State of Texas Debt Issuance Guidelines
The 77th Legislature passed HB 2190 (Junell) requiring the Texas Bond Review Board to develop and adopt debt issuance guidelines and policies for state issuers and to ensure that state debt is prudently managed.
The following policies were created by the Bond Review Board per the requirements of HB 2190, in an effort to standardize and rationalize the issuance and management of debt by the State of Texas. The primary objective of the guidelines is to establish conditions for the use of debt and to create procedures and policies that minimize the State’s debt service and issuance costs, retain the highest possible credit rating, and maintain full and complete financial disclosure and reporting. The policies apply to all debt issued by the State, including leases and any other forms of indebtedness supported by state general revenues. However, all state issuers regardless of the type of debt issued, should develop and maintain their own debt policies based on their unique goals and programs.
Regular, updated debt policies can be an important tool to ensure the use of the State’s limited resources to meet its commitments to provide needed services to the citizens of Texas and to maintain sound financial management practices. These policies are therefore guidelines for general use, and allow flexibility for Issuers to be able to respond to changed economic conditions.
One function of these debt policies is to stimulate discussion and broaden appreciation of debt issues. These policies should be reviewed as a guideline once every biennium.
Policy 1: Credit Ratings
The State of Texas seeks to maintain the highest possible credit ratings for all categories of short- and long-term General Obligation debt that can be achieved without compromising delivery of basic services and programs and achievement of adopted policy objectives.
The State recognizes that external economic, natural, or other events may, from time to time, affect the creditworthiness of its debt. Nevertheless, the Executive and Legislative branches of State Government are committed to ensuring that actions within their control are prudent and necessary to maintain the creditworthiness objectives of the State.
Policy 2: Financial Disclosure
The State of Texas is committed to full and complete financial disclosure, and to cooperating fully with rating agencies, institutional and individual investors, State departments and agencies, other levels of government, and the general public to share clear, comprehensible, and accurate financial information. The State of Texas is committed to meeting secondary disclosure requirements on a timely and comprehensive basis.
Official statements accompanying debt issues, Comprehensive Annual Financial Reports, and continuing disclosure statements will strive to meet the minimum standards (to the extent applicable to each debt issue) promulgated by regulatory bodies and professional organizations such as the Securities and Exchange Commission (SEC), Municipal Securities Rulemaking Board (MSRB), the Governmental Accounting Standards Board (GASB), and follow Generally Accepted Accounting Principles (GAAP).
The State Comptroller of Public Accounts, in conjunction with individual issuers, shall be responsible for ongoing disclosure to established state and national information repositories and for maintaining compliance with disclosure standards promulgated by national regulatory bodies.
Policy 3: Capital Planning
To enhance creditworthiness and prudent financial management, the State will prepare a systematic capital plan and conduct long-term financial planning. This planning process will involve the co-operation and coordination of data and information among all state agencies and oversight bodies, including the Bond Review Board and the Legislative Budget Board. The result of the planning process will be a Comprehensive Capital Expenditures Plan prepared by the Bond Review Board and submitted to the state leadership, pursuant to SB1, Article 9, Section 6.38, 77th Regular Session. This plan will be updated and adjusted periodically as necessary. The plan will be implemented via the adoption of biennial capital budget items through the Legislative Appropriations Request process.
Policy 4: Debt Limits
The State will keep outstanding debt within the limits prescribed by the State’s constitution, specifically Article 3, Section 49-j; and at levels consistent with its creditworthiness objectives.
Purposes and Uses of Debt
Policy 5: Capital Financing
Debt will be issued for a capital project when it is an appropriate means to achieve a fair allocation of costs between current and future beneficiaries or in the case of emergency. Debt should not be issued to finance operating costs, except in the case of short-term borrowing to meet cash flow needs.
