Merge the Texas Public Finance Authority and the Bond Review Board

The state should merge the Texas Public Finance Authority and the Bond Review Board to form the Office of Debt Management.


Background
The Texas Performance Review (TPR) researched debt management in the State of Texas and made recommendations in its Breaking the Mold report, published July 1991. In revisitin g this issue, TPR finds the process of issuing debt in Texas is still fragmented, inefficient and difficult to manage. Twenty-nine state agencies and universities have authority to issue bonds in Texas, down from the 34 noted by TPR in fiscal 1991. 1~ The reduction resulted from legislative action on TPR s recommendations.

A recent State Auditor s report recommended the state encourage various cost-effective debt management policies and develop a comprehensive debt management plan that considers both state and local government debt, since local government debt represents about 85 percent of the total debt outstanding in Texas. 2~ In 1991, the 72nd Legislature took the first step toward developing a state debt management plan by establishing a state debt limit, reducing the number of state agencies authorized to issue debt, requiring statistical reporting of debt indicators for st ate and local issuers and including the Bond Review Board (BRB) in the state s new capital planning and budgeting system. TPR concur s with the concept of a comprehensive debt management plan; however, the state should first get its own house in order before incorporating units of local government in a comprehensive statewide debt management plan.

Opportunities remain at the state level to gain economies of scale in the bond issuance process. Few state bond issuers market bonds frequently enough to achieve economies of scale. It is generally not cost effective for infrequent issuers to perform in-ho use a substantial portion of the legal and financial services necessary to issue and sell bonds. Thus, most issuers rely on outside bond professionals to provide these services, driving up bond issuance costs.

The cost of issuing bonds can be reduced by increasing the average size of the issuance. For example, in 1991, bond issues of $50 million and less had average issuance costs of $14.17 per $1,000 of bonds issued; issues of $50 to $100 million had average co sts of $13.33; and issues greater than $100 million averaged $7.63 per $1,000. 3~

With its decentralized bond issuance system, TPR found the state does not take advantage of its purchasing volume to improve the quality and reduce the cost of bond professionals, such as underwriters, bond counsels, financial advisors, rating agencies, pa ying agents and printers. Nor does the state enter into long-term contracts with bond professionals. These professionals are selected at the discretion of each state bond issuer and, sometimes, different bond professionals are selected each time bonds a re issued. Moreover, no uniform state standards for selecting bond professionals exist.

State Bond Issuance in Texas
State bonds are classified as general obligation (GO) or non-general obligation (non-GO) based on whether the state is legally bound to repay the principal and interest on the bonds. Voters approve the issuance of GO bonds through an amendment to the Texas Constitution. Debt authorized by such an amendment carries a constitutional pledge of the full faith and credit of the state.

The repa yment of non-GO debt (revenue bonds) depends on the revenue stream of a program or on legislative appropriation. Any pledge of state funds beyond the current budget period is contingent upon future legislative appropriations, which cannot be guaranteed by state statute.

Bonds also are categorized as self-supporting and not self-supporting, based on the source of repayment of principal and interest. Self-supporting bond programs (GO and non-GO) are designed so that the debt service is paid from sources oth er than the state s General Revenue Fund. Thus, these bonds do not put direct pressure on the state s finances. Non-self-supporting bonds depend solely on the state s General Revenue Fund for the payment of debt service, directly affecting state finances since the debt service is paid from the same source of funds used by the Legislature to finance state government operations.

State bonds also are issued for different purposes. Twenty state agencies and universities issue bonds to finance state capital pr ojects while the remaining nine state bond issuers administer loan programs to provide financial assistance to individuals or political subdivisions of the state. (See Table 1.)

