TITLE 19. EDUCATION

PART 2. TEXAS EDUCATION AGENCY

CHAPTER 33. STATEMENT OF INVESTMENT OBJECTIVES, POLICIES, AND GUIDELINES OF THE TEXAS PERMANENT SCHOOL FUND

SUBCHAPTER A. STATE BOARD OF EDUCATION RULES

19 TAC §33.65

The State Board of Education (SBOE) adopts an amendment to §33.65, concerning the bond guarantee program (BGP) for school districts. The amendment is adopted with changes to the proposed text as published in the December 16, 2016, issue of the Texas Register (41 TexReg 9840). The adopted amendment increases the multiplier used in calculating the capacity of the Permanent School Fund (PSF).

REASONED JUSTIFICATION. The Texas Education Code (TEC), §7.102(c)(33), authorizes the SBOE to adopt rules for the implementation of the PSF BGP as authorized in the TEC, Chapter 45, School District Funds, Subchapter C, Guaranteed Bonds. The TEC, §45.063, authorizes the SBOE to adopt rules necessary for the administration of the program. Section 33.65 is the rule the SBOE adopted to implement the program.

Section 33.65 sets out the statutory provisions for the BGP, provides definitions, specifies bond eligibility requirements, and explains the requirements of and policies related to the program's application process. The rule also describes how PSF capacity to guarantee bonds is determined, provides limitations on access to the program, and allows for the commissioner to allocate specific holdings of the PSF under certain conditions. In addition, the rule provides requirements specific to districts that have declared financial exigency, explains what effect defeasance has on guaranteed bonds, and sets out specific program conditions for bonds issued or guaranteed on certain specified dates. The rule also explains program payment conditions and guarantee restrictions.

Under the TEC, §45.053, the board has authority to increase the multiplier used in the calculation of the PSF capacity to guarantee bonds. The adopted amendment to 19 TAC §33.65 increases the multiplier in subsection (e)(1) to three and one-half times the cost value of the PSF effective March 1, 2017, and three and three-fourths times the cost value of the PSF effective September 1, 2017. A change was made at adoption to clarify in subsection (e)(1) that under no circumstances could the capacity of the fund exceed the limits set by federal regulation.

The amendment was approved by the SBOE for first reading and filing authorization at its November 18, 2016, meeting and for second reading and final adoption at its February 3, 2017, meeting.

In accordance with the TEC, §7.102(f), the SBOE approved the amendment for adoption by a vote of two-thirds of its members to specify an effective date earlier than the beginning of the 2017-2018 school year. The earlier effective date will enable the Bond Guarantee Program (BGP) to recommence providing guarantees to open-enrollment charter schools. This part of the guarantee program is currently frozen due to a lack of available capacity.

SUMMARY OF COMMENTS AND RESPONSES. Following is a summary of the public comments received and the corresponding responses regarding the proposed amendment to 19 TAC §33.65.

Comment. Two individuals commented that increasing the multiplier used to calculate the capacity of the PSF BGP to allow access to additional charter schools would subject the PSF to risks because a charter school revenue bond does not offer the same safeguards as a school district unlimited tax bond. The individuals added that the eligibility criteria for charter schools to obtain a PSF bond guarantee should be stricter because of this difference in safeguards.

Response. The SBOE disagrees. The current review process and safeguards are sufficient to protect the PSF.

STATUTORY AUTHORITY. The amendment is adopted under the Texas Education Code (TEC), §7.102(c)(33), which requires the State Board of Education (SBOE) to adopt an annual report on the status of the guaranteed bond program and authorizes the SBOE to adopt rules as necessary to administer the bond guarantee program; TEC, §45.053(d), which grants the SBOE the authority to increase by rule the multiplier used in calculating the capacity of the fund; TEC, §45.063, which authorizes the SBOE to adopt rules necessary for the administration of the bond guarantee program; and Texas Constitution, Article VII, §5(d), which authorizes the legislature to use the permanent school fund to establish a bond guarantee program that has been enacted under the TEC, Chapter 45, Subchapter C.

CROSS REFERENCE TO STATUTE. The amendment implements the Texas Education Code, §§7.102(c)(33), 45.053(d), and 45.063, and the Texas Constitution, Article VII, §5(d).

§33.65.Bond Guarantee Program for School Districts.

(a) Statutory provision. The commissioner of education must administer the guarantee program for school district bonds according to the provisions of the Texas Education Code (TEC), Chapter 45, Subchapter C.

(b) Definitions. The following definitions apply to the guarantee program for school district bonds.

(1) Annual debt service--Payments of principal and interest on outstanding bonded debt scheduled to occur between September 1 and August 31 during the fiscal year in which the guarantee is sought as reported by the Municipal Advisory Council (MAC) of Texas or its successor, if the district has outstanding bonded indebtedness.

(A) The annual debt service will be determined by the current report of the bonded indebtedness of the district as reported by the MAC of Texas or its successor as of the date of the application deadline.

(B) The annual debt service does not include:

(i) the amount of debt service to be paid on the bonds for which the reservation is sought; or

(ii) the amount of debt service attributable to any debt that is no longer outstanding at the application deadline, provided that the Texas Education Agency (TEA) has sufficient evidence of the discharge or defeasance of such debt.

(C) Solely for the purpose of this calculation, the debt service amounts for variable rate bonds will be those that are published in the final official statement, or if there is no official statement, debt service amounts based on the maximum rate permitted by the bond order or other bond proceeding that establishes a maximum interest rate for the bonds.

(2) Application deadline--The last business day of the month in which an application for a guarantee is filed. Applications must be submitted electronically through the website of the MAC of Texas or its successor by 5:00 p.m. on the last business day of the month to be considered in that month's application processing.

(3) Average daily attendance (ADA)--Total refined average daily attendance as defined by the TEC, §42.005.

(4) Bond--A debt security issuance approved by the attorney general, issued under the TEC, §45.003 or §45.004, to provide long-term financing with a maturity schedule of at least three years.