Policy 6: Asset Life
The State should consider long-term financing for the acquisition, maintenance, replacement, or expansion of physical assets (including land) only if they have a useful life of at least five years. Debt should be used only to finance capital projects, except in case of emergency. State debt should not be issued for periods exceeding the useful life or average useful lives of the project or projects to be financed except in the case of an emergency or when it is appropriate to achieve a fair allocation of costs between current and future beneficiaries.
Debt Standards and Structure
Policy 7: Length of Debt
Debt will be structured for the shortest period consistent with a fair allocation of costs to current and future beneficiaries or users, and within applicable federal tax law.
Policy 8: Debt Structure
Debt should be structured to achieve the lowest possible net cost to the State or State Issuer, given market conditions, the nature of the capital project, and the nature and type of security provided. Moreover, to the extent possible, the State Issuer will design the repayment of its overall debt so as to recapture rapidly its credit capacity or the State’s credit capacity for future use.
Policy 9: Level Principal Debt Service
A level principal repayment structure should be considered for use for bonds repaid from general revenues of the state. This structure results in 50 percent of the debt being repaid in ten years (if financed for a twenty year term), and creates future capacity for debt service on additional bond issues. A level debt service structure should be reserved for bonds repaid from a dedicated revenue stream, if necessary or appropriate.
Policy 10: Backloading: “Backloading” of debt service costs will be considered only:
(1) when natural disasters or extraordinary or unanticipated external factors make the short-term cost of the debt prohibitive; (2) when the benefits derived from the debt issuance can clearly be demonstrated to be greater in the future than in the present; (3) when such structuring is beneficial to the issuer’s overall amortization schedule; or (4) when such structuring will allow debt service to more closely match project revenues during the early years of the project’s operation.
Policy 11: Variable Rate Debt
A State issuer may choose to issue securities that pay a rate of interest that varies according to pre-determined formula or results from a periodic remarketing of the securities, consistent with state law and covenants of pre-existing bonds.
Variable rate debt should be converted to fixed rate debt as necessary to maintain the creditworthiness objectives of the State, to meet particular needs of a financing program, or to lock in low fixed interest rates when advantageous. An issuer should take into account the amount of time that variable rate debt has been outstanding when determining the final maturity of the fixed rate debt.
Policy 12: Subordinate Debt
A state issuer should issue subordinate debt only if it is financially beneficial as defined by the issuer or consistent with creditworthiness objectives.
Policy 13: Derivatives
State issuers should consider the use of derivative products when products meet the specific needs of a financing program or provide a demonstrated economic benefit to the state that outweighs the costs and risks of the transaction. Appropriate public finance professionals, including financial advisors and legal counsel should be retained to ensure that the State receives fair market value for the transaction.
Policy 14: Refundings
Periodic reviews of all outstanding debt should be undertaken by state issuers to determine refunding opportunities. Refunding should be considered (within federal tax law constraints) if and when there is a net economic benefit of the refunding or the refunding is necessary to eliminate restrictive covenants essential to operations and management.
In general, advance refundings for economic savings should be undertaken when a net present value savings of at least three percent (3%) of the refunded debt can be achieved. Current refundings which produce a positive net present value savings may also be considered; however, current refundings seeking exemption from formal review must produce a net present value savings of at least two percent (2%). Refundings with no savings or negative savings should not be considered unless there is a compelling public policy objective such as restructuring to eliminate restrictive bond covenants or to provide additional financial flexibility.
Policy 15: BANs
Use of bond anticipation notes (BANs) will be undertaken only if the transaction costs plus interest on the debt are less than the cost of internal financing, or available cash is insufficient to meet working capital requirements.
Policy 16: COPs
Lease Transactions Involving Certificates of Participation (COPs) or Participation Interests (PIs) – The Bond Review Board discourages the use of COPs or PIs in lease with option to purchase (LWOP) transactions. LWOP transactions utilizing COPs and PIs often require higher interest rates and are considerably more complex to structure and document with commensurately higher legal costs than lease revenue bond issues. In addition, to protect the state’s credit ratings should it later become desirable to exit the LWOP, such transactions would require expensive credit enhancement. Consequently, unless a unique situation justifies the issuance of COPs or PIs in an LWOP transaction, the Bond Review Board does not consider such transactions to be the most cost-effective means of financing and recommends issuers utilize lease revenue bond financings as an alternative.
