Fitch Ratings affirms its 'AAA' on the Texas Permanent School Fund's (PSF) bond guarantee program.
The Rating Outlook is Stable.
RATING RATIONALE:
--Despite volatility in the financial markets and its investment portfolio, the PSF has maintained sufficient assets in stable, high-quality, and liquid securities to cover potential defaults within its bond guarantee program, while meeting its primary mission to generate adequate returns on investment that can be distributed to local school districts to subsidize operations.
--Given the high credit quality and expected continued strong payment performance by Texas school districts, plans by the State Board of Education (SBOE) to increase the ratio of PSF bond guarantees to invested assets from 2.5:1 to 3:1 do not jeopardize Fitch's current rating.
--Strong governance and statutory and operating provisions assure timely payment of school district debt in the event of non-payment by a school district.
RATING DRIVERS:
-- Investment portfolio valuation and composition;
-- Credit quality of local school districts.
SECURITY:
Local school district bonds approved under the program are guaranteed by the corpus and income of the PSF. By law, a school district must notify the Commissioner of Education at least five days before a maturity date if it will be unable to pay debt service. Funds would then be transferred from the appropriate PSF account of the state treasury to the paying agent in an amount sufficient to pay debt service.
CREDIT SUMMARY:
The PSF is a perpetual endowment that was established in 1854 to support Texas public schools. As of March 31, 2010, the fund had a market value of $28.2 billion and a book value of $23 billion. Funds are invested in a diversified mix of equities; fixed income; land, minerals and real assets; and alternative investments, with a small allocation to cash. The PSF makes distributions to school districts to support their operations based on a total return methodology; these distributions totaled $717 million for each of the fiscal years ending Aug. 31, 2009 and 2008. Since 1983 the fund has also guaranteed school bonds, thereby facilitating market access for local school districts.
The PSF cannot guarantee new bonds if total outstanding guarantees exceed the State Capacity Limit, set annually by the SBOE. The State Capacity Limit is currently 2.5 times (x) the combined book value of the PSF's investments, including land, mineral and real assets, but an increase to 3x has been approved. The State Capacity Limit is restricted by both state statute and IRS rules, both of which have recently been raised to 5x book value. In December 2008 the PSF had to suspend further guarantees after declines in the global financial markets resulted in a significant decline in the PSF's investments, causing its leverage ratio to rise above 2.5x. Its asset valuations subsequently recovered and some of its guaranteed bonds were refunded, lowering the leverage back below 2.5x; this allowed the PSF to resume guaranteeing new bonds, which it started doing in February 2010. At March 31, 2010, the PSF's leverage was 2.12x. Fitch considered plans to increase the State Capacity Limit in its rating analysis and determined that doing so does not jeopardize the PSF's 'AAA' rating.
The PSF's financial assets, with a fair market value of $20.5 billion at the fiscal year ending Aug. 31, 2009, are managed under the direction of the SBOE, with management duties delegated to the PSF's investment office, a division of the Texas Education Agency (TEA). They are invested with the objectives of generating returns to distribute to subsidize local school operations, as well as to grow the balance of the fund. Therefore, two thirds are allocated to a diversified mix of domestic and international equities, with another 10% allocated to alternative investments, and the remainder to fixed income securities (mostly U.S. treasuries, government agency, and corporate obligations). Land, real assets and minerals, which had a fair value of $4.1 billion at Aug. 31, 2009, are under the management of the School Land Board.
The PSF's bond guaranty program had guaranties outstanding totaling $48.6 billion at March 31, 2010, down from $50 billion at fiscal year-end 2009. There were guarantees to 781 school districts, although the top ten accounted for about 23.5% of the total par outstanding. The quality of Texas school districts is generally strong; Fitch estimates that most have credit quality in the 'AA' category. No Texas school district has defaulted on its debt since the Great Depression.
Fitch considered the ability of the PSF to pay school district debt under stress scenarios consistent with a 'AAA' rating that would affect both the PSF's investments and its guaranteed school debt. The PSF has sufficient funds to pay all school district debt under such scenarios, even at what will be the new State Capacity Limit of 3x book value.
Applicable criteria available on Fitch's website at 'www.fitchratings.com' include:
--'Tax-Supported Rating Criteria', Dec. 21, 2009;
--'State Revolving Fund and Municipal Loan Pool Rating Guidelines', dated April 28, 2008.
--'Closed-End Fund Debt and Preferred Stock Rating Criteria', dated Aug. 17, 2009.
Additional information is available at 'www.fitchratings.com'.
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or
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