(5) Bond Guarantee Program (BGP)--The guarantee program that is described by this section and established under the TEC, Chapter 45, Subchapter C.

(6) Bond order--The order adopted by the governing body of a school district that authorizes the issuance of bonds and the pricing certificate, if any, establishing the terms of the bonds executed pursuant to such order.

(7) Combination issue--An issuance of bonds for which an application for a guarantee is filed that includes both a new money portion and a refunding portion, as permitted by the Texas Government Code, Chapter 1207. The eligibility of combination issues for the guarantee is limited by the eligibility of the new money and refunding portions as defined in this subsection.

(8) Enrollment growth--Growth in student enrollment, as defined by §129.1025 of this title (relating to Adoption by Reference: Student Attendance Accounting Handbook), that has occurred over the previous five school years.

(9) Nationally recognized investment rating firm--An investment rating firm that is designated by the United States Securities and Exchange Commission as a nationally recognized statistical rating organization (NRSRO) and is demonstrating that it has:

(A) had its current NRSRO designation for at least three consecutive years;

(B) provided credit ratings to each of the following:

(i) fifteen or more fixed income securities denominated in United States dollars and issued during the immediately preceding three years; and

(ii) ten or more school districts in the United States; and

(C) a documented separation of duties between employees involved in credit analysis and employees involved in business relationships with clients.

(10) New money issue--An issuance of bonds for the purposes of constructing, renovating, acquiring, and equipping school buildings; the purchase of property; or the purchase of school buses. An issuance of bonds for the purpose of constructing teacher or student housing is eligible for the guarantee for new money only if it is an integral part of the educational mission of the school district as determined by the commissioner. Eligibility for the guarantee for new money issues is limited to the issuance of bonds authorized under the TEC, §45.003. A new money issue does not include the issuance of bonds to purchase a facility from a public facility corporation created by the school district or to purchase any property that is currently under a lease-purchase contract under the Local Government Code, Chapter 271, Subchapter A. A new money issue does not include an issuance of bonds to refinance any type of maintenance tax-supported debt. Maintenance tax-supported debt includes, but is not limited to:

(A) time warrants or loans entered under the TEC, Chapter 45, Subchapter E; or

(B) any other type of loan or warrant that is not supported by bond taxes as defined by the TEC, §45.003.

(11) Notes issued to provide interim financing--An issuance of notes, including commercial paper notes, designed to provide short-term financing for the purposes of constructing, renovating, acquiring, and equipping school buildings; the purchase of property; or the purchase of school buses. For notes to be eligible for the guarantee under this section, the notes must be:

(A) issued to pay costs for which bonds have been authorized at an election occurring before the issuance of the notes;

(B) approved by the attorney general or issued in accordance with proceedings that have been approved by the attorney general; and

(C) refunded by bonds issued to provide long-term financing no more than three years from the date of issuance of such notes, provided that the date of issuance of notes will be determined by reference to the date on which the notes were issued for capital expenditures and the intervening date or dates of issuance of any notes issued to refinance outstanding notes will be disregarded.

(12) Refunding issue--An issuance of bonds for the purpose of refunding bonds, including notes issued to provide interim financing, that are supported by bond taxes as defined by the TEC, §45.003. Eligibility for the guarantee for refunding issues is limited to refunding issues that refund bonds, including notes issued to provide interim financing, that were authorized by a bond election under the TEC, §45.003.

(13) Total debt service--Total outstanding principal and interest on bonded debt.

(A) The total debt service will be determined by the current report of the bonded indebtedness of the district as reported by the MAC of Texas or its successor as of the date of the application deadline, if the district has outstanding bonded indebtedness.

(B) The total debt service does not include:

(i) the amount of debt service to be paid on the bonds for which the reservation is sought; or

(ii) the amount of debt service attributable to any debt that is no longer outstanding at the application deadline, provided that the TEA has sufficient evidence of the discharge or defeasance of such debt.

(C) Solely for the purpose of this calculation, the debt service amounts for variable rate bonds will be those that are published in the final official statement, or if there is no official statement, debt service amounts based on the maximum rate permitted by the bond order or other bond proceeding that establishes a maximum interest rate for the bonds.

(c) Data sources.

(1) The following data sources will be used for purposes of prioritization:

(A) projected ADA for the current school year as adopted by the legislature for appropriations purposes;

(B) final property values certified by the comptroller of public accounts, as described in the Texas Government Code, Chapter 403, Subchapter M, for the tax year preceding the year in which the bonds will be issued. If final property values are unavailable, the most recent projection of property values by the comptroller, as described in the Texas Government Code, Chapter 403, Subchapter M, will be used;

(C) debt service information reported by the MAC of Texas or its successor as of the date of the application deadline; and

(D) enrollment information reported to the Public Education Information Management System (PEIMS) for the five-year time period ending in the year before the application date.

(2) The commissioner may consider adjustments to data values determined to be erroneous or not reflective of current conditions before the deadline for receipt of applications for that application cycle.

(d) Bond eligibility.

(1) Only those combination, new money, and refunding issues as defined in subsection (b)(7), (10), and (12), respectively, of this section are eligible to receive the guarantee.

(2) Refunding issues must comply with the following requirements to retain eligibility for the guarantee for the refunding bonds, except that subparagraph (C) of this paragraph does not apply to a refunding issue that provides long-term financing for notes issued to provide interim financing.

(A) As with any district applying for approval for the guarantee, the district issuing the refunding bonds must meet the requirements for initial approval specified in subsection (g)(2)(A) of this section.

(B) The bonds to be refunded must have been:

(i) previously guaranteed by the Permanent School Fund (PSF) or approved for credit enhancement under §61.1038 of this title (relating to School District Bond Enhancement Program);

(ii) issued on or after November 1, 2008, and before January 1, 2010; or

(iii) issued as notes to provide interim financing as defined in subsection (b)(11) of this section.

