State of Texas Debt – An Overview
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State of Texas Debt – An Overview
January 2015
Texas Bond Review Board Texas Public Finance AuthorityBob Kline, Executive Director Lee Deviney, Executive [email protected] [email protected] 512-463-5544www.brb.state.tx.us www.tpfa.state.tx.us
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1. Introduction
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Why issue Governmental Debt?
Debt Issuance is a discretionary financing tool
• Conserve current revenue• Match capital project costs to useful life of the
asset• Manage cash flow
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State Debt OutstandingTexas Debt Outstanding as of August 31, 2014* (millions)
Self-SupportingNot
Self-Supporting Total
General Obligation $10,446 $4,643 $15,088
Revenue $23,377 $186 $23,563
Conduit/Component** $5,676 $0 $5,676
Total $39,498 $4,828 $44,327
*Does not include the TRAN**Not a legal liability of the state, secured by third party entities
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Texas State Debt Issuers
1. Texas Department of Transportation
A. Texas Private Activity Bond Surface Transportation Corp.
B. Grand Parkway Transportation Corp.
2. Texas Public Finance Authority
A. TPFA Charter School Finance Corp.
3. Texas Department of Housing & Community Affairs
4. Texas Veterans Land Board
5. Texas Higher Education Coordinating Board
6. Texas State Affordable Housing Corp.
7. Texas Water Development Board
8. Office of Economic Development & Tourism
9. Texas Agriculture Finance Authority (Department of Agriculture)
10. The University of Texas System
11. The Texas A&M University System
12. University of Houston System
13. Texas State University System
14. The Texas Tech University System
15. The University of North Texas
16. Texas Southern University
17. Stephen F. Austin State University
18. Midwestern State University
19. Texas Woman’s University
20. Texas State Technical College System
Agencies Higher Education Institutions
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BRB compared to TPFABond Review Board – Oversight Agency
• Board: Governor, Lt. Governor, Comptroller and Speaker (non-voting)
• Approves state debt and lease purchases that are more than $250,000 or have a term longer than 5 years (excludes university revenue debt rated AA- or higher, TRAN and PUF debt)
• Collects, analyzes and reports information on state and local debt
• Administers the state's Private Activity Bond Allocation Program
Texas Public Finance Authority – Issuing Agency• Board: Appointed by the Governor• Issues state debt as authorized by the legislature• Issues for 24 state agencies including 4 universities• Administers the Master Lease Purchase Program
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TPFA Client Agencies1. Adjutant General’s Department
(formerly Texas Military Facilities Commission)
2. Cancer Prevention and Research Institute of Texas
3. Midwestern State University4. Texas Agriculture Finance Authority5. Texas Commission on Environmental Quality
(formerly Texas Low-Level Radioactive Waste Disposal Authority)
6. Texas Department of Aging and Disability Services
7. Texas Department of Agriculture8. Texas Department of Criminal Justice9. Texas Department of Insurance10.Texas Department of Public Safety11. Texas Department of State Health Services12.Texas Department of Transportation
(Governor’s Office – Colonia Roadway Grant Program)
13.Texas Facilities Commission14.Texas Health and Human Services Commission
15.Texas Historical Commission16.Texas Juvenile Justice Department17.Texas Military Preparedness Commission
(Texas Military Value Revolving Loan Fund)
18.Texas Parks and Wildlife Department19.Texas School for the Blind and Visually Impaired20.Texas School for the Deaf21.Texas Southern University22.Texas State Preservation Board23.Texas Windstorm Insurance Association24.Texas Workforce Commission Optional Use of TPFA As An Issuer
• Stephen F. Austin State University
• Texas State Technical College System
•General Academic Teaching Institutions as defined by Section 61.003 of the Texas Education Code
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2. Debt Instruments
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What is a Debt Instrument?
