Key Points of Report A Briefing Report on School District Debt February 1998 Overall Conclusion The magnitude of tax-supported, long-term school district debt may have implications to the State and to school districts. It is imperative that interested parties have complete and accurate information on school district debt and management and monitoring practices. Texas independent school districts throughout the State are experiencing rapid growth in student enrollment. To meet the demands of the increasing student population, these school districts are financing facility renovations and building new facilities by issuing debt. During our research of school district long-term debt we found issues that legislative leaders, the Texas Education Agency, and school district administrators and board members should consider. Issues for Further Consideration C The Texas Education Agency should develop guidelines for school districts to use when reporting accretion on capital appreciation bonds in the independent school districts’ annual financial reports. Long-term debt is understated in school districts’ annual financial reports due in part to a lack of specific guidance on the treatment of capital appreciation bond accretion. C The Permanent School Fund’s insurance capacity should be increased. Without an increase in the amount of bonds the Fund can insure it will reach capacity by 2002. As a result, school districts may be forced to purchase insurance from private companies at an increased cost. As of August 31, 1996, 84 percent of school district bonds were insured through the Fund. C The $300 fee charged by the Texas Education Agency to participate in the Permanent School Fund insurance program should be adjusted to reflect the costs of the program. C Texas should consider formulating a statewide policy on school district long-term debt management. School district debt is a local issue, controlled by local school boards. While complete state oversight of school district debt is not appropriate, the long-range impact of increasing school debt could have statewide implications. Contact Carol A. Smith, CPA, Audit Manager (512) 479-4700 Office of the State Auditor Lawrence F. Alwin, CPA This audit was conducted in accordance with Government Code, Section 321.0131. Table of Contents Overview .................................................... 1 School District Long-Term Debit Is Understated ................. 3 The Permanent School Fund Insures School District Bonds ...... 4 The Fund Bond Insurance Program Will Reach Capacity in 2002 .......... 5 The Fund’s Bond Insurance Fee Is A Bargain .......................... 5 There Is Limited State Oversight of School District Debt ......... 6 Bond Review Board Assesses School Districts on Their Debt Management Practices .......................................... 7 School Districts Do Not Have Specific Debt Management Policies ......... 8 School Board Members Need More Training in Debt Management ......................................... 10 Texas School Districts Refunded Bonds to Restructure Debt and Extend Payments .................................. 12 Key Debt Management Ratios Continue to Deteriorate ............................................... 13 Appendices 1 - Objectives, Scope, and Methodology ........................... 15 2 - Definition of Terms ........................................... 17 3 - The Debt Issuance Process .................................... 18 4 - Debt Instruments ............................................ 20 Overview Overall Conclusion since fiscal year 1993. In 1996, school districts issued $2 billion in bonds compared Texas independent school districts throughout to $650 million in fiscal year 1993. The the State are experiencing rapid growth in percentage of increase between fiscal years student enrollment. To meet the demands of 1995 and 1996 was 49 percent. the increasing student population, these school districts are financing Figure 2 facilities renovations and building new facilities by issuing debt. This Student Population Growth report explores numerous issues concerning the use of these debt 3,800 3,700 instruments and the results on 3,600 school district long-term debt. 3,500 3,400 3,300 3,200 3,100 Background 3,000 2,900 School district outstanding debt has 1988 1989 1990 1991 1992 1993 1994 1995 1996 increased steadily since 1992. At Fiscal Years the end of fiscal year 1996, the Source: Texas Education Agency amount of bond principal outstanding was $10.9 billion compared to The student population in Texas has increased $8.3 billion at the end of fiscal year 1992 from 3.2 million to 3.7 million since 1988 (Figure 1). (Figure 2), a 15.97 percent increase, according Figure 1 to information obtained from Snapshots published by the Texas Education Agency. Amount of Bond Principal The annual growth has averaged 1.87 percent. Since fiscal year 1994, when the Texas Oustanding Education Agency began to keep this 12,000 particular data, the number of total schools 11,000 has increased at an annual rate of 2.42 10,000 percent. The number of high schools, 9,000 however, increased by 13.44 percent from 8,000 1,228 to 1,393 between fiscal year 1995 and 7,000 1996. 