To issue new debt, such as a bond, a Texas independent school district (ISD) must meet several state and federal requirements. These criteria ensure financial responsibility and accountability to voters and taxpayers and ensure that a district cannot accrue more debt than it is able to pay off. These regulations are designed to ensure fiscal responsibility and accountability to taxpayers.
1. Voter Approval: A majority of voters in a general election (May or November) must approve the bond. This condition ensures that the community supports the district's plan to take on new debt for facility projects.
2. 50-Cent Test (Tax Rate Cap): Before a new bond sale, the district must demonstrate to the Texas Attorney General that the tax rate to repay all of its existing and new debt—known as the Interest and Sinking (I&S) tax rate—will not exceed 50.0 cents per $100 of taxable property value. This test is based on current tax valuations and does not allow the district to use its fund balance to artificially lower the tax rate to pass.
3. Useful Life Test: Federal regulations from the Internal Revenue Service (IRS) require that the term of a tax-exempt bond not exceed 120% of the useful life of the assets being financed. For example, if a bond is used to buy technology with a 5-year useful life, the district cannot borrow for that asset for longer than 6 years. To comply, districts often have different repayment schedules for various projects within a single bond package.
4. Debt Restrictions: State and federal law mandate that bond funds can only be used for capital projects like new facilities, renovations, and equipment. They cannot be used for operating expenditures or routine ongoing expenses, such as teacher salaries, utilities, or general maintenance. The I&S portion of the tax rate is strictly for paying back debt, not for daily operational costs.