Table 1 - Texas State Bond Issuers

Current System Purpose Proposed System

Loan Programs
1. Texas Department of Agriculture Loan Programs Texas Department of Agriculture
2. Texas Department of Commerce Loan Programs Texas Department of Commerce
3. Texas Employment Commission Loan Programs Texas Employment Commission
4. Texas Higher Education Loan Programs Texas Higher Education
Coordinating Board Coordinating Board
5. Texas Department of Housing and Loan Programs Texas Department of Housing and
Community Affairs Community Affairs
6. Texas Water Development Board Loan Programs Texas Water Development Board
7. Texas School Facilities Finance Program Loan Programs Texas School Facilities Finance Program 8. Texas Water Resources Finance Authority Loan Programs Texas Water Resources Finance Authority 9. Veter ans Land Board Loan Programs Veterans Land Board

Current System Purpose Proposed System

Capital Projects
1. Texas Turnpike Authority Capital Projects Texas Turnpike Authority
2. Permanent University Fund Capital Projects Permanent University Fund
3. Texas A&M University System Capital Projects Texas A&M University System
4. University of Texas System Capital Projects University of Texas System
5. Texas Public Finance Authority Capital Projects
6. Angelo State University Capital Projects
7. East Texas State University Capital Projects
8. Lamar University Capital Projects
9. Midwestern State University Capital Projects
10. Sam Houston State University Capital Projects
11. Southwest Texas State University Capital Projects
12. Stephen F. Austin State University Capital Projects Office of Debt Management
13. Sul Ross State University Capital Projects
14. Texas College of Osteopathic Medicine Capital Projects
15. Texas Southern University Capital Projects
16. Texas State University System Capital Projects
17. Texas Tech University Capital Projects
18. Texas Women s University Capital Projects
19. University of Houston System Capital Projects
20. University of North Texas Capital Projects

Source: Texas Performance Review

The Texas Public Finance Authority
Texas Public Finance Authority (TPFA) performs several functions and has become the largest bond issuer in the state. 4~ TPFA issues bonds for capital construction projects on behalf of the Gener al Services Commission, the Texas Department of Criminal Justice, the Texas Department of Mental Health and Mental Retardation, the Texas Youth Commission and other state agencies authorized by the Legislature. As of January 1991, TPFA also is authorized t o issue bonds for Texas State Technical College, the National Research Laboratory Commission, the Texas Parks and Wildlife Department and the Texas National Guard Armory Board. The TPFA board has six members appointed by the governor for staggered six-year terms.

TPFA is responsible for the Master Equipment Lease Purchase Program, which provides short-term financing for capital equipment purchases by various state agencies. TPFA issues tax-exempt commercial paper to purchase equipment on behalf of state agencies. O nce the amount of commercial paper issued reaches approximately $50 million, TPFA converts it to longer-term lease revenue bonds. TPFA also monitors bond issues for compliance with the Federal Tax Code to protect the tax-exempt status of bonds, ensure the proper transfer of monies between funds and make timely debt service payments to bondholders.

The Bond Review Board
BRB was created in 1987 and is responsible for reviewing and approving all state bonds and lease-purchases of more than $250,000 issued by state agencies and universities. Its mission is to ensure that Texas state debt is properly authorized and issued in the most open and cost-effective manner. 5~ The board is composed of the governor, lieutenant governor, speaker of the house, state treasurer and comptroller of public accounts or their designees.

The board reviews and evaluates each bond issue for factors such as proper legal authorization, use of proceeds, investment provisions, market timing of issuance and issuance costs, to name a few. The board also administers the School Facilities Aid Fund t o provide low-interest loans to school districts for acquiring, constructing or renovating school facilities. The board has the authority to issue up to $750 million in bonds to provide financing for the fund.

In 1991, the 72nd Legislature transferred the administration of the state s private activity bond cap allocation program to BRB from the Texas Department of Commerce, and gave the board a significant role in developing a capital planning and budgeting system for the state.

In reviewing the state s debt management function, TPR found that duplication of effort exists between staff at the BRB and state bond issuers. As the complexity of state bond issuance continues to grow, the BRB has accumulated a level of staff expertise that meets, if not exceeds, the level of expertise of state bond issuers. Moreover, this expertise is not fully utilized, because the board, by nature of its review responsibilities, gets involved in the issua nce process in the final stages . The board is not involved at the front end of the planning process for bond issuance, which is contrary to the board s mission to ensure that bonds are cost-effectively issued.

Once bond issues are presented to BRB, the b oard can approve, disapprove or require an issuer to modify the bond issue proposal. However, this late in the process, pressure is usually placed on the board to approve the bond issues so that projects are not delayed. This added pressure also impairs th e board s ability to carry out its legislative mandate.

