"State Guarantees for School Debt and the Texas Penalty".

• Author: DOUGLAS, JENNIFER RITTER
• Position: Review

Clarke, Wes and Bland, Robert L.

Municipal Finance Journal, Summer 2000, pp. 1-12.

At first glance, the title of this article would seem counterintuitive. In Texas, school district debt is insured by the Permanent School Fund (PSF)--a constitutionally establish endowment worth $20 billion. School districts pay only $500 to use the fund as insurance, and it is rated AAA/Aaa by all three major bond rating agencies. But the authors of the report argue that despite the PSF guarantee, Texas school districts actually pay higher interest rates on their bonds than other states. The research compared AAA/Aaa-rated insured bonds to AA/Aa bonds without insurance. The results showed that on average, insured bonds incur an interest cost of 14.6 basis points higher than issues that receive an AA rating on their own merits. The justification for this may be that because of the flood of AAA-rated insured bonds in the market, savvy investors look past the insurance to the underlying rating to assess the bond's ultimate risk, in an effort to distinguish between AAA instruments. Although the PSF guarantee app ears to provide interest cost savings...