The triple-A Texas program that guarantees public school bonds is quickly using up its already limited capacity, ending December with only a projected $26.65 million available.

Amid a slew of school debt approved by voters last year, the Permanent School Fund program has experienced high demand that shrank its projected available capacity from $3.97 billion at the end of August to $410 million on Nov. 30.

Carolyn Perez, a spokeswoman for the program, said Friday it is still operating. 

“Currently, there are no plans to close it down,” she said in an email. “With the help of members of the Texas congressional delegation, both legislative and regulatory solutions currently are still being pursued.”

The program is capped at $117.32 billion under federal law.

Not only does it bestow triple-A ratings on school bonds, investors like PSF-wrapped bonds due to their liquidity.

The program last reached capacity in 2009, forcing the Texas Education Agency to stop accepting applications. It reopened in early 2010 after the Internal Revenue Service increased the limit in December 2009.

After legislation to permanently remove the IRS limit stalled in Congress last fall, U.S. Rep. Lloyd Doggett, D-Texas, in January introduced the Keeping Texas School Construction Costs Down Act of 2023.

The TEA has been giving schools with the lowest property wealth per average daily attendance priority for the guarantee, leaving many districts to sell bonds based on their own underlying credit ratings.

Fitch Ratings said it expects minimal negative effects on the credit profiles of school districts that issue debt without the PSF guarantee.

“Those districts forced to issue without the guarantee will face increased borrowing costs, but these costs should be easily absorbed by wealthy, higher-rated districts,” the rating agency said in a report Tuesday. “Although the prioritization of lower credit quality school districts could weaken the program’s aggregate pool quality over time if the program’s guarantee cap is not raised, Fitch’s cash flow modeling demonstrates that the program has ample cushion to mitigate this risk.”

Despite the scarcity of the guarantee, Texas school districts are still heading to the municipal bond market.

Lamar Consolidated Independent School District in the Houston area has $648.6 million of bonds pricing next week through Raymond James without the PSF guarantee.

Ahead of the sale, Moody’s Investors Service downgraded the district’s rating to Aa3 from Aa2, while S&P Global Ratings revised the outlook on its AA rating to negative.

“The outlook revision reflects the district’s significant new-money debt plans, which, when fully carried out, are expected to increase its overall debt burden and carrying charges to levels that are above those of similarly rated peers and could ultimately pressure operations in the long term if anticipated valuation growth is not realized,” S&P analyst Emily Powers said in a statement.

Terrell Palmer, president of Post Oak Municipal Advisors, Lamar’s financial advisor, said bond insurance will be available if it provides a benefit.

“The interest rate on the bonds will be slightly higher, however well below the rate assumed with the bond election in November,” he said in an email, adding the higher rate will not impact the tax rate promised to voters, who approved about $1.5 billion of bonds for the growing district Nov. 8.     

Colin MacNaught, CEO & co-founder of BondLink, said with almost 75% of Texas school districts now selling bonds without the PSF guarantee, he recommends giving investors more time to dig into their unenhanced credit. 

“Nothing beats robust disclosure and signaling to investors that you have a system in place to provide regular updates even if you’re not in the bond market every year,” he said in an email.

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