How are school districts funded?
Texas School districts, like Katy ISD, are funded by two primary revenue sources— local revenue and state revenue.
School District Revenue: Local Property Taxes
Local revenue comes from property taxes paid by residential and commercial taxpayers within the boundaries of a school district. There are two tax rates stated in a property tax bill that make up a total rate. These two rates fund two different portions of a school district's budget. These rates are the Maintenance and Operation or M&O Tax Rate, and the Interest and Sinking, or I&S Tax Rate.
The M&O Tax Rate funds the day to day maintenance and operations of the school district. This is also known as a school district's General Operating Fund. The General Operating Fund is the larger of the two tax rates. The Interest and Sinking Tax Rate can only be used to pay off debt incurred by issuing voter approved bonds. School districts are required to set the I&S tax rate at the level necessary to make the annual debt payments on all outstanding voter approved bonds.
Katy ISD's M&O Tax Rate is currently just under 100 cents, while the I&S Tax Rate is 39 cents, for a total of 139 cents or $1.39 per $100 of taxable value.
Over the past 16 years the M&O Tax Rate has come down from a high of $1.63 in 2005-2006 to the current $1.00 (or $0.9988) level. Changes in the M&O tax rate are largely due to changes in school finance laws over this same period of time.
The Interest and Sinking Tax Rate has been fairly steady for many years. Katy ISD has been able to maintain and sometimes even lower the I&S tax rate due to consistent property tax base growth. The District was in the position to drop the I&S rate by a penny after the 2014 bond authorization. And, in 2019 and 2020, due, in large part to the passing of House Bill 3, Katy ISD was able to keep the I&S at 39 cents, while dropping the Maintenance and Operations Tax Rate, or the General Operating Fund, by 13 cents. The Interest and Sinking Tax Rate is collected and set aside in its own account and used to pay back bonds.
School District Revenue: State Funding
State revenue represents about 45 percent of Katy ISD's budget, while a very small portion of revenue, 2 percent, comes from the federal government.
How is funding allocated to school districts?
School districts are allocated funds based on the number of students they have. A basic allotment of $6,160 per student is currently calculated for each school district, which is funded by local property taxes, sometimes known as the district's local share, plus state provided revenue sometimes referred to as the state's share. With a larger number of students comes increased expenditures for additional teachers and related staff to serve those students.
If local property values increase, the state share of the basic allotment of $6,160 will be less However, if property values decrease, the state share of the $6,160 will be higher. The less wealthy a school district's property tax base is the more state funds the school district will receive. Conversely, if a community can raise more money locally through taxes, the district receives less state funds. Districts with property wealth that generates more than $6,160 per student are required to send excess local tax revenue to the state where it will be redistributed to less wealthy school districts. This is often summarized in school finance in one word – "Robinhood."
2020-21 Budget (GOF/M&O)
Eighty-eight percent (88%) of Katy ISD's M&O budget is currently salary and benefits for teachers, nurses, counselors, maintenance crews, bus drivers and other supporting faculty. The second most significant expense supported by Katy ISD's budget is utilities. Utilities for a district the size of Katy ISD are about $20 million dollars per year.
Software and teacher supplies also represent significant parts of the budget.
The vast majority of what we do as a school district is in the classroom, that is represented by the blue expenditure bar. 67 percent of what we do is put into instruction, and 90 percent of our expenditures are spent on students for instructional purposes and support, counseling, co-curricular activities, transportation, and other personnel support.
Katy ISD uses bonds to fund the capital needs of the district. Capital needs may include new schools, renovations, or updated technology and safety and security.
The district's bond cycle is based on a Long-Range Facilities Plan that accounts for the life cycles of aging building components, technology and safety needs, as well as projected enrollment growth and community feedback.
Over the past 25 years, taxpayer's approval has funded growth by building new schools and addressing aging facility needs through eight Katy ISD bond referendums.
