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Abstract: 

Qualifying school districts in Texas enjoy a state guarantee for their debt. The state’s Permanent School Fund (PSF) is a pool of money used to guarantee bonds issued for school construction. The “penalty” referred to in the title of this article may be confusing because most observers of the municipal bond market would assume a state guarantee provides significant benefits in interest cost savings to issuers. Indeed, there is a benefit to school districts from this backing, but this analysis also reveals that the benefits are not sufficient to overcome the “Texas penalty” created by not having a state income tax. Upon approval by the Commissioner of Education, bonds issued by qualifying school districts for construction or to refund construction bonds receive the backing of the PSF, negating the need to purchase bond insurance. PSF-backed issues automatically receive a triple-A rating. The application process is simple and requires a $500 fee to register the issue with the PSF. The purpose of this research is to determine whether the benefits from the PSF backing are equal to those derived from conventional bond insurance.

Keywords: Texas Permanent School Fund; state credit assistance programs; small district borrowing

Affiliations:  1: University of North Texas; 2: University of North Texas.