10 Most Populous States
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Debt Affordability Study (DAS)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
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Interest Rate SwapInterest 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
Pay-Fixed, Receive-Variable SwapPay-Fixed, Receive-Variable Swap
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Issuer
Synthetic Fixed-Rate Debt
Swap Provider
Bondholders ss
Variable Rate
Variable Rate
Fixed Rate
Pay-Variable, Receive-Fixed SwapPay-Variable, Receive-Fixed Swap
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Issuer
Synthetic Floating-Rate Debt
Swap Provider
Bondholders ss
Variable Rate
Fixed Rate
Fixed Rate
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 – 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
counterparty51
State Swaps Outstanding State Swaps Outstanding
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PAY-FIXED, RECEIVE-VARIABLE (Synthetic Fixed-Rate)Notional Amount as of
8/31/10 (in thousands)
Texas Department of Housing and Community Affairs $ 377,077 University of Texas System $1,405,526 Veterans Land Board $1,419,235Total $3,201,838 PAY-VARIABLE, RECEIVE-FIXED (Synthetic Floating Rate) Veterans Land Board $21,895 PAY-VARIABLE, RECEIVE-VARIABLE (Basis Swap) Texas Transportation Commission $400,000 University of Texas System $583,570 Veterans Land Board $241,765Total $1,225,335 Total Swaps Outstanding $4,449,068
8. Private Activity Bond (PAB) 8. Private Activity Bond (PAB) Allocation ProgramAllocation Program
Rob Latsha
Senior Financial Analyst & Program Administrator
Texas Bond Review Board
512-475-4800
www.brb.state.tx.us
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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
• 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
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Private Activity Bond Program for Private Activity Bond Program for 20102010
Sub-ceilings: Available Allocated
#1 - Single Family Housing $624,514,010 $116,142,544#2 - State Voted Issues 178,432,574 95,279,609#3 - Qualified Small Issues 44,608,144 3,440,000#4 - Multifamily Housing 490,689,580 5,275,000#5 - Student Loan Bonds 234,192,754 85,850,000#6 - All Other Issues 657,970,118 445,510,316
Sub Total $2,230,407,180 $751,497,469 Carryforward 2,728,226,243 859,699,500 HERA Carryforward 448,500,000 398,500,000
Total $5,407,133,423 $2,009,696,969
Other Bonding AuthorityOther 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
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