Every 3 to 4 years, based on the District's Long-Range Facilities Plan and demographic data, the school board may consider the formation of a Community Bond Advisory Committee to review capital needs and determine whether a district's bond is warranted. The Committee hears from various internal administrators, as well as external experts, to get a comprehensive overview of the District's needs. Based on their independent review of the Long-Range Facilities Plan, demographic data and capital needs, if the Committee agrees a bond is needed, they will recommend a bond package and election, for the school board to consider and approve.
What is a bond election?
When a school board calls for a bond election, they are asking their local voters to decide if they agree to authorize the district to issue bonds for the identified capital needs.
When a community's taxpayers approve a schools bond, by election, the school district then uses the Interest and Sinking tax rate to repay the debt to investors. In some communities they must raise the interest and sinking tax rate to pay the debt to the investors. In Katy ISD's case, because of the managed growth and many years of successful fiscal management in our bond program, we have not had to raise that tax rate to make required bonded debt payments.
What Does Katy ISD Buy with Bond Funds?
Once a community has approved a bond program, the district then goes through a bid process that, ultimately, puts contracts in place to begin construction on the various projects. Now, it is time to start paying those contracts, so the District sells bonds. Bonds are sold as cash is needed to fund projects such as the construction of new schools or the purchase of new technologies.
Cash from bond sales is used to pay contracted vendor payments every month. Bonds are sold to meet cash requirements for vendor payments. To minimize the amount of interest paid on the District's bond sales, Katy ISD sells bonds as needed, in incremental amounts, rather than selling the entire authorization amount all at once.
The District's consistent and projected tax base growth has allowed Katy ISD to maintain a steady Interest & Sinking tax rate despite the need to sell more bonds due to student growth.
Unlike a homeowner, a school district does not pay for one project/asset with a 30-year mortgage that has equal level payments every year. When we sell bonds, we are likely funding multiple projects with the funds received, so we structure the repayment of the bonds to match the useful lives of those different projects. For example, the useful life cycles of technologies and even building components like rooftops are shorter than the life cycle of a brand new building; therefore, we make certain that we repay the principal amounts associated with those shorter life projects prior to the end of their useful lives. While a bond sale may have a 30-year term, the annual payments are structured to match the useful lives of the projects being financed with that bond sale.
What is the bond market?
There are many different types of bonds. The most common types of bonds are US Treasury bonds, corporate bonds and municipal bonds. School districts utilize municipal bonds. From an investor perspective, a major benefit of municipal bonds is that interest earnings are typically tax exempt, meaning the investor does not have to pay federal income taxes on the interest they receive from owning these tax-exempt bonds.
There are many uses of public debt funded by bonds. In 2019, the most recent data available, across the country 24% of all the bonds that were issued were for education purposes, while 28% were for general purposes.
What is a bond?
A bond is a contract between an Issuer, like Katy ISD, and investors, where the Issuer promises to repay money borrowed from the investors over time at a negotiated, agreed-upon tax exempt interest rate.
How does Katy ISD repay its debt?
Bonds are secured by pledge of the issuer's full faith and credit and taxing power. Full faith and credit implies that all sources of revenue, unless specifically excluded, will be available to pay back the debt service on the bonds. And in Katy ISD's case, our 39 cent Interest and Sinking tax rate has been, and is projected to continue to be sufficient to make the payments on our existing bond debt and projected future bond debt.
Uses for Bond Proceeds: Two Types
Texas school districts issue bonds for two purposes: 1) to pay for the construction, renovation, acquisition and/or equipping of school buildings; and 2) to refinance a portion of the District's outstanding debt in order to achieve a present value savings to the District and its taxpayers. A refunding bond issue is like refinancing a home mortgage to take advantage of lower interest rates. Whenever Katy ISD is presented with an opportunity to refund its bonds, and the bonds are at a position to be refunded, we refund those at a lower interest rate to save interest which also creates capacity for future new borrowings, which is important in a fast growth district. The goal is always to save money for Katy ISD taxpayers, but also to ensure capacity for the future, should the District need to issue additional bonds to build more schools or renovate campuses.