(C) The district must demonstrate that issuing the refunding bond(s) will result in a present value savings to the district and that the refunding bond or bonds will not have a maturity date later than the final maturity date of the bonds being refunded. Present value savings is determined by computing the net present value of the difference between each scheduled payment on the original bonds and each scheduled payment on the refunding bonds. Present value savings must be computed at the true interest cost of the refunding bonds. If the commissioner approves refunding bonds for the guarantee based on evidence of present value savings but at the time of the sale of the refunding bonds a present value savings is not realized, the commissioner may revoke the approval of the bonds for the guarantee.

(D) The refunding transaction must comply with the provisions of subsection (g)(4)(A)-(C) of this section.

(3) If a district files an application for a combination issue, the application will be treated as an application for a single issue for the purposes of eligibility for the guarantee. A guarantee for the combination issue will be awarded only if both the new money portion and the refunding portion meet all of the applicable eligibility requirements described in this section. As part of its application, the applicant district must present data that demonstrate compliance for both the new money portion of the issue and the refunding portion of the issue.

(4) If the commissioner determines that an applicant has deliberately misrepresented information related to a bond issue to secure a guarantee, the commissioner must revoke the approval of the bonds for the guarantee.

(e) Determination of PSF capacity to guarantee bonds.

(1) Each month the commissioner will estimate the available capacity of the PSF. If necessary, the commissioner will confirm that the PSF has sufficient capacity to guarantee the bonds before the issuance of the final approval for the guarantee in accordance with subsection (g)(3) of this section. The calculation of capacity will be based on a multiplier of three and one-half times the cost value of the PSF effective March 1, 2017, and a multiplier of three and three-fourths times the cost value of the PSF effective September 1, 2017, with the proviso that under no circumstances could the capacity of the fund exceed the limits set by federal regulation. The commissioner may reduce the multiplier to maintain the AAA credit rating of the PSF. Changes to the multiplier made by the commissioner are to be ratified or rejected by the State Board of Education (SBOE) at the next meeting for which the item can be posted.

(2) The SBOE will establish an amount of capacity to be held in reserve of no less than 5.0% of the fund's capacity. The reserved capacity can be used to award guarantees for districts that experience unforeseen catastrophes or emergencies that require the renovation or replacement of school facilities as described in the TEC, §44.031(h). The amount to be held in reserve may be increased by a majority vote of the SBOE based on changes in the asset allocation and risk in the portfolio and unrealized gains in the portfolio, or by the commissioner as necessary to prudently manage fund capacity. Changes to the amount held in reserve made by the commissioner are to be ratified or rejected by the SBOE at the next meeting for which the item can be posted.

(3) The net capacity of the PSF to guarantee bonds is determined by subtracting the amount to be held in reserve, as determined under paragraph (2) of this subsection, from the total available capacity, as described in paragraph (1) of this subsection.

(f) Application process and application processing.

(1) Application submission and fee. A district must apply to the commissioner for the guarantee of eligible bonds or the credit enhancement of eligible bonds as authorized under §61.1038 of this title by submitting an application electronically through the website of the MAC of Texas or its successor. The district must submit the information required under the TEC, §45.055(b), and this section and any additional information the commissioner may require. The application and all additional information required by the commissioner must be received before the application will be processed. The district may not submit an application for a guarantee or credit enhancement before the successful passage of an authorizing proposition.

(A) The application fee is $1,500.

(B) The fee is due at the time the application for the guarantee or the credit enhancement is submitted. An application will not be processed until the fee has been remitted according to the directions provided on the website of the MAC of Texas or its successor and received by the TEA.

(C) The fee will not be refunded to a district that:

(i) is not approved for the guarantee or the credit enhancement; or

(ii) does not sell its bonds before the expiration of its approval for the guarantee or the credit enhancement.

(D) The fee may be transferred to a subsequent application for the guarantee or the credit enhancement by the district if the district withdraws its application and submits the subsequent application before the expiration of its approval for the guarantee or the credit enhancement.

(2) Application prioritization and processing. Applications will be prioritized based on districts' property wealth per ADA, with the application of a district with a lower property wealth per ADA prioritized before that of a district with a higher property wealth per ADA. All applications received during a calendar month will be held until up to the 15th business day of the subsequent month. On or before the 15th business day of each month, the commissioner will announce the results of the prioritization and process applications for initial approval for the guarantee, up to the available net capacity as of the application deadline, subject to the requirements of this section.

(A) Approval for guarantees will be awarded each month beginning with the districts with the lowest property wealth per ADA until the PSF reaches its net capacity to guarantee bonds.

(B) Approval for guarantees will be awarded based on the fund's capacity to fully guarantee the bond issue for which the guarantee is sought. Applications for bond issues that cannot be fully guaranteed will not receive an award. The amount of bond issue for which the guarantee was requested may not be modified after the monthly application deadline for the purposes of securing the guarantee during the award process. If PSF net capacity has been exhausted, the commissioner will process the application for approval of the credit enhancement as specified in §61.1038 of this title.

(C) The actual guarantee of the bonds is subject to the approval process prescribed in subsection (g) of this section.

(D) An applicant school district is ineligible for consideration for the guarantee if its lowest credit rating from any nationally recognized investment rating firm as defined in subsection (b)(9) of this section is the same as or higher than that of the PSF.

(3) Late application. An application received after the application deadline will be considered a valid application for the subsequent month, unless withdrawn by the submitting district before the end of the subsequent month.

(4) Notice of application status. Each district that submits a valid application will be notified of the application status within 15 business days of the application deadline.

(5) Reapplication. If a district does not receive approval for the guarantee or for any reason does not receive approval of the bonds from the attorney general within the time period specified in subsection (g)(4) of this section, the district may reapply in a subsequent month. Applications that were denied approval for the guarantee will not be retained for consideration in subsequent months.

