Bonds 101 - Texas Bond Review Board

Report
State of Texas Debt – An Overview
January 2011
Texas Bond Review Board
Texas Public Finance Authority
Bob Kline, Executive Director
[email protected]
512-463-1741
www.brb.state.tx.us
Dwight Burns, Executive Director
[email protected]
512-463-5544
www.tpfa.state.tx.us
1. Introduction
BRB vs. TPFA
Bond Review Board – Oversight Agency
• Board: Governor, Lt. Governor, Comptroller and Speaker (nonvoting)
• 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
3
Texas Debt Issuers
4
TPFA Client Agencies
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
Adjutant General/Military Facilities Commission
Cancer Prevention and Research Institute of Texas
Department of Aging and Disability Services
Department of Agriculture/Texas Agricultural Finance Authority
Department of Public Safety
Department of State Health Services
Health and Human Services Commission
Midwestern State University
School for the Blind and Visually Impaired
School for the Deaf
State Preservation Board
Stephen F. Austin State University
Texas Department of Criminal Justice
Texas Department of Transportation/Office of the Governor (Colonias Roadway Grant Program)
Texas Facilities Commission
Texas Historical Commission
Texas Military Preparedness Commission (Texas Military Value Revolving Loan Fund)
Texas Parks and Wildlife Department
Texas Southern University
Texas Windstorm Insurance Association
Texas Workforce Commission
Texas Youth Commission
TPFA Charter School Finance Corporation
*TPFA gained authority by the 81st Legislature to issue debt on behalf of TAFA
2. Debt Instruments
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.
7
Common Terms for Debt
Securities
• 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
8
remarketing of variable-rate debt at reset dates
Terms - 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
Debt 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
10
Commercial 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 longterm debt at maturity
11
Municipal (Tax-Exempt) Interest Rates
6.00%
5.00%
Rate (%)
4.00%
3.00%
2.00%
1.00%
0.00%
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
Municipal Market Data (10/19/2010)
Municipal Market Data (11/15/2010)
Municipal Market Data (12/15/2010)
12
Fixed Rates vs. Variable Rates
Bond Buyer Index vs. SIFMA Index vs. TPFA CP
(as of 11/30/10)
13
Taxation 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
14
3. Types of Texas Debt
General 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)
16
Revenue 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
17
Lease 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
18
Tax and Revenue Anticipation
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
19
Debt 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)
20
College & University Debt Outstanding
As of 08-31-10 (billions)
7.0
6.0
Billions
5.0
4.0
3.0
2.0
1.0
0.0
2004
2005
2006
PUF
2007
Non-TRB
2008
2009
2010
TRB
21
Refundings
•
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
22
4. Debt Sale Mechanics
Debt 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
24
Debt 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 Disclosure
25
Finance Team
Bonds and Notes:
o Financial Advisor
o Bond Counsel
o Underwriter
Commercial Paper Transactions also include:
o Dealer
o Paying Agent
o Liquidity Provider
26
Methods 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
27
Negotiated
•
•
•
•
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
28
Competitive
•
•
•
•
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
29
Pricing/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
30
5. General Revenue Impact
Self-Supporting vs. Not Self-Supporting
Self-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
32
Not 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
33
Constitutional 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
34
Calculating the Constitutional
Debt 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 GR
35
Q&A
6. Texas Debt
State 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
38
Historical State Debt Outstanding
As of 8/31/10 (billions)
$40.0
$35.0
$30.0
$25.0
$20.0
$15.0
$10.0
$5.0
$2001
2002
GO Self Supporting
2003
2004
Revenue Self Supporting
2005
2006
2007
GO Not Self Supporting
2008
2009
2010
Revenue Not Self Supporting
39
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
2044
2045
2046
2047
