S.B. No. 968

AN ACT

relating to financing tools for certain obligations for public improvements and for certain obligations of The University of Texas System.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:

SECTION 1. Section 1371.001, Government Code, is amended by amending Subdivisions (1), (2), (4), (5), (7), and (8) and adding Subdivision (3-a) to read as follows:

(1) "Credit agreement" means a loan agreement, revolving credit agreement, agreement establishing a line of credit, letter of credit, reimbursement agreement, insurance contract, commitment to purchase obligations [an obligation], purchase or sale agreement, interest rate management [swap] agreement, or other commitment or [other] agreement authorized by a governing body in anticipation of, related to, or in connection with the authorization, issuance, sale, resale, security, exchange, payment, purchase, remarketing, or redemption of some or all of an issuer's obligations or interest on obligations [an