6,000 1992 1993 1994 1995 1996 Recently passed legislation will also Fiscal Years contribute to the increase in construction. The Source: Bond Review Board 75th Legislature passed the Facilities Allotment Program (FAP) effective The percentage of increase between fiscal September 1, 1997. years 1995 and 1996 was 14.58 percent, the largest annual percentage increase since 1992. The FAP provides assistance to school Texas school districts issued $2.15 billion in districts in making debt service payments on new-money bonds in fiscal year 1996. This is qualifying bonds and lease purchase 55 percent of all bonds issued by Texas agreements. The FAP will allow school governments during the fiscal year. The amount of bonds issued has increased steadily FEBRUARY 1998 A BRIEFING ON SCHOOL DISTRICT DEBT PAGE 1 Overview districts that could not previously support new implications for future school district debt to do so. The Legislature appropriated solvency, and the amount of debt associated $200 million for the FAP, authorizing the with each type; and (3) review the roles of the distribution of $100 million during each of the Texas Education Agency, the Attorney next two years. General's Office, and the Texas Bond Review Board to determine the extent of oversight and Since enactment of the FAP, school districts to identify gaps in oversight responsibilities. have rushed to hold bond elections to qualify for the program. On September 27, 1997 San The scope of this project included (1) all Antonio ISD voters passed a record $483 school district long-term debt; (2) the roles of million bond issue to renovate and build new the Attorney General's Office and the Texas facilities. The bond package was presented to Education Agency in the issuance of the voters as a win-win situation. long-term debt by the school districts; (3) the role of the Bond Review Board in collecting, The district showed how the new Homestead compiling, and reporting information on Exemption and the FAP would save the school district long-term debt; and (4) statutes majority of homeowner's money, even if the and regulations related to the issuance of bonds passed. school district debt. Summary of Objectives and Scope The objectives of this project were to (1) analyze the increase in new debt; (2) determine types of alternative debt, PAGE 2 A BRIEFING REPORT ON SCHOOL DISTRICT DEBT FEBRUARY 1998 Section 1: School District Long-Term Debit Is Understated School district long-term debt is understated in the What are Capital Appreciation Bonds? annual financial reports of the school districts. In Capital appreciation bonds are deep discounted our review of 34 school district annual financial debt instruments. When a CAB is issued or sold, reports (AFRs) with a total of $1 billion of bonds the issuer sells the bond and promises to pay the outstanding, we found 20 districts with capital bondholder the principal and interest at a future appreciation bonds (CABs) with a face value of date. There no regular interest payments $71 million. Of the 20 school districts, 18 did not associated with CABs. disclose $67 million (94 percent) in liability associated with the CABs in their financial During the time the bond is outstanding, the CAB “accretes” interest until the bond matures. The statements. Without an accurate and total accretion is the difference between the face reporting of the accretion of the CABs, the total value of the bond and the price of the bond amount of outstanding long-term liability is bought at an original discount. The accretion unknown. remains a liability of the school district until the CAB matures or is extinguished through a School districts have not been consistent in refunding. reporting CAB accretion in the financial statements because of a lack of specific guidance from the Government Accounting Standards Board and the Texas Education Agency on the treatment of CAB accretion. School districts report bonds payable in the General Long Term Debt Account Group (GLTDAG) in accordance with generally accepted government accounting principles. Additional information, such as description of new issues and refundings, are disclosed in the Notes to the Financial Statements (Notes). Debt service payments are also disclosed in the Notes in the form of a Debt Service Schedule. School districts can: & Report the annual CAB accretion in the GLTDAG. & Disclose the accretion in the Notes to the Financial Statements. & Not report or disclose the accretion at all. (Most school districts have chosen not to report or disclose the accretion, with a few disclosing the accretion in the Notes and even fewer reporting the accretion on their balance sheet.) Although most school districts have not recognized their future liability on the balance sheet, they have not totally ignored it either. Future CAB principal and interest payments are included in the debt service schedules in the Notes to the AFRs. To pay for the CABs as they mature, school districts normally include the maturity amount in the school district's budget in the year of maturity.