Millions
Debt Service on State Debt
as of 8/31/10 (millions)
$3,500
$3,000
$2,500
$2,000
$1,500
$1,000
$500
$0
REV/SS
REV/NSS
GO/NSS
GO/SS
40
Local Debt Outstanding
($174.55 billion outstanding as of 8/31/2009)
($54.35 billion)
Public School Districts
33.7%
($1.95 billion)
Health & Hospital
Districts
1.4%
($11.38 billion)
Counties
6.8%
($3.24 billion)
Community and Junior
Colleges
2.1%
Source: Texas Bond Review Board
($25.41 billion)
Water Districts &
Authorities
15.5%
($8.85 billion)
Other Special Districts &
Authorities
6.9%
($55.13 billion)
Cities, Towns, Villages
33.5%
41
State and Local Debt – 10 Most
Populous States
TOTAL STATE AND LOCAL DEBT OUTSTANDING: TEN MOST POPULOUS STATES
Total State and Local Debt
Population
State
(thousands)
New York
19,490
Illinois
12,902
Pennsylvania
12,448
California
36,757
Texas
24,327
Florida
18,328
Michigan
10,003
Ohio
11,486
North Carolina
9,222
Georgia
9,686
MEAN
Amount
(millions)
$269,742
124,163
118,611
341,094
215,877
142,129
75,247
68,658
51,202
50,561
$145,728
Per Capita
Amount
$13,840
9,624
9,529
9,280
8,874
7,755
7,522
5,978
5,552
5,220
$8,317
State Debt
Per Capita
Rank
1
2
3
4
5
6
7
8
9
10
Amount
(millions)
$114,240
58,437
40,100
121,930
33,299
42,321
29,065
26,885
19,605
13,072
$49,895
% of Total
Debt
42.4%
47.1%
33.8%
35.7%
15.4%
29.8%
38.6%
39.2%
38.3%
25.9%
Per Capita
Amount
$5,861
4,529
3,221
3,317
1,369
2,309
2,906
2,341
2,126
1,350
34.6%
$2,933
Per
Capita
Rank
1
2
4
3
9
7
5
6
8
10
Amount
(millions)
$155,502
65,726
78,511
219,164
182,578
99,808
46,182
41,773
31,597
37,489
$95,833
Local Debt Per
% of Total Capita
Debt
Amount
57.6%
$7,979
52.9%
5,094
66.2%
6,307
64.3%
5,963
84.6%
7,505
70.2%
5,446
61.4%
4,617
60.8%
3,637
61.7%
3,426
74.1%
3,870
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.
42
Per
Capita
Rank
1
6
3
4
2
5
7
9
10
8
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
43
7. State Credit Ratings, Debt
Affordability and Swaps
Credit Ratings
State Credit Ratings:
o Moody’s
o Standard and Poor’s
o Fitch
Aaa
AA+
AAA
Factors Considered:
o
o
o
o
Economy
Financial condition
Debt burden
General management practices
45
General Obligation Credit Ratings 10 Most Populous States
RATING
Steps from
AAA Ranking
State
Georgia
North Carolina
1
Florida
1
TEXAS
3
Ohio
4
Pennsylvania
6
New York
8
Michigan
12
Illinois
16
California
August, 2010
Moody's
Investors
Service
Aaa
Aaa
Aa1
Aaa
Aa1
Aa1
Aa2
Aa2
Aa3
A1
Standard
&
Poor's
AAA
AAA
AAA
AA+
AA+
AA
AA
AAA+
Fitch
Ratings
AAA
AAA
AAA
AAA
AA+
AA+
AA
AAA
A-
A46
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
47
Interest 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
48
Pay-Fixed, Receive-Variable Swap
Synthetic Fixed-Rate Debt
Fixed Rate
Swap
Provider
Issuer
Variable Rate
Variable
Rate
Bondholder
s ss
49
Pay-Variable, Receive-Fixed Swap
Synthetic Floating-Rate Debt
Variable Rate
Swap
Provider
Issuer
Fixed Rate
Fixed Rate
Bondholder
s ss
50
Major 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
counterparty
51
State Swaps Outstanding
PAY-FIXED, RECEIVE-VARIABLE (Synthetic Fixed-Rate)
Texas Department of Housing and Community Affairs
University of Texas System
Veterans Land Board
Total
PAY-VARIABLE, RECEIVE-FIXED (Synthetic Floating Rate)
Veterans Land Board
Notional Amount as of
8/31/10
(in thousands)
$ 377,077
$1,405,526
$1,419,235
$3,201,838
$21,895
PAY-VARIABLE, RECEIVE-VARIABLE (Basis Swap)
Texas Transportation Commission
University of Texas System
Veterans Land Board
Total
$400,000
$583,570
$241,765
$1,225,335
Total Swaps Outstanding
$4,449,068
52
8. Private Activity Bond (PAB)
Allocation Program
Rob Latsha
Senior Financial Analyst & Program Administrator
Texas Bond Review Board
512-475-4800
[email protected]
www.brb.state.tx.us
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
54
Private Activity Bond Program for
2010
Sub-ceilings:
Available
Allocated
$624,514,010
178,432,574
44,608,144
490,689,580
234,192,754
657,970,118
$116,142,544
95,279,609
3,440,000
5,275,000
85,850,000
445,510,316
Sub Total
Carryforward
HERA Carryforward
$2,230,407,180
2,728,226,243
448,500,000
$751,497,469
859,699,500
398,500,000
Total
$5,407,133,423
$2,009,696,969
#1 - Single Family Housing
#2 - State Voted Issues
#3 - Qualified Small Issues
#4 - Multifamily Housing
#5 - Student Loan Bonds
#6 - All Other Issues
55
Other 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
56
Q&A

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