Austin ISD will save $25 million in borrowing costs after IRS updates school bond program

The IRS recently announced its plans to revise a federally set cap to a program that guarantees bonds for Texas school districts. The program is reaching its $117.3 billion maximum and is threatening to cost districts millions more in interest to issue debt for bond projects.

The federal change raises a limit set in 2009 to about $218 billion at current levels, according to the Texas Education Agency, and means school districts in Texas will save millions on $6.8 billion in bond packages voters approved in the fall.

School districts in Texas must get insurance to back their bond sales, which guarantees to investors that the district will pay back the money. For years, the Permanent School Fund, which has a AAA credit rating, has acted as school districts’ guarantor, which in turn reduces borrowing costs for schools, but the state-run program was nearing its federally set limit before the IRS announced Wednesday its notice of intent for the change.

U.S. Rep. Lloyd Doggett, D-Austin, has been working on either asking the IRS to raise the limit or taking congressional action to do so.

Because the cap was set in 2009, it didn’t reflect current construction costs, he has said in previous statements. With the IRS change, the capacity of the guarantee program will continuously change based on current conditions, effectively updating itself.

This is essentially a permanent fix, Doggett said.

“Every dollar that goes into fostering our children’s public education should be cost-effective for school districts and the taxpayers who approve these bonds,” Doggett said.

Doggett’s office estimates the change will save Texas taxpayers about $425 million per year.

"News of this change by the IRS is a welcome victory for Texas students and taxpayers. Instead of paying millions in higher interest costs, school districts can instead use that money for much-needed facility improvements,” State Board of Education Chairman Keven Ellis said in a statement Thursday.

The newly opened capacity will save the Austin district $25 million on the $2.4 billion bond package that voters approved in November, said Eduardo Ramos, chief financial officer for the district.

“We’re very excited about this decision, not only for our district, Austin ISD, but also districts across the state,” Ramos said.

In January, the district sold about $600 million in bonds from the 2022 package without the benefit of the bond guarantee program, Ramos said. The district had applied to access the program shortly after the bond referendum passed in November, but the TEA rejected the application, he said.

The lack of the program’s guarantee made a difference, he said.

The Austin and Dallas districts both went to the market to sell about $600 million in bonds in January, he said. Though both districts have excellent bond ratings, Austin got a 3.67% interest rate, compared with the 3.57% interest rate in Dallas, which had been accepted into the guarantee program, he said.

“What this decision allows for is us to really minimize our finance costs so we can use these dollars to invest in our facilities,” Ramos said.

The district probably won’t sell more bonds for the 2022 package until January 2024, he said.

This article originally appeared on Austin American-Statesman: IRS school bond fix to save Texas districts millions in borrowing costs