(g) Approval for the guarantee; district responsibilities on receipt of approval.

(1) Initial and final approval provisions.

(A) If, during the monthly estimation of PSF capacity described in subsection (e)(1) of this section, the commissioner determines that the available capacity of the PSF is 10% or less, the commissioner may require an applicant school district to obtain final approval for the guarantee as described in paragraph (3) of this subsection.

(B) If the commissioner has not made such a determination:

(i) the commissioner will consider the initial approval described in paragraph (2) of this subsection as both the initial and final approval; and

(ii) an applicant school district that has received notification of initial approval for the guarantee, as described in paragraph (2) of this subsection, may consider that notification as notification of initial and final approval for the guarantee and may complete the sale of the applicable bonds.

(2) Initial approval.

(A) The following provisions apply to all applications for the guarantee, regardless of whether an application is for a new money, refunding, or combination issue. Under the TEC, §45.056, the commissioner will investigate the applicant school district's accreditation status and financial status. A district must be accredited and financially sound to be eligible for initial approval by the commissioner. The commissioner's review will include the following:

(i) the purpose of the bond issue;

(ii) the district's accreditation status as defined by §97.1055 of this title (relating to Accreditation Status) in accordance with the following:

(I) if the district's accreditation status is Accredited, the district will be eligible for consideration for the guarantee;

(II) if the district's accreditation status is Accredited-Warned or Accredited-Probation, the commissioner will investigate the underlying reason for the accreditation rating to determine whether the accreditation rating is related to the district's financial soundness. If the accreditation rating is related to the district's financial soundness, the district will not be eligible for consideration for the guarantee; or

(III) if the district's accreditation status is Not Accredited-Revoked, the district will not be eligible for consideration for the guarantee;

(iii) the district's compliance with statutes and rules of the TEA; and

(iv) the district's financial status and stability, regardless of the district's accreditation rating, including approval of the bonds by the attorney general under the provisions of the TEC, §45.0031 and §45.005.

(B) The following limitation applies to applications for new money issues of bonds for which the election authorizing the issuance of the bonds was called after July 15, 2004. The commissioner will limit approval for the guarantee to a district that has, at the time of the application for the guarantee, less than 90% of the annual debt service of the district with the highest annual debt service per ADA, as determined by the commissioner annually, or less than 90% of the total debt service of the district with the highest total debt service per ADA, as determined by the commissioner annually. The limitation will not apply to school districts that have enrollment growth, as defined in subsection (b)(8) of this section, of at least 25%, based on PEIMS data on enrollment available at the time of application. The annual debt service amount is the amount defined by subsection (b)(1) of this section. The total debt service amount is the amount defined by subsection (b)(13) of this section.

(C) The commissioner will grant or deny initial approval for the guarantee based on the review described in subparagraph (A) of this paragraph and the limitation described in subparagraph (B) of this paragraph and will provide an applicant district whose application has received initial approval for the guarantee written notice of initial approval.

(3) Final approval. The provisions of this paragraph apply only as described in paragraph (1) of this subsection. A district must receive final approval before completing the sale of the bonds for which the district has received notification of initial approval.

(A) A district that has received initial approval must provide a written notice to the TEA two business days before issuing a preliminary official statement (POS) for the bonds that are eligible for the guarantee or two business days before soliciting investment offers, if the bonds will be privately placed without the use of a POS.

(i) The district must receive written confirmation from the TEA that the capacity continues to be available before proceeding with the public or private offer to sell bonds.

(ii) The TEA will provide this notification within one business day of receiving the notice of the POS or notice of other solicitation offers to sell the bonds.

(B) A district that received confirmation from the TEA in accordance with subparagraph (A) of this paragraph must provide written notice to the TEA of the placement of an item to approve the bond sale on the agenda of a meeting of the school board of trustees no later than two business days before the meeting. If the bond sale is completed pursuant to a delegation by the board to a pricing officer or committee, notice must be given to the TEA no later than two business days before the execution of a bond purchase agreement by such pricing officer or committee.

(i) The district must receive written confirmation from the TEA that the capacity continues to be available for the bond sale before the approval of the sale by the school board of trustees or by the pricing officer or committee.

(ii) The TEA will provide this notification within one business day before the date that the district expects to complete the sale by official action of the board or of a pricing officer or committee.

(C) The TEA will process requests for final approval from districts that have received initial approval on a first come, first served basis. Requests for final approval must be received before the expiration of the initial approval.

(D) A district may provide written notification as required by this paragraph by facsimile transmission or by email in a manner prescribed by the commissioner.

(4) District responsibilities on receipt of approval.

(A) Once a district is awarded initial approval for the guarantee, each issuance of the bonds must be approved by the attorney general within 180 days of the date of the letter granting the approval for the guarantee. The initial approval for the guarantee will expire at the end of the 180-day period. The commissioner may extend the 180-day period, based on extraordinary circumstances, on receiving a written request from the district or the attorney general before the expiration of the 180-day period.

(B) If the bonds are not approved by the attorney general within 180 days of the date of the letter granting the approval for the guarantee, the commissioner will consider the application withdrawn, and the district must reapply for a guarantee.

(C) If applicable, the district must comply with the provisions for final approval described in paragraph (3) of this subsection to maintain approval for the guarantee.

(D) A district may not represent bonds as guaranteed for the purpose of pricing or marketing the bonds before the date of the letter granting approval for the guarantee.

(h) Financial exigency. The following provisions describe how a declaration of financial exigency under §109.2001 of this title (relating to Financial Exigency) affects a district's application for guarantee approval or a district's previously granted approval.

(1) Application for guarantee of new money issue. The commissioner will deny approval of an application for the guarantee of a new money issue if the applicant school district has declared a state of financial exigency for the district's current fiscal year. The denial of approval will be in effect for the duration of the applicable fiscal year unless the district can demonstrate financial stability.