Policy 17: Credit Enhancements
Credit enhancement (letters of credit, bond insurance, etc.) may be used, but only when net debt service on the bonds is reduced by more than the costs of the enhancement.
Debt Administration and Process
Policy 18: Investment of Bond Proceeds
Bond proceeds should be invested as part of an investment schedule that reflects the anticipated need to draw down funds for project purposes. Through careful matching of investment maturity dates, a state issuer can maximize its return while ensuring the necessary cash flow. Investments will be consistent with those authorized by existing state law and by the issuer’s investment policies.
Policy 19: Competitive Sale
Bids should be awarded on a true interest cost basis (TIC), providing other bidding requirements are satisfied. In such instances where the Issuer deems all bids received unsatisfactory, it may, at the election of the issuer, subsequently sell through a negotiated sale in accordance with its standard procedures.
Policy 20: Negotiated Sale
Negotiated sales of debt should be considered in the following circumstances: (1) when the complexity of the issue requires specialized expertise; (2), when the negotiated sale would result in substantial savings in time or money; or (3) when market conditions are unusually volatile or uncertain.
Policy 21: Underwriters
For all negotiated sales, underwriters should be required to demonstrate sufficient capitalization and experience related to the debt issuance and should be able to show minority and women participation within their firms.
Policy 22: HUB Participation
Issuers are required to make a good faith effort to achieve 33% participation by HUB firms in the underwriting and issuance of debt. Issuers should also encourage underwriters to make similar good faith efforts with including HUB participation in syndicates for competitive sales.
Policy 23: Bond Counsel
State issuers should retain outside bond counsel for all bond transactions where necessary to market the bonds. Bonds issued by the state issuers should include a written opinion by bond counsel affirming that the state issuer is authorized to issue the debt, stating that the State Issuer has met all state constitutional and statutory requirements necessary for issuance, and the issue is tax-exempt, if applicable.
Policy 24: Financial Advisor
State Issuers should consider retaining an external financial advisor if the Issuer does not possess the expertise for the transaction being considered. The utilization of a financial advisor for a particular bond sale should be at the discretion of the Issuer on a case by case basis.
Policy 25: Compensation for Services
Compensation for bond counsel, underwriters’ counsel, financial advisors, and other services should be reasonable based on the level of services rendered, desired qualifications, expertise, industry standards, and complexity of the issue.
Policy 26: RFP/RFQ Process
State Issuers shall make all final determinations of selection for legal and other services in accordance with Chapter 1201 Texas Government Code. The determination will be made following an independent review of responses to requests for proposals (RFPs) or requests for qualifications (RFQs). The RFP and RFQs should be reviewed by at least the issuer’s financial professional charged with debt oversight and or the agency’s financial advisor.
Policy 27: Arbitrage Compliance
State Issuers shall maintain a system of record keeping and reporting to meet the arbitrage rebate compliance requirements of federal tax code.
Policy 28: Intergenerational Housing
Housing developments that comingle age-restricted units and family units must meet the definition of intergenerational housing and abide by the Board’s policy.
Policy 29: Property Tax Exemption
The Bond Review Board will approve applications for the issuance of bonds to finance multifamily housing revenue developments for which the organization is designated a Community Housing Development (CHDO) and qualifies for 100 percent property exemption under Section 11.182 of the Texas Tax Code only if the application includes a payment in lieu of taxes (PILOT payment) in an amount equal to 50 percent of the property taxes that would have been imposed by the applicable school district for the tax year for which the exemption applies, payable to the Comptroller of Public Accounts and submitted to the Comptroller by February 1 of the year following approval of the project.