Other States
According to a 14-state survey conducted by the BRB, other states have a more centralized approach to issuing bonds than Texas. 6~ In all 14 states, a single agency issues GO bonds. Unli ke Texas, the debt service on GO bonds issued by these states is usually paid from state general revenues. Thus, Texas large number of self-supporting GO bond programs is unique.

However, the survey indicates that the issuance of self-supporting non-GO bonds is much more decentralized in other states. For example, the issuance of self-supporting non-GO bonds is conducted by the using agencies in 11 states. In three states California, Florida and Georgia revenue bonds are issued by the same agency that issues GO bonds.

Centralization versus Decentralization
TPR evaluated the feasibility of centralizing bond issuance in a single state agency so the state could save money by creating enough volume to allow certain services to be performed in-house. TPR also looked at whether consolidating bond issuance for smal l, infrequent issuers could lower the cost of services that are not performed in-house.

It was assumed that, if cost-effective, most legal services, financial advisory services, printing and other se rvices could be performed in-house. TPR determined that it would not be feasible to perform certain services in-house, such as those provided by underwriters, rating agencies and tax counsels. These services require highly specialized expertise, impartial and independent judgment and access to the capital markets services the state cannot provide for itself.

TPR considered consolidating bond issuance only for issuers that sell bonds to finance capital projects, since these bonds have the most direct effec t on state finances. TPR analyzed the bond issuance programs administered by TPFA and the 15 colleges and universities outside the University of Texas and Texas A&M systems to find out if centralized bond issuance would be cost-effective.

The nine state bond-financed loan programs (see Table 1) were excluded from consideration because the legal and financial aspects of these programs are generally more complex than the capital improvement projects. Separating the bond issuance function from the operation of the various loan programs would be difficult and would not be as cost-effective as consolidating the issuance for capital programs because the majority of staff with experience in issuing bonds to finance loan programs would need to be retained and tran sferred to a centralized agency. Moreover, the state s loan programs are self-supporting and do not depend on the state s General Revenue Fund to pay debt service.

Also excluded from consideration were the University of Texas and the Texas A&M systems, s ince bond issuance for member institutions is already centralized at the system level. TPR found that the level of staff expertise at both systems is sufficient to perform a significant portion of legal and financial services necessary for the issuance of bonds in-house. In addition, bonds issued by the Permanent University Fund on behalf of member institutions were excluded from consideration since they are self-supporting non-GO bonds.

Although the Texas Turnpike Authority is involved in capital construction projects, it was excluded from consideration since its bonds are self-supporting.


Recommendations
A. The Texas Public Finance Authority (TPFA) and the Bond Review Board (BRB) should be merged to form the Office of Debt Management. All duties and responsibilities of both agencies should be transferred to the Office of Debt Management. The board of the current BRB should govern the new Office of Debt Management.

B. The Office of Debt Management should be authorized as the central agency to issue b onds for capital projects, reducing the number of agencies and universities authorized to issue such bonds from 20 to five. The Legislature should statutorily authorize the Office of Debt Management to charge fees to state agencies and universities for ser vices performed.

The bond issuance functions of the Office of Debt Management would be funded out of bond proceeds and the functions of the current BRB would continue to be funded out of the General Revenue Fund. However, the Office of Debt Management s hould consider charging agencies and universities fees for their services, if appropriate, in cases where administrative costs are not funded out of bond proceeds.

C. To achieve certain cost efficiencies, the Office of Debt Management should develop standard criteria for the selection of contracted bond professionals. The Office of Debt Management also should consider entering into one-year state contracts with team s of bond professionals.

Standard selection criteria for contracted bond professionals will make the selection process more open, competitive and objective.


Implications
The new Office of Debt Management would assume the bond issuance responsibilities of TPF A and 15 colleges and universities outside the University of Texas and Texas A&M systems (See Table 1). Bond issuance authority for the loan programs would remain with the nine agencies that currently have that responsibility.

The recommendations would have the net result of eliminating one state agency. Two state agencies TPFA and BRB would be abolished and a new agency, the Office of Debt Management, would be created to assume their responsibilities. The recommendations would reduce future debt service payments by lowering the cost of issuing bonds.