(2) Approval granted before declaration. If in a given district's fiscal year the commissioner grants approval for the guarantee of a new money issue and the school district subsequently declares a state of financial exigency for that same fiscal year, the district must immediately notify the commissioner and may not offer the bonds for sale unless the commissioner determines that the district may proceed.

(3) Application for guarantee of refunding issue. The commissioner will consider an application for the guarantee of a refunding issue that meets all applicable requirements specified in this section even if the applicant school district has declared a state of financial exigency for the district's current fiscal year. In addition to fulfilling all applicable requirements specified in this section, the applicant school district must also describe, in its application, the reason financial exigency was declared and how the refunding issue will support the district's financial recovery plan.

(i) Allocation of specific holdings. If necessary to successfully operate the BGP, the commissioner may allocate specific holdings of the PSF to specific bond issues guaranteed under this section. This allocation will not prejudice the right of the SBOE to dispose of the holdings according to law and requirements applicable to the fund; however, the SBOE will ensure that holdings of the PSF are available for a substitute allocation sufficient to meet the purposes of the initial allocation. This allocation will not affect any rights of the bond holders under law.

(j) Defeasance. The guarantee will be completely removed when bonds guaranteed by the BGP are defeased, and such a provision must be specifically stated in the bond order. If bonds guaranteed by the BGP are defeased, the district must notify the commissioner in writing within ten calendar days of the action.

(k) Bonds issued before August 15, 1993. For bonds issued before August 15, 1993, a school district seeking the guarantee of eligible bonds must certify that, on the date of issuance of any bond, no funds received by the district from the Available School Fund (ASF) are reasonably expected to be used directly or indirectly to pay the principal or interest on, or the tender or retirement price of, any bond of the political subdivision or to fund a reserve or placement fund for any such bond.

(l) Bonds guaranteed before December 1, 1993. For bonds guaranteed before December 1, 1993, if a school district cannot pay the maturing or matured principal or interest on a guaranteed bond, the commissioner will cause the amount needed to pay the principal or interest to be transferred to the district's paying agent solely from the PSF and not from the ASF. The commissioner also will direct the comptroller of public accounts to withhold the amount paid, plus interest, from the first state money payable to the district, excluding payments from the ASF.

(m) Bonds issued after August 15, 1993, and guaranteed on or after December 1, 1993. If a school district cannot pay the maturing or matured principal or interest on a guaranteed bond, the commissioner will cause the amount needed to pay the principal or interest to be transferred to the district's paying agent from the PSF. The commissioner also will direct the comptroller of public accounts to withhold the amount paid, plus interest, from the first state money payable to the district, regardless of source, including the ASF.

(n) Payments. For purposes of the provisions of the TEC, Chapter 45, Subchapter C, matured principal and interest payments are limited to amounts due on guaranteed bonds at scheduled maturity, at scheduled interest payment dates, and at dates when bonds are subject to mandatory redemption, including extraordinary mandatory redemption, in accordance with the terms of the bond order. All such payment dates, including mandatory redemption dates, must be specified in the bond order or other document pursuant to which the bonds initially are issued. Without limiting the provisions of this subsection, payments attributable to an optional redemption or a right granted to a bondholder to demand payment on a tender of such bonds according to the terms of the bonds do not constitute matured principal and interest payments.

(o) Guarantee restrictions. The guarantee provided for eligible bonds under the provisions of the TEC, Chapter 45, Subchapter C, is restricted to matured bond principal and interest. The guarantee applies to all matured interest on eligible bonds, whether the bonds were issued with a fixed or variable interest rate and whether the interest rate changes as a result of an interest reset provision or other bond order provision requiring an interest rate change. The guarantee does not extend to any obligation of a district under any agreement with a third party relating to bonds that is defined or described in state law as a "bond enhancement agreement" or a "credit agreement," unless the right to payment of such third party is directly as a result of such third party being a bondholder.

(p) Notice of default. A school district that has determined that it is or will be unable to pay maturing or matured principal or interest on a guaranteed bond must immediately, but not later than the fifth business day before maturity date, notify the commissioner.

(q) Payment from PSF.

(1) Immediately after the commissioner receives the notice described in subsection (p) of this section, the commissioner will instruct the comptroller to transfer from the appropriate account in the PSF to the district's paying agent the amount necessary to pay the maturing or matured principal or interest.

(2) Immediately after receipt of the funds for payment of the principal or interest, the paying agent must pay the amount due and forward the canceled bond or coupon to the comptroller. The comptroller will hold the canceled bond or coupon on behalf of the PSF.

(3) Following full reimbursement to the PSF with interest, the comptroller will further cancel the bond or coupon and forward it to the school district for which payment was made. Interest will be charged at the rate determined under the Texas Government Code, §2251.025(b). Interest will accrue as specified in the Texas Government Code, §2251.025(a) and (c).

(r) Bonds not accelerated on default. If a school district fails to pay principal or interest on a guaranteed bond when it matures, other amounts not yet mature are not accelerated and do not become due by virtue of the school district's default.

(s) Reimbursement of PSF. If payment from the PSF is made on behalf of a school district, the school district must reimburse the amount of the payment, plus interest, in accordance with the requirements of the TEC, §45.061.

(t) Repeated failure to pay. If a total of two or more payments are made under the BGP or the credit enhancement program authorized under §61.1038 of this title on the bonds of a school district, the commissioner will take action in accordance with the provisions of the TEC, §45.062.

The agency certifies that legal counsel has reviewed the adoption and found it to be a valid exercise of the agency's legal authority.

Filed with the Office of the Secretary of State on February 9, 2017.