A debt instrument is a contract for a loan between a lender and a borrower specifying:
– Term or maturity for debt security is the due date for the loan (e.g., years, months, days)
– Interest rate on the bond (e.g., 5%);
– Debt service or repayment schedule, (e.g., monthly, semi-annually or annually);
– Revenue source pledged to repay the loan
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Common Terms• Par – Face value of a security
• Coupon – Interest rate paid on a security
• Discount or Premium – Amount the price of a security is less than orexceeds par value
• Fixed rate – Interest rate that does not fluctuate during the life of the security
• Variable Rate – Interest rate that resets at fixed intervals based on a predetermined index or formula
• Yield – Investor rate of return
• Liquidity Provider – Financial intermediary that facilitates the remarketing
of variable-rate debt at reset dates 10
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Types of Debt Instruments
• Bonds: Long Term (5+ years)Fixed or Variable Interest Rate
• Notes: Short Term (<5 years)Fixed or Variable Interest Rate
• Commercial Paper: Days (max. maturity of 270 days)
Variable Interest Rate
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Commercial Paper
• Secured by general obligation pledge or a specified revenue source
• Variable interest rate – usually much lower than long term interest rate
• Maturity ranges from 1 to 270 days
• Rolled-over (reissued) or refunded (repaid) with long-term debt at maturity
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Municipal (Tax-Exempt) Yield Curve – AAA Rating
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Long Term vs. Short Term Rates
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Credit Ratings Effect On Interest Rates
Rates are for 20 Year Tax Exempt Municipal Bonds.
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Taxation on Interest Earnings
• Taxable: Earnings are taxed at the federal and possible state and local levels
• Tax-Exempt: Exempt from taxation Investors will accept a lower interest rate because their
earnings are exempt from taxation
5% Coupon Bond @ 25% Tax Rate = 3.75% After Tax Return
Federal tax law limits the issuance, investment and use of proceeds of tax-exempt debt instruments
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3. Types of Texas Debt
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General Obligation (GO) Debt
• Constitutional Pledge:Legally secured by a constitutional pledge of the first monies coming into the State Treasury that are not constitutionally dedicated for another purpose
• Requires the Approval: 2/3 vote of both houses of the legislature and Majority of Texas Voters
• Examples: Debt for mental health facilities (HHS), prisons (TDCJ), parks (TPWD)
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Revenue Debt
• Secured by a specific revenue source
• Does not require voter approval
• Examples: College and university debt, certain water development bonds
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Lease Purchase
• TPFA issues revenue debt to finance a purchase of personal property or equipment under its Master Lease Program (MLPP)
• TPFA holds the title to the property and leases the property to the client agency
• Client agency makes lease payments to TPFA from general revenue appropriated to the client agency
• TPFA uses the lease payments to pay debt service
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Tax & Revenue Anticipation Notes (TRAN)
• Issued by the Comptroller to address the State’s cash flow needs (i.e. mismatch between state revenues and expenditures)
• Must be repaid before the end of the biennium; usually issued and repaid each fiscal year
• Repaid from General Revenue
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Refundings
• Used to: Refinance – Issue new debt to pay off old debt Lower interest rates Change bond terms Change repayment schedule (“Restructure”)
• Can be a current refunding or an advance refunding
• Federal tax law permits tax-exempt bonds to be advance refunded only once
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4. General Revenue Impact
Self-Supporting and Not Self-Supporting
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Self-Supporting• Repaid with revenues other than general revenues,
can be either GO or revenue debt
• Examples:o GO: Water Development Board debt repaid from
loans for water and wastewater projects
o Revenue: University revenue financing system debt, Texas Dept. of Housing and Community Affairs single family mortgage debt
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Not Self-Supporting
• Repaid with state general revenues, can be either GO or revenue debt
• Examples:o GO: HEAF debt, most TPFA debt, CPRIT debt
o Revenue: TPFA MLPP, Building Revenue Bonds
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5. Debt Sale Mechanics
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State Debt Issuance Process
1. Legislative authorization and appropriation
2. Issuer Board approval
3. Bond Review Board approval
4. Sale (Negotiated/Competitive/Privately Placed)
5. Attorney General approval
6. Closing
7. Ongoing Administration/Reporting
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Finance Team
Bonds and Notes: Financial Advisor Bond Counsel Underwriter Rating Agencies
Commercial Paper Transactions also include: Dealer Paying Agent Liquidity Provider
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Methods of SaleNegotiated
• Unusual financial or legal structure
• Issuance timing important (e.g., refunding)
• Requires more pre-marketing effort
Competitive• Straightforward structure
• Well-known credit and security pledge
• Size and ratings often attract bidders
Private Placement• Unique financial or legal structure
• Sold directly to purchaser
• Not underwritten
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Debt Administration
Timely debt service payments Monitor expenditure of bond proceeds Comply with federal tax law
