Monday, July 29, 2013

TX 2nd Special Considers Backing College Bonds

The Texas House considers issuing bonds to fund state colleges and universities. HB 5 would permit several universities to issue "revenue bonds" for improvements and expansion of those universities. The bill is scheduled for floor action in the Texas House as early as the afternoon on July 29th.

The bonds would be secured by the state's general fund and would be scheduled to start issuing repayment or dividends starting in 2015. Should the universities not have the revenue available to pay the amounts promised, the deficit (difference) would be covered from the state's general fund. Each university system and institution named contains this wording, specifically targeting each system as applicable:

       (b)  The board may pledge irrevocably to the payment of bonds authorized by this section all or any part of the revenue funds of an institution, branch, or entity of [insert university system name] System, including student tuition charges. The amount of a pledge made under this subsection may not be reduced or abrogated while the bonds for which the pledge is made, or bonds issued to refund those bonds, are outstanding.
       (c)  If sufficient funds are not available to the board to meet its obligations under this section, the board may transfer funds among institutions, branches, and entities of [insert university system name] System to ensure the most equitable and efficient allocation of available resources for each institution, branch, or entity to carry out its duties and purposes.
The bill directs the state to set aside $175 million for 2015 in order to be prepared to cover possible shortfalls in the first round of interest, dividends, and repayments:

H.B. 5 appropriates $175 million out of the general revenue fund to the comptroller of public accounts for the state fiscal year ending August 31, 2015, for distribution to institutions of higher education and university systems for debt service on revenue bonds authorized by the bill.

Unlike private universities, public (state) universities such as Texas A&M and the University of Texas must seek approval from the legislature to sell bonds, a type of security similar to a US Savings Bond, in order to fund expansions or improvements. These proposed bonds would fund various things for several universities. The projects are enumerate in the bill itself, which can be read in its entirety at this link.

For example, Texas A&M seeks expansion or improvement to over 10 of their facilities across the state:

             (1)  Texas A&M University--Commerce, $40 million for a library and technology center;
             (2)  Texas A&M University--Corpus Christi, $60 million for a life sciences research building; 
             (3)  Texas A&M University--Kingsville, $33.6 million for music building expansion and renovation of Jones Auditorium;
             (4)  Texas A&M University--Texarkana, $36.8 million for an academic and laboratory learning center;
             (5)  West Texas A&M University, $12 million for the Amarillo Center;

to include the San Antonio and Galveston campuses:

             (10)  Texas A&M University, $64 million for a biocontainment research facility; 
             (11)  Texas A&M University at Galveston, $36.8 million for an academic building; 
             (12)  Texas A&M University--Central Texas, $50 million for a science, health science, and wellness building; and 
             (13)  Texas A&M University--San Antonio, $70 million for a science and technology building.

HB 5 specifically names the following institutions: Texas A&M, University of Texas, University of Houston, Texas State University, University of North Texas, Texas Women's University, Midwestern State University, Texas Southern University, Texas State Tech University and Texas Tech University.

The Texas A&M bond request aggregates to a sum of $628.8 million dollars. University of Texas is looking to borrow $928.7 million. The remainder of the university systems' planned bond issue totals per project are available in the House's analysis of the bill, available here.

True Public Funding Of Higher Education?

A few months ago, we did our own cursory analysis of a bond issue for an Independent School District. In that analysis, the proposed bond was to borrow money in order to expand the school district to include building two more schools. The bond didn't take into account additional costs such as the payrolls and benefits of the increased human resources. It was basically an effort to borrow from Peter to pay Paul, to whom it already owed a significant sum. The new issue was partially a refinancing deal to "gain money" from paying off the already issued bonds and selling new ones at a lower interest rate. It wasn't saving any money. It was paying less interest in the short run. It was also contingent on selling low-yield municipal bonds in a depressed market when the borrower has almost hit its available credit limit. That proposed bond was in a city with one of the highest per capita public debts in the nation.

The university bond proposal is quite different. The most glaring difference is that the universities charge students tuition and usage fees. They can raise those tuition rates in order to meet their payroll and operating costs. They can market and produce a better product, gaining them more customers. In short, they operate in a more competitive and capitalist market system.

The investment in university bonds can be much more lucrative than ISD bonds. Universities have a greater propensity for revenue (profit) than ISDs, who have none. So, there is a greater chance of a return on the risk/investment. There payout from the ISD bonds is a low return (less than the inflation rate, so the net is a loss, not gain) for a promise of (maybe) better educational opportunities for the students.

With college, there is a great amount of "school choice". Look at billboards, internet, and television advertisements. Do you ever see any for your local public school seeking your business? How about colleges and universities? The latter are competing for business all around. There is an implicit necessity to provide the clients the best product a university can. If they fail, they lose students and risk going out of business.

The only drawback comes with the state guaranteeing the loans. The government used to "cosign" student loans that were issued by private lending institutions. That is what bond purchasers amount to, private lenders. Now, the federal government has nationally socialized the student loan market, directly controlling and issuing the loans. The loans are more available to students, with much lower standards of qualification. That leads to a greater number of defaulted loans. It also led to a drastic inflation of school tuition, including state universities.

While the guarantees from Texas's general fund may secure the bonds, making them a lower risk investment, the risk is to the taxpayers of the state who could get stuck with the bill. Overall, though, these bonds may prove to be rather stable investments for your portfolio.