A former chief financial officer for the Dallas Independent School District is taking a job at an investment bank that specializes in school construction financing in Texas, but he’s warning about a potential chilling effect a certain sliver of the local government bond market could feel from the Republican tax plan.
Former DISD CFO James Terry will become managing director at Siebert Cisneros Shank & Co., the firm announced Tuesday. Henry Cisneros, the Housing and Urban Development Department secretary under President Bill Clinton and former mayor of San Antonio, chairs the investment bank’s executive committee.
Terry joins at a time when scores of public schools across the state are overcrowded and badly in need of renovations and expansions. Investment banks have profited from helping school districts issue debt to fund these construction projects when they can.
Over the last twenty years, Terry’s new firm, SCS, has underwritten nearly $18 billion in bonds for 44 school districts in Texas.
But some of this business could soon dry up.
The Republican tax overhaul plans in both the House and Senate contain a wrinkle that could prevent cash-strapped school districts, universities, airports, hospitals, and other local institutions from refinancing their debt through a process used to save local taxpayers on interest rate costs.
Local school districts can pay off outstanding debt before it is due by issuing new “advance refunding bonds” at lower interest rates. The proceeds from the sale of the new bonds are then used to buy enough government-backed securities like Treasuries that are deposited into an escrow account. The holdings are designed to be sufficient enough to allow the school district to use the principal and interest earned on them to pay off the old debt as a roundabout way of refinancing early.
But both proposals in the House and Senate would tax the income school districts receive from these so-called advance refunding bonds, essentially making them too costly to issue in the market and forcing struggling school districts to wait until their debt becomes fully due to refinance it.
While Terry was CFO, the DISD conducted three advance refunding deals.
Many school districts, Terry said, may be scrambling to issue these early bonds while they’re still tax exempt.
“That’s a real glitch right now,” Terry said. “Those school districts are trying to refinance their debt now so they avoid a penalty.”
Current DISD Chief Financial Officer Larry Throm said the district wouldn’t have this opportunity until a set of bonds comes due in 2024. He downplayed the impact from the Republican proposal.
“They’re taking an option away from us certainly, but it’s not disruptive to our system,” Throm said. “We just have to wait until the bond matures and refinance on that date.”
Research has shown that a major driver for school districts and other local agencies to do an advance refunding is that it saves money more immediately even if they prove more costly in the long run. If a school district is scrambling to meet their debt payments, they can issue these bonds to save them money before the old debt comes completely due.
Throm indicated that such deals aren’t for every district and that it may make economic sense for the federal government to recoup this income by repealing the tax exemption.
“Each deal has to be evaluated by itself,” Throm said.
By repealing the tax exemption for these bonds, lawmakers are raising $16.8 billion in revenue through the end of 2027 to offset a small fraction of the previous bill’s tax cuts, which are estimated to increase the deficit by $1.4 trillion.
The tax plan’s fate in the House and Senate is still unknown despite a deal in conference. If the debate lingers into 2018, it could put a freeze on the market for school districts that don’t move quickly enough to issue the bonds under the current tax code, experts warn.
Lawmakers signaled on Wednesday that a deal could soon be reached over the House and Senate plans, but it was unclear if the repeal of these special bonds’ tax exemption remains.
Republican Rep. Pete Sessions from Dallas has pushed back against some proposals, like language that would hike taxes on graduate students, but his office did not respond to requests for comments about whether he supported taxing advance refunding bonds.
Read more from the Dallas Business Journal here.