use of facility investment of bond proceeds arbitrage rebate compliance
Legislative appropriations for debt service, if required Continuing Disclosure
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6. State Debt
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Texas Debt Issuers
1. Texas Department of Transportation
A. Texas Private Activity Bond Surface Transportation Corp.
B. Grand Parkway Transportation Corp.
2. Texas Public Finance Authority
A. TPFA Charter School Finance Corp.
3. Texas Department of Housing & Community Affairs
4. Texas Veterans Land Board
5. Texas Higher Education Coordinating Board
6. Texas State Affordable Housing Corp.
7. Texas Water Development Board
8. Office of Economic Development & Tourism
9. Texas Agriculture Finance Authority (Department of Agriculture)
10. The University of Texas System
11. The Texas A&M University System
12. University of Houston System
13. Texas State University System
14. The Texas Tech University System
15. The University of North Texas
16. Texas Southern University
17. Stephen F. Austin State University
18. Midwestern State University
19. Texas Woman’s University
20. Texas State Technical College System
Agencies Higher Education Institutions
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State Debt OutstandingTexas Debt Outstanding as of August 31, 2014* (millions)
Self-SupportingNot
Self-Supporting Total
General Obligation $10,446 $4,643 $15,088
Revenue $23,377 $186 $23,563
Conduit/Component** $5,676 $0 $5,676
Total $39,498 $4,828 $44,327
*Does not include the TRAN**Not a legal liability of the state, secured by third party entities
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State Debt OutstandingAs of 8/31/14 (billions)
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$0.0
$5.0
$10.0
$15.0
$20.0
$25.0
$30.0
$35.0
$40.0
$45.0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Conduit & Component Revenue Self-Supporting GO Self SupportingGO Not Self-Supporting Revenue Not Self- Supporting
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Debt Service on State Debtas of 8/31/14 (billions)
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$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
$3.5
$4.0
$4.5
Billio
ns
REV/ SS REV/ NSS GO/ NSS GO/ SS
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Debt Issued by Universities• Revenue Debt: Revenue financing system (RFS) debt finances
permanent improvements and is repaid from system-wide revenue (except legislative appropriations)
• Tuition Revenue Bonds: Legislature may authorize tuition revenue bonds (TRBs) and appropriate general revenue to offset the institution’s debt service
• PUF: Certain institutions within The University of Texas and Texas A&M Systems may issue obligations backed by income from the Permanent University Fund (PUF)
• HEAF: Certain institutions, including some within The University of Texas and Texas A&M Systems, may issue Higher Education Assistance Fund debt (HEAF or Constitutional Appropriation Bonds)
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College & University Debt Outstanding
37As of 08/31/14 (billions)
$0.00$1.00$2.00$3.00$4.00$5.00$6.00$7.00$8.00$9.00
$10.00
2006 2007 2008 2009 2010 2011 2012 2013 2014PUF Non-TRB TRB
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Constitutional Debt Limit
• Texas Constitution prohibits the issuance of additional state debt if the percentage of debt service payable by general revenue in any fiscal year exceeds 5% of the average of unrestricted general revenue for the past three years
• CDL at FYE: 1.20% for issued debt 2.71% issued and authorized but
unissued debt
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7. Credit Ratings
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Texas Credit RatingsState Credit Ratings:
o Moody’s Aaao Standard and Poor’s AAAo Fitch AAA
Factors Considered: o Economyo Financial conditiono Debt burden o General management practices
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States With AAA Ratings
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Net Tax-Supported 2013Debt as a % of 2012 Net Tax-Supported Personal Income
State Rating* Personal Income Rank Debt Per Capita Rank Per CapitaAlaska AAA 3.2% 19 $1,573 16 $50,150Delaware AAA 5.7% 8 2,485 8 44,815Georgia AAA 2.9% 22 1,064 25 37,845Maryland AAA 3.4% 18 1,791 14 53,826Missouri AAA 1.7% 36 668 36 40,663North Carolina AAA 2.1% 32 806 33 38,683TEXAS AAA 1.5% 40 614 38 43,862Utah AAA 3.4% 16 1,187 21 36,640Virginia AAA 2.7% 24 1,302 19 48,838
Mean of AAA States 3.0% $1,277 $43,925Median of AAA States 2.9% $1,187 $43,862
* Rated Aaa by Moody's, and AAA by Standard & Poor's and Fitch Ratings.Sources: Moody's Investors Service, 2014 State Debt Medians; Bureau of Economic Analysis, State BEAR Facts
SELECTED DEBT MEASURES FOR TEXAS AND STATES RATED AAA
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RATINGSeptember, 2014
Upgrades Moody's Standard Needed
for Investors & FitchAAA
Ranking State Service Poor's Ratings- Georgia Aaa AAA AAA
-North
Carolina Aaa AAA AAA- Texas Aaa AAA AAA1 Florida Aa1 AAA AAA3 Ohio Aa1 AA+ AA+4 New York Aa2 AA+ AA+7 Michigan Aa2 AA- AA8 Pennsylvania Aa3 AA AA-13 California Aa3 A A18 Illinois A3 A- A-
General Obligation Credit Ratings - 10 Most Populous States
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Positive Rating Drivers
• Strong Financial Management
• Low Debt
• Growth-Oriented Economy
• Significant Reserve Balances
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Negative Rating Drivers
• Growth Related Spending Pressures– Transportation, Water, School Funding
• Unfunded Pension Liabilities
• Sales Tax Dependence
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8. Local Debt
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Types of Local Governments• School Districts• Cities• Counties• Water Districts & Authorities• Community/Junior College Districts• Health/Hospital Districts & Authorities• Other Special Districts (Road Districts & Authorities
and education authorities)
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Local Debt Outstanding($205.27 billion outstanding as of 8/31/2014)
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Total Debt Outstandingas of 8/31/14 (billions)
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State and Local Debt – 10 Most Populous States
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StatePopulation (thousands)
Amount (millions)
Per Capita Amount
Per Capita Rank
Amount (millions)
% of Total Debt
Per Capita Amount
Per Capita Rank
Amount (millions)
% of Total Debt
Per Capita
Amount
Per Capita Rank
New York 19,607 $340,093 $17,345 1 $135,884 40.0% $6,930 1 $204,209 60.0% $10,415 1Illinois 12,874 146,233 11,359 2 64,302 44.0% 4,995 2 81,932 56.0% 6,364 5California 38,063 419,751 11,028 3 153,529 36.6% 4,034 3 266,223 63.4% 6,994 3Texas 26,094 270,737 10,375 4 45,626 16.9% 1,749 9 225,110 83.1% 8,627 2Pennsylvania 12,770 129,428 10,135 5 46,199 35.7% 3,618 4 83,229 64.3% 6,518 4Michigan 9,885 76,352 7,724 6 30,824 40.4% 3,118 5 45,528 59.6% 4,606 7Florida 19,355 146,922 7,591 7 38,171 26.0% 1,972 7 108,751 74.0% 5,619 6Ohio 11,551 81,238 7,033 8 33,602 41.4% 2,909 6 47,636 58.6% 4,124 9Georgia 9,919 55,785 5,624 9 13,401 24.0% 1,351 10 42,384 76.0% 4,273 8North Carolina 9,748 50,779 5,209 10 18,292 36.0% 1,876 8 32,488 64.0% 3,333 10
MEAN $171,732 $9,342 $57,983 34.1% $3,255 $113,749 65.9% $6,087Note: Detail may not add to total due to rounding.Source: U.S. Census Bureau, State and Local Government Finances by Level of Government and by State: 2012, the most recent data available.
