Use Interest and Sinking Fund Balances to Reduce General Revenue Appropriations for Debt Service

The Legislature should use balances in interest and sinking funds to reduce the need for general revenue appropriations for debt service.


Background
The Texas Public Finance Authority (TPFA) issues revenue and general obligation bonds to finance the state s capital projects, such as the construction or acquisition of correctional and mental health facilities. Once bonds are issued, TPFA manages and monitors bond proceeds a nd legal covenants to ensure compliance with the Federal Tax Code, and to make timely debt service payments on outstanding bonds. TPFA has entered into a funds management agreement with the State Treasury to maintain and invest balances in bond funds.

Each time general obligation bonds are issued by TPFA, an average of three separate funds are created. Generally, a project fund is created to pay for the costs of acquiring or constructing capital projects, an interest and sinking fund is created to pay i nterest on outstanding bonds, and a rebate fund is created to pay rebates and/or penalties to the federal government required under federal arbitrage rebate rules for interest earned on bond funds.

As of September 1992, TPFA had 22 bond issues outstanding, with a total of 75 separate bond funds. 1 Each fund requires timely voucher processing, investment and interest distribution calculations and payment of debt service. TPFA works closely with the Comptroller s office and the Treasury to ensure the proper tr ansfer of monies between and among bond funds.

Generally, once bond project funds have retained enough interest to pay for estimated project costs, the interest earned on project fund balances is transferred to interest and sinking funds to pay debt service on bonds. 2 In some cases, however, bond project funds retain interest earnings until agency projects are complete. Once TPFA receives a project completion letter from agencies managing bond projects, such as the Texas Department of Criminal Justice, a ny project fund balances remaining can be transferred to interest and sinking funds to help pay debt service.

One of the TPFA goals, as mentioned in their 1994-95 request for legislative appropriations, is to ensure that bonds are monitored and managed in the most efficient manner possible. The process of monitoring the transfer of monies between bond funds is adequate; however, TPFA does not take an active role in managing and projecting balances in interest and sinking funds that the Legislature could potentially use to reduce general revenue appropriations for TPFA debt service payments on general obligation bonds. Additionally, TPFA does not provide the Legislature with realistic projections of future annual debt service payments on general obligatio n bonds. As a result, more General Revenue Fund appropriations for TPFA debt service payments have been made by the Legislature than are necessary, which is inconsistent with the goal of managing bonds in the most efficient manner possible.

For example , during the 1992-93 biennium, the Legislature appropriated $4 million out of estimated interest and sinking fund balances for TPFA debt service payments on general obligation bonds. Additionally, a rider in the General Appropriations Act required TPFA to use all balances available in interest and sinking funds for the purpose of paying debt service on general obligation bonds prior to the expenditure of funds appropriated out of the General Revenue Fund.

As Table 1 shows, TPFA estimates that $32.1 million $28.1 million in excess of the amount appropriated by the Legislature will be spent out of interest and sinking funds during the 1992-93 biennium. Moreover, TPFA did not project any balances in interest and sinking funds that the Legislature could appropriate for general obligation (GO) debt service payments during the 1994-95 biennium. Instead, TPFA requested that all appropriations for debt service payments be made out of the General Revenue Fund. 3

Table 1 - General Obligation - Debt Service Expenditures by Fund - Texas Public Finance Authority,
1991-95

Fiscal Total Debt General Revenue Interest and Sinking
Year Service Expenditures Fund Expenditures Fund Expenditures

1991 $ 56,026,461 $ 37,051,176 $18,975,285
1992 78,101,930 67,670,178 10,431,752
1993* 86,815,402 65,115,402 21,700,000
1994* 134,893,864 134,893,864 0
1995* 153,487,676 153,487,676 0

*Estimated.
Source: Texas Public Finance Authority.


Recommendations
A. The Legislature should appropriate estimated balances in interest and sinking (I&S) funds to reduce the need for general revenue appropriations to the Texas Public Finance Authority (TPFA) for debt service payments on general obligation bonds during the 1994-95 biennium.

B. TPFA should provide estimates of I&S fund balances to the Legislative Budget Office and the Governor s Budget Office at the beginning of each regular session for inclusion in the General Appropriations Act.

C. If the Legislature creates an Office of Debt Management, as proposed in a separate recommendation in this report, all functions of TPFA should be transferred to the new agency.


Implications
The recommendation would save general revenue to the extent that interest and sinking fund balances are used to offset General Revenue Fund appropriations for TPFA debt service payments on general obligation bonds. The recommendation also provides value b ecause TPFA would be required to make projections of balances in interest and sinking funds at the beginning of the budget process, so that the L egislature would know how much is available out of these funds to pay debt service. The recommendation would provide a management tool to the Legislature to alleviate critical spending pressures on the general revenues of the state.


Fiscal Impact
Based on the last three years of interest and sinking fund expenditures, conservative estimates indicate that $10 million per year could be available in interest and sinking funds to pay debt service as shown in the following table. These savings would be achieved by appropriating $10 million per year in debt service payments from interest and sinking funds and reducing general revenue funding for debt service payments commensurately.

Fiscal Gain to the General Loss to Interest Change
Year Revenue Fund 001 and Sinking Funds in FTEs

1994 $10,000,000 $(10,000,000) 0
1995 10,000,000 (10,000,000) 0
1996 10,000,000 (10,000,000) 0
1997 10,000,000 (10,000,000) 0
1998 10,000,000 (10,000,000) 0


Endnotes
1 Texas Public Finance Authority (TPFA), Requests for Legislative Appropriations For Fiscal Years 1994 and 1995 (Austin, Texas, September 11, 1992), p. 2.
2 Interview with Robert Moore, Texas Public Finance Authority, Austin, Texas, December 3, 1992.
3 TPFA, Requests for Appropriations, p. 5.
4 The State of Texas, Supplement to House Journal, Seventy-second Legislature, First Called Session (Austin, Texas, 1991), pp. 1-115-116.
5 TPFA, Requests for Appropriations, p. 4.