Who participates in a bond issue/Bond Sale?
Katy ISD's auditor annually audits the District's financial books and issues an opinion indicating that our financial records are properly reported and presented so that investors feel confident with the financial condition of the district. Others involved in a bond sale include our Municipal Advisors, Texas Attorney General, the District's bond counsel, and Rating Agencies.
Katy ISD's Municipal Advisor- Hilltop Securities
Katy ISD's municipal advisor is Hilltop securities. They advise us on all matters associated with a bond sale. Their role is to protect the welfare of the district/issuer in financing. They review proposed bond structure terms, interest rates, and so forth, as well as provide historical knowledge of transactions. They know what is going on in the market and how institutions may be able to better structure transactions to get the best pricing available. In short, they formulate a financial plan, they evaluate our financing structure and they identify financial opportunities for us that are in the best interest of the District – allowing us to continue to successfully manage our debt portfolio.
Katy ISD's Bond Counsel
Orrick is Katy ISD's bond counsel. Bond counsel makes sure that the District's bonds are issued while legally protecting both the district and the investor. Counsel is retained to give a legal opinion on the assured compliance. They prepare, review and advise the district on all necessary bond documents and ultimately ensure that the bond issue is approved by the State Attorney General of Texas.
Rating agencies rate the debt of public and private entities. Rating agencies provide the primary analysis of our ability to pay back the funds that Katy ISD borrows. Rating agencies provide a rating to the district, like when someone goes to the bank for a loan and that bank verifies their credit rating. The highest credit quality for a personal credit score is above 800. That would be comparable to an Aaa/AAA bond rating. Moody's ratings include Aaa, Aa1, Aa2, and Aa3; while Standard & Poor's ratings include AAA, AA+, AA, AA1 and A1. Katy ISD is rated Aa1 with Moody's, and AA+ with Standard and Poor's. Katy ISD's rating is considered very strong, and, while we do not currently have the highest possible rating, we are one of only 31 districts out of over 1,000 in the state that has a Moody's rating of Aa1 or better. Also, it is important to understand that Katy ISD's biggest rating challenge is our continuous need to issue new bonds to keep up with our fast growth, which is a challenge for all Texas fast growth districts. Also, like most school districts in Texas, Katy ISD's bonds are backed by the AAA rated Permanent School Fund. The combination of Katy ISD's strong stand-alone ratings plus the AAA Permanent School Fund Guarantee rating ensures that we will obtain the lowest, most competitive interest rates available when we sell bonds.
Katy ISD's Auditors
Katy ISD's auditors are WhitleyPenn. They provide an audit of our financial statements; they authenticate that the district's current financial condition and our historic performance are correctly presented in our audit and test the effectiveness of the District's internal control systems.
When Katy ISD is in the position to go to market for a bond sale, the district forms a financing team. The financing team is led by the district's municipal advisor. Together, we will establish a structure for the financing. We prepare a Preliminary Official Statement to provide to the rating agencies and investors, and we work with potential buyers of our bonds, prior to the sale. We pre-price in an effort to get as many orders as possible for Katy ISD bonds. The bonds are finalized on the pricing date, and close roughly a month later which is when Katy ISD receives the bond proceeds and bond projects.
Types of School Bonds Investors There are different types of investors that buy school bonds. They include retail investors, mutual funds that serve as a strong portion of retail investors' portfolios, investment advisors, banks, and insurance companies. 12.
What happens if the bond is delayed and is not passed in 2021?
The District would be subject to upward inflationary pressure, interest rate risks, and a majority of campuses will be exposed to Districtwide rezoning that could result in overcrowding. However, rezoning the District now would not eliminate the existing and future growth, nor the overcrowding many of our schools are experiencing. The District is only 74.1% built out. Rezoning the District now would only result in another Districtwide rezoning 3-4 years from now. This would be followed by an additional Districtwide rezoning three to four years after that. Demographers project Katy ISD will reach a 100,000 student enrollment in the next seven years. The majority of future growth and development will occur in the northwest quadrant of the District. We do not believe it is in the best interest of our students and families to move Districtwide attendance boundaries every three to four years. It takes away from our neighborhood schools concept and would result in a majority of our schools exceeding maximum design capacity.