TOTAL STATE AND LOCAL DEBT OUTSTANDING: TEN MOST POPULOUS STATESState DebtTotal State and Local Debt Local Debt
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Local Debt Issuance Process
1. Voter and/or Governing Body approval*2. Sale (Negotiated/Competitive/Privately Placed)
3. Attorney General approval4. Closing5. Issuance data is sent to Bond Review Board for
analysis 6. Ongoing Administration/Reporting
* The BRB does not approve local debt issuances50
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Types of Local Government Long-Term Debt
General Obligation Debt (61%)• Supported by ad valorem (property) taxes• Includes combination tax & revenue debt• Usually voter approved
Revenue Debt (39%)*• Voter approval not needed• Secured by a specific revenue source
*Includes conduit debt51
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Not Voter Approved GO Debt
• Certificates of Obligation
• Tax Notes
• Other types of Bonding Authority
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Not Voter Approved: Certificates of Obligation
• Issued without voter approval
• Used for the construction of public works
• GO debt payable from ad valorem taxes
• Issuers: cities, counties and some hospital districts
• Maturity up to 40 years
• Petition by 5% of the voters requires a voter referendum
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Not Voter Approved: Tax Notes and Other Bonds
Tax Notes• No opportunity for voter petition• Maturity up to 7 years• Used for the construction of public works
Other types of bonding authority:• Time Warrants - Issued mainly by school districts • Pension Obligation Bonds (Houston, El Paso,
Dallas)
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Repayment Structures
Current Interest Bonds - CIBs• Most commonly used debt structure• Interest paid on a periodic basis
Capital Appreciation Bonds - CABs• Sold at a discount• No current interest payment• At maturity investor receives both principal and
interest • Interest compounds on interest • Largely utilized by ISDs to preserve debt capacity
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Characteristics of CABs
CABs are issued to: • Preserve debt limits – reduced par• Help local governments reach tax-rate targets• Become more expensive as maturity lengthens due to
compounding
• Premium CABs (PCABs) are CABs sold with a premium
• raise additional proceeds and still preserve par limits• local governments issue more PCABs than non-
premium CABs
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Debt Service/Par for Local Government
57
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
CIB CAB
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Local Debt Service Outstanding
58
$-
$50
$100
$150
$200
$250
$300
$350
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Billi
ons
CAB Debt Service CIB Debt Service
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9. Private Activity Bond (PAB) Allocation Program
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PAB Summary
• Private Debt sold like a public security (tax-exempt)
• Allowable common uses include:– low-income mortgages, – small industry, – low-income housing, – student loans, – waste disposal facilities, etc.
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Private Activity Bond Program for 2014
Sub-ceilingsVolume Cap
AvailableVolume Cap
AllocatedCarryforward Designated
#1 - Single Family Housing 740,549,404$ 31,266,000$ 1,224,590,213$ #2 - State Voted Issues 211,585,544 - 247,358,087 #3 - Qualified Small Issues 52,896,386 3,650,000 - #4 - Multifamily Housing 581,860,246 80,945,000 806,650,000 #5 - Student Loan Bonds 277,706,027 - - #6 - All Other Issues 780,221,693 155,360,000 95,000,000 Sub Total 2,644,819,300$ 271,221,000$ 2,373,598,300$ Abandoned 347,460,208 Carryforward 2,632,133,225 892,560,804 1,392,112,213
Total 5,276,952,525$ 1,163,781,804$ 4,113,170,721$