TRD-201700574

Cristina De La Fuente-Valadez

Director, Rulemaking

Texas Education Agency

Effective date: March 1, 2017

Proposal publication date: December 16, 2016

For further information, please call: (512) 475-1497


CHAPTER 89. ADAPTATIONS FOR SPECIAL POPULATIONS

SUBCHAPTER AA. COMMISSIONER'S RULES CONCERNING SPECIAL EDUCATION SERVICES

DIVISION 7. DISPUTE RESOLUTION

19 TAC §§89.1151, 89.1165, 89.1175, 89.1180, 89.1183, 89.1185, 89.1186, 89.1191 - 89.1193

The Texas Education Agency (TEA) adopts amendments to §§89.1151, 89.1165, 89.1175, 89.1180, 89.1183, 89.1185, 89.1186, 89.1191, and 89.1193 and new §89.1192, concerning special education services. The amendments to §§89.1151, 89.1165, 89.1175, 89.1180, 89.1183, 89.1185, 89.1186, and 89.1191 and new §89.1192 are adopted without changes to the proposed text as published in the November 25, 2016, issue of the Texas Register (41 TexReg 9209) and will not be republished. The amendment to §89.1193 is adopted with changes to the proposed text as published in the November 25, 2016, issue of the Texas Register (41 TexReg 9209). The adopted amendments and new section add a rule regarding a court's award of attorneys' fees under the Individuals with Disabilities Education Act (IDEA), 20 U.S.C. §1400, et seq.; clarify the circumstances under which a party may request and the procedural rules that apply to an expedited due process hearing requested under IDEA; amend a rule regarding the assignment of mediators to mediations requested under IDEA; and make minor technical corrections and clarifications.

REASONED JUSTIFICATION. IDEA and its implementing regulations provide that parents and public agencies may request mediation and due process hearings when disputes arise regarding the identification, evaluation, or educational placement of a child with a disability or the provision of a free appropriate public education to the child. IDEA requires TEA, as the state educational agency, to offer mediation as a dispute resolution mechanism and to conduct due process hearings and have procedural safeguards in effect to ensure that each public agency in the state meets the IDEA requirements.

Chapter 89, Division 7, is revised to clarify dispute resolution rules as follows.

Section 89.1151, Special Education Due Process Hearings, is amended to make minor technical changes to use plain language and for consistency.

Section 89.1165, Request for Special Education Due Process Hearing, is amended to make a minor technical change to use plain language.

Section 89.1175, Representation in Special Education Due Process Hearings, is amended to make minor technical changes to use plain language.

Section 89.1180, Prehearing Procedures, is amended to make minor technical changes to use plain language and for consistency.

Section 89.1183, Resolution Process, is amended to make minor technical changes to use plain language.

Section 89.1185, Hearing Procedures, is amended to make minor technical changes to use plain language.

Section 89.1186, Extensions of Time, is amended to make minor technical changes to use plain language.

Section 89.1191, Special Rule for Expedited Due Process Hearings, is amended to clarify that an expedited due process hearing may be requested by a parent to appeal a disciplinary placement decision or a manifestation determination or by a school district to appeal a current placement decision that is substantially likely to result in injury to the child or others. The rule is also amended to clarify that the timelines that apply to expedited due process hearings are mandatory and that requests for expedited due process hearings may not be amended or challenged as insufficient. Finally, the rule is amended to make minor technical edits.

New §89.1192, Attorneys' Fees, is added to clarify that, consistent with IDEA, a court may award attorneys' fees to the prevailing party in a due process hearing under certain circumstances.

Section 89.1193, Special Education Mediation, is amended in subsection (f) to align with IDEA and clarify that TEA will select mediators on a random, rotational, or other impartial basis. New language in subsection (f) also explains that TEA will provide the parties with written notice of the specific mediator selected to conduct the mediation. In addition, the rule is amended to make minor technical changes. In response to public comment, subsection (f) was modified at adoption to provide that selection of a mediator on an impartial basis includes allowing the parties to agree on the mediator, to instruct parties who mutually agree on a mediator to advise TEA of the desired mediator, and to specify that parties must not contact a mediator until TEA has provided the parties with written notice of the mediator assignment.

SUMMARY OF COMMENTS AND AGENCY RESPONSES. The public comment period on the proposal began November 25, 2016, and ended December 27, 2016, and included public hearings that were held on Thursday, December 8, 2016, and Friday, December 9, 2016. Following is a summary of public comments received, including those received at the public hearings, and corresponding agency responses.

Comment: Disability Rights Texas (DRTx) commented in support of the proposed amendment to 19 TAC §89.1191. DRTx considers the proposed amendment to be consistent with federal law and appropriate.

Agency Response: The agency agrees.

Comment: DRTx commented that proposed new 19 TAC §89.1192 is unnecessary, confusing, and does not assist courts in ruling on requests for attorneys' fees.

Agency Response: The agency disagrees. The rule was proposed in response to guidance from the U.S. Department of Education's Office of Special Education Programs that each state should address 34 Code of Federal Regulations, §300.517, in its state policies and procedures.

Comment: DRTx, the Texas Council of Administrators of Special Education, the Texas Association of School Boards, 13 parent attorneys, 6 school district attorneys, a school district attorney on behalf of her law firm and 4 school district clients, 2 parent advocates, and 3 school district administrators commented that the provision in proposed 19 TAC §89.1193(f) that reserves for the agency the right to make the final mediator selection based on various program considerations should not be adopted. According to the commenters, the current procedure of allowing the parties to agree on a mediator has historically worked very well and is essential to successful mediations because it enables the parties to be vested in the process and to work with a mediator they trust.

Sixteen attorneys commented that they use their professional judgment to select a mediator based on the issues, temperament of the parties, and tone of the dispute. The attorneys also noted that differing skill sets among the mediators play a role in their selection decisions. An administrator commented that the parties have greater knowledge than the agency in determining which mediator is best suited to a particular dispute. Another administrator commented that school districts would be far less likely to agree to mediation if not allowed to jointly select the mediator.