What is the historical and anticipated taxable values for the district?
In the past 10 years, from the 2010-2011 fiscal year to the current 2020-2021 fiscal year, the District’s tax base has experienced an average increase of 8.6% per year. In the past five fiscal years, the average increase was 6.5%, even with the impact of Hurricane Harvey. Conservative estimated taxable value growth used in this bond proposal range from 1% to 3% per year through the 2027-2028 fiscal year. Values are held constant for the 2028-2029 year and beyond.
Explain tax rate vs. tax increase due to the increase of property values, especially new families.
The amount of taxes levied by Katy ISD are calculated by multiplying the tax rate set by the District by the taxable value of the property within the District. The taxable values are set by the county appraisal districts. Property values will increase as new businesses move in and new homes are built for incoming families. These increased values will generate more tax revenue, even if the tax rate remains unchanged.
How does multi-family growth impact taxes?
Multi-family apartment complexes impact tax collections and other revenues in several ways. The value of the facility itself will generate local tax revenue, and the students within the multi-family facility will generate state funding. The property tax generated per student may be more or less than that generated by a single family residential home dependent upon the value of the multi-family facility and the number of students housed within the facility.
If the District over estimates future costs and there are funds leftover from the bond, where does the extra money go?
Funds available from project savings have historically been repurposed for other bond order authorized spending. Project savings have occurred in past authorizations due primarily to favorable pricing on construction projects. This created the opportunity to utilize these funds to construct projects including additional schools, property purchases, infrastructure, etc.
What is a general obligation debt?
The specific definition from the Municipal Securities Rulemaking Board (MSRB) is: GENERAL OBLIGATION BOND OR GO BOND Typically refers to a bond issued by a state or local government that is payable from general funds of the issuer, although the precise source and priority of payment for general obligation bonds may vary considerably from issuer to issuer depending on applicable state or local law. Most general obligation bonds are said to entail the full faith and credit (and in many cases the taxing power) of the issuer, depending on applicable state or local law. General obligation bonds issued by local units of government often are payable from (and in some cases solely from) the issuer's ad valorem taxes, while general obligation bonds issued by states often are payable from appropriations made by the state legislature.
Is a strong credit rating combined with Texas guarantee important to consider for obtaining a bond?
Strong credit ratings are important with regard to selling our bonds in a marketplace where they compete for investor dollars. Similar to a personal credit rating, strong credit ratings help the District because bonds we issue are more attractive to investors which results in lower borrowing costs.
With new property growth coming into the District, have we taken into account the tax revenue dollars we will receive?
Yes, an assumption has been made that taxable property values will increase year over year.
Is there a recommended target percentage for a reserve account balance or rule of thumb metric?
Rating agencies generally expect a district to have a Maintenance and Operating fund balance of at least 90 days of expenses. Thirty days or less would be considered a worst practice by the rating agencies. Texas Education Agency (TEA) recommends that districts have at least 75 days of cash in reserves.
What was the percent change in tax base for residential vs. commercial/industry over the past 3 years?
The percentage change for Real Residential, Single-Family from 2017 to 2020 is 11.89%. The percentage change for Real, Commercial and Industrial from 2017 to 2020 is 17.83%. Forecasts are dependent on future assessed values from county appraisal districts - Harris, Fort Bend and Waller.
What is Katy ISD's total bond indebtedness as of August 31, 2020?
2010-A Unlimited Tax Refunding Bonds
2010-C Unlimited Tax School Building Bonds
2012-A Unlimited Tax School Building & Refunding Bonds
2013 Unlimited Tax School Building Bonds
2014-A Unlimited Tax Refunding Bonds
2014-B Limited Tax Refunding Bonds
2015-A Unlimited Tax School Building Bonds
2015-B Unlimited Tax Refunding Bonds
2015-C Variable Rate Unlimited Tax Refunding Bonds
2016-A Unlimited Tax School Building Bonds
2016-B Unlimited Tax Refunding Bonds
2016-C Limited Tax Refunding Bonds
2016-D Unlimited Tax Refunding Bonds
2017 Unlimited Tax School Building Bonds
2018 Unlimited Tax School Building Bonds
2019 Unlimited Tax School Building Bonds
2019-A Unlimited Tax Refunding Bonds
2019-B Unlimited Tax Refunding Bonds
2020 Unlimited Tax School Building Bonds
Total Bonded Debt
What is the total dollar value the bond proposal could reach without increasing the tax rate?
Until the projects to be included in the proposal are determined, this value is unknown. In addition, several variables must be estimated once the projects are determined. The District strives to ensure that estimates of variables are realistic and conservative. The major variables include:
Taxable Assessed Value (TAV) - The District’s current taxable assessed value is approximately $45 billion and we have projected increases of:
2% for 2021-2022
3% for 2022-2023 and 2023-2024
2% for 2024-2025 and 2025-2026
1% for 2026-2027 and 2027-2028
Interest Rates - The District has benefitted from the low interest rate environment in recent years and has been able to issue bonds at very low rates. In fact, interest rates that affect municipal bonds are currently at an all-time low. Current estimates would be that the District could issue bonds at a rate of 2.32% in 2020. The District is modeling current interest rates plus 100 basis points over the next four years.
Useful Lives of Assets Financed - The District structures the bond repayment schedule to match the useful lives of assets being financed. Assets with shorter lives, for example technology with a five-year useful life, will have equivalent principal payments in the first five years of the bond repayment schedule. This compressed repayment schedule puts added pressure on the tax rate. Assets with longer lives, for example a new campus facility with a fifty-year useful life, will have principal payments spread over the 30-year life of the bonds. Actual lives will be determined by the projects included in the authorization.
Cash Flows - Once specific projects are identified; the District will be able to prepare a cash flow indicating when cash will be needed to fund each project. At that time bond sales will be made to provide cash annually based on identified needs. The District sells bonds dependent upon cash needs approximately once per fiscal year. Therefore, bonds would probably be sold annually in increments required to cover cash flow needs anticipated over the next 12-month period. The complete authorization would be issued in approximately 3-4 years depending on the number of projects and size of the authorization.
Fund Balance - The District can decide to utilize the debt service fund balance to manage the debt service tax rate.
Interest Earnings - The District invests its construction funds (bond proceeds) and debt service funds. Interest earned on these funds is deposited into the debt service fund to help manage the tax rate.
- How do bond sales effect tax rates and what happens if interest rates rise in the future?
Bond sales are structured to cover cash needs for a twelve-month period and to repay principal at a rate to match the useful lives of the assets included in the sale. The larger the cash need, the larger the sale and the interest expense incurred. Likewise, if interest rates rise, interest expense will also increase. Either of these will increase pressure on the tax rate. Current projections incorporate interest rates increasing.
- What is the actual growth in taxes/household?
The tax rate remained stable from 2007-08 to 2014-15. In 2015-16 the District was able to lower the tax rate by $0.01 (1 cent). The District was able to lower the tax rate another $0.128 (12.8 cents) over the last two years. Actual growth or increase in a household's school taxes would have resulted from increased property values. Property values are not determined by the school district, but are determined by the county appraisal districts in which the property is located. Katy ISD is located in Waller, Fort Bend and Harris counties.
- What is the District's current total outstanding debt?
As of August 31, 2020, the District's outstanding principal is $1,888,706,959 and estimated associated interest is $1,095,003,240. *Does not include estimated refunding's (to lower interest expense) or calls (to lower principal amounts) currently under review.