Fiscal Impact
To determine whether a centralized bond issuing agency was cost-effective, TPR first analyzed the cost of issuing bonds for the target group of issuers for capital projects. The cost of the current system includes contracted professional services, in-house staff and overhead dedicated to bond issuance.

TPR then estimated the cost of issuing bonds under a new, centralized system by creating a model staff to meet the level of services that could be performed in-house. The cost of issuance under the new system includes the additional annual cost of operatin g the Office of Debt Management and the cost of professional services which would continue to be contracted out.

Under the new system, it is assumed that the majority of legal services would be performed in-house, except for the writing and issuance of a tax opinion and a bond opinion. Most financial advisory services and printing also would be performed in-house.

Current funding and staff ($663,687) at BRB would be transferred to the Office of Debt Management plus an additional amount of $442,000 (funded out of bond proceeds) would be required to fund salaries, employee benefits and operating expenses for seven add itional staff dedicated to bond issuance functions. 7~ This staff is necessary for certain professional serv ices to be performed in-house. It is assumed that capital equipment would be transferred from the TPFA to the Office of Debt Management.

TPFA has a fiscal 1993 budget of $547,000 (including employee benefits) and a staff of 12 employees. 8~ Its administrative costs are funded out of revenue bond proceeds, which TPR considers as general revenue-related funds.

TPR then compared the cost of issuing bonds under the old system with the cost under the new system. Savings under the new system, which consist of both issuance savings and administrative savings, are estimated at $550,000 per year, which will result in lower debt service payments. About 95 percent of the issuance savings would accrue to the General Revenue Fund and 5 percent to the local funds of co lleges and universities, based on past issuance volume.

The following tables summarize the savings in bond issuance costs and administrative costs/savings achieved by merging TPFA and BRB to form an Office of Debt Management. The savings reflect lower debt service payments resulting from lower issuance costs.

Estimated Savings - Bond Issuance Costs

Issuance Savings Issuance Savings Total
Fiscal to the General to Local Issuance Change in
Year Revenue Fund 001 Funds Savings FTEs

1994 $393,000 $21,000 $414,000 0
1995 393,000 21,000 414,000 0
1996 393,000 21,000 414,000 0
1997 393,000 21,000 414,000 0
1998 393,000 21,000 414,000 0



Estimated Savings - Administrative Costs

Administrative Savings Administrative Administrative Cost to the Total
Fiscal to the General Savings to General Revenue Administrative Change in
Year Revenue Fund 001 Local Funds Fund 001 Savings FTEs

1994 $547,000 $31,000 $(442,000) $136,000 -5 1995 547,000 31,000 (442,000) 136,000 -5 1996 547,000 31,000 (442,000) 136,000 -5 1997 547,000 31,000 (442,000) 136,000 -5 1998 547,000 31,000 (442,000) 136,000 -5


Summary of Total Cost Savings

Savings Savings
Fiscal to the General to Local Funds of Change in
Year Revenue Fund 001 State Universities FTEs

1994 $498,000 $52,000 -5
1995 498,000 52,000 -5
1996 498,000 52,000 -5
1997 498,000 52,000 -5
1998 498,000 52,000 -5



Endnotes
1 Comptroller of Public Accounts, Breaking the Mold: New Ways to Govern Texas, 1991, p. CG 141.
2 State Auditor s Office, Debt Management Securing Texas Future, SAO Report Number 3-026 (Austin, Texas, December 1992), p. 1.
3 Senate Finance Committee, Testimony Before the Senate Finance Committee, testimony by Tom K. Pollard, Austin, Texas, August 27, 1992.
4 Texas Public Finance Authority, Requests for Legislative Appropriations For Fiscal Years 1994 and 1995 (Austin, Texas, September 11, 1992), p. 2.
5 Texas Bond Review Board, Requests for Legislative Appropriations For Fiscal Years 1994-1995 (Austin, Texas, September 18, 1992), p. 1.
6 Texas Performance Review, Breaking the Mold, p. CG 141.
7 Texas Bond Review Board, Requests for Legislative Appropriations, p. 7.
8 Texas Public Finance Authority, Requests for Legislative Appropriations, pp. 3-10.