Agency Response: The agency appreciates the comments and provides the following clarification. The proposed amendment was not intended to eliminate entirely the current procedure that allows the parties to agree on a mediator. The proposed amendment was intended to give the agency some flexibility to propose another mediator in certain situations. The current procedure has resulted in a majority of the mediations being assigned to several mediators from the same region. Not only does this result in mediations not being conducted as promptly as they could if they were distributed more evenly among the contract mediators, but it hinders the agency's ability to maintain a sufficient number of qualified mediators willing to contract with the state to provide mediation services. Due to the commenters' concerns, however, the agency has modified the proposed amendment at adoption. Specifically, the agency has deleted the provision in proposed 19 TAC §89.1193(f) stating that the agency will consider the parties' request for a mediator but reserves the right to make the final mediator selection. The agency has replaced the provision with a sentence stating, "Selecting mediators on an impartial basis includes permitting the parties involved in a dispute to agree on a mediator from the TEA's list of mediators." In addition, a conforming change was made to state, "If the parties agree to a mediator, they must advise the TEA of the desired mediator." In response to another comment, the agency has made revisions to clarify the statement prohibiting the parties from contacting a mediator to discuss the mediator's availability. Because the agency believes that the prompt scheduling of mediations and the equitable distribution of cases are worthy program considerations, the agency will seek input from stakeholders regarding possible options for modifying the mediation procedures in the future.

Comment: An attorney and a parent advocate commented that the proposed amendment to 19 TAC §89.1193(f) is based on the internal administration of the program, not on the goal of fostering successful dispute resolution. In addition, two attorneys stated that the success of the mediation should be a more important consideration than the desire to level out the distribution of work among mediators.

Agency Response: The agency disagrees. IDEA requires the agency to have procedures in place to ensure the availability of qualified mediators. Equitable distribution of the cases furthers the goal of maintaining a sufficient number of qualified mediators willing to contract with the state to provide mediation services. The agency believes that this a worthy and needed program consideration. In addition, the agency is also concerned that the inequitable distribution of mediation assignments results in delays in conducting mediations. However, the agency has modified the proposed amendment based on other comments to allow the parties to continue to agree on a specific mediator. The agency will seek input from stakeholders regarding possible options for modifying the mediation procedures in the future.

Comment: Fourteen attorneys commented that they believe the proposed amendment to 19 TAC §89.1193(f) has fiscal implications. The commenters predicted that the proposed amendment would lead to failed mediations, which would result in more due process hearings and the significant costs associated with them.

Agency Response: The agency disagrees. The agency strongly believes that all of the contract mediators are capable of conducting successful mediations. However, the agency has modified the proposed amendment based on other comments to allow the parties to continue to agree on a specific mediator. The agency will seek input from stakeholders regarding possible options for modifying the mediation procedures in the future.

Comment: One attorney commented that allowing the parties to select the mediator serves to ensure impartiality in the selection process, and that by reserving the right to make the final mediator selection, the proposed amendment does not align with the IDEA mandate that the process be impartial.

Agency Response: The agency disagrees. The IDEA does not prohibit agency selection of a mediator. However, the agency has modified the proposed amendment based on other comments to allow the parties to continue to agree on a specific mediator. The agency will seek input from stakeholders regarding possible options for modifying the mediation procedures in the future.

Comment: One contract mediator commented in favor of the proposed amendment to 19 TAC §89.1193(f), stating that by retaining the right to make the final mediator selection, the agency removes the appearance of partiality that may exist because of the "significant power imbalance" between a parent and the school district and the mistrust that a parent may have of a school district's preferences. The commenter noted that the proposed amendment would further reduce the appearance of partiality by eliminating "any temptation for a party representative to implicitly condition future 'business' on a mediator's acquiescing to a representative's desire to control the mediation process." The mediator further commented that the State Office of Administrative Hearings (SOAH) does not allow parties opting to use the SOAH mediation process to choose their mediator and stated that the program has been very successful.

Agency Response: The agency appreciates the comments. However, the agency has modified the proposed amendment based on other comments to allow the parties to continue to agree on a specific mediator. The agency will seek input from stakeholders regarding possible options for modifying the mediation procedures in the future.

Comment: A contract mediator commented in favor of the proposed amendment to 19 TAC §89.1193(f), noting that the agency would be able to maintain a more balanced pool of trained mediators if it retained the right to make the final mediator selection. The commenter further noted that a more even distribution of cases throughout the mediator pool would allow the agency to better evaluate stakeholder feedback and would enhance mediator training.

Agency Response: The agency appreciates the comments and agrees that there are benefits to having a more equitable distribution of mediation cases. However, the agency has modified the proposed amendment based on other comments to allow the parties to continue to agree on a specific mediator and has removed the language stating that the agency reserves the right to make the final mediator selection. The agency will seek input from stakeholders regarding possible options for modifying the mediation procedures in the future.

Comment: Two contract mediators commented in support of the proposed amendment to §89.1193(f), noting that as stewards of taxpayer resources, the agency should be allowed to make a selection decision that would contain program costs.

Agency Response: The agency agrees. However, the agency has modified the proposed amendment based on other comments to allow the parties to continue to agree on a specific mediator and has removed the language stating that the agency reserves the right to make the final mediator selection. The agency will seek input from stakeholders regarding possible options for modifying the mediation procedures in the future.

Comment: Eighteen attorneys commented that the proposed provision in 19 TAC §89.1193(f) that prohibits the parties from contacting a mediator to discuss the mediator's availability to conduct the mediation unnecessarily slows down the mediation process and should not be adopted.

Agency Response: The agency disagrees and provides the following clarification. In order to preserve and promote mediator impartiality, the agency does not allow contract mediators to communicate with the parties or their representatives before a case has been assigned to the mediator. The purpose of the provision is to inform the parties that no mediator contact is permitted at this early stage in the process. In addition, when the agency is aware that a desired mediator is unavailable to conduct the mediation, it promptly advises the parties of this fact so that an available mediator may be assigned without further delay. While the agency does not agree that the provision should be deleted, the language has been modified at adoption for clarity. Specifically, a sentence has been added to clarify that the parties must not contact a mediator on the TEA's list of mediators until the TEA has provided the parties with the written notice of the mediator assignment.

