State of Texas
Debt Issuance Policies
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
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
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
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
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
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
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
Policy 28: Intergenerational
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.