STATUTORY AUTHORITY. The amendments and new section are adopted under the Texas Education Code (TEC), §29.001, which requires the Texas Education Agency to develop and modify as necessary a statewide plan that includes rules for the administration and funding of the delivery of services to children with disabilities in the state of Texas so that a free appropriate public education (FAPE) is available to all of those children between the ages of 3 and 21; TEC, §29.0162, which gives the commissioner authority to adopt rules related to the qualification of non-attorney representatives at due process hearings; 34 Code of Federal Regulations (CFR), §300.100, which requires a state to submit a plan to the Secretary of Education that provides assurances that the state has policies and procedures in effect to ensure that it meets the conditions in 34 CFR, §§300.101-300.176; 34 CFR, §300.121, which requires that a state have procedural safeguards in effect to ensure that each public agency in the state meets the dispute resolution requirements in 34 CFR, §§300.500-300.536, and also requires that children with disabilities and their parents be afforded those procedural safeguards; 34 CFR, §300.506, which requires a state to establish and implement procedures to allow parents and public education agencies who are in dispute regarding the identification, evaluation, or educational placement of a child with a disability, or the provision of a FAPE to the child the opportunity to resolve the dispute through a mediation process; 34 CFR, §300.507, which provides that a state has the authority to establish an explicit time limitation for filing a request for a hearing; 34 CFR, §300.508, which mandates that a state must implement procedures to require either party in a due process hearing to provide a copy of the request for a hearing to the other party; 34 CFR, §300.511, which requires a state to ensure that parents and public education agencies have the opportunity for an impartial due process hearing conducted by the state when they are involved in a dispute regarding the identification, evaluation, or educational placement of a child with a disability, or the provision of a FAPE to the child; 34 CFR, §300.512, which allows for state law determination of whether parties may be represented at due process hearings by non-attorney representatives; 34 CFR, §300.517, which allows a court the discretion to award reasonable attorneys' fees to the prevailing party in any action or proceeding brought under IDEA and describes the circumstances for making the award; and 34 CFR, §300.532, which provides that a state may establish procedural rules governing expedited due process hearings.

CROSS REFERENCE TO STATUTE. The amendments and new section implement the Texas Education Code, §29.001 and §29.0162, and 34 Code of Federal Regulations, §§300.100, 300.121, 300.506-300.508, 300.511, 300.512, 300.517, and 300.532.

§89.1193.Special Education Mediation.

(a) In accordance with 34 Code of Federal Regulations (CFR), §300.506, the Texas Education Agency (TEA) has established a mediation process to provide parents and public education agencies with an opportunity to resolve disputes involving any matter arising under Part B of the Individuals with Disabilities Education Act (IDEA) or 34 CFR, §300.1 et seq. Mediation is available to resolve these disputes at any time.

(b) The mediation procedures must ensure that the process is:

(1) voluntary on the part of the parties;

(2) not used to deny or delay a parent's right to a due process hearing or to deny any other rights afforded under Part B of the IDEA; and

(3) conducted by a qualified and impartial mediator who is trained in effective mediation techniques and who is knowledgeable in laws and regulations relating to the provision of special education and related services.

(c) A request for mediation must be in writing and must be filed with the TEA by mail, hand-delivery, or facsimile. The TEA has developed a form that may be used by parties requesting mediation. The form is available on request from the TEA and is also available on the TEA website.

(d) The TEA will maintain a list of individuals who are qualified mediators and knowledgeable in laws and regulations relating to the provision of special education and related services.

(e) An individual who serves as a mediator:

(1) must not be an employee of the TEA or the public education agency that is involved in the education or care of the child who is the subject of the mediation process;

(2) must not have a personal or professional conflict of interest, including relationships or contracts with schools or parents outside of mediations assigned by the TEA; and

(3) is not an employee of the TEA solely because the individual is paid by the TEA to serve as a mediator.

(f) The TEA will select mediators on a random, rotational, or other impartial basis. Selecting mediators on an impartial basis includes permitting the parties involved in a dispute to agree on a mediator from the TEA's list of mediators. If the parties agree to a mediator, they must advise the TEA of the desired mediator. The TEA will provide the parties with written notice of the specific mediator assigned to conduct the mediation. The parties must not contact a mediator on the TEA's list of mediators until the TEA has provided the parties with the written notice of the mediator assignment.

(g) If a mediator is also a hearing officer under §89.1170 of this title (relating to Impartial Hearing Officer), that individual may not serve as a mediator if he or she is the hearing officer in a pending due process hearing involving the same student who is the subject of the mediation process or was the hearing officer in a previous due process hearing involving the student who is the subject of the mediation process.

(h) The TEA will bear the cost of the mediation process.

(i) A mediation session must be scheduled in a timely manner and held in a location that is convenient to the parties.

(j) If the parties resolve a dispute through the mediation process, the parties must execute a legally binding agreement that:

(1) states that all discussions that occurred during the mediation process will remain confidential and may not be used as evidence in any subsequent due process hearing or civil proceeding; and

(2) is signed by both the parent and a representative of the public education agency who has the authority to bind the public education agency.

(k) A written, signed mediation agreement under subsection (j) of this section is enforceable in any state or federal court of competent jurisdiction.

(l) Discussions that occur during the mediation process are confidential and may not be used as evidence in any subsequent due process hearings or civil proceedings of any state or federal court.

The agency certifies that legal counsel has reviewed the adoption and found it to be a valid exercise of the agency's legal authority.

Filed with the Office of the Secretary of State on February 9, 2017.

TRD-201700579

Cristina De La Fuente-Valadez

Director, Rulemaking

Texas Education Agency

Effective date: March 1, 2017

Proposal publication date: November 25, 2016

For further information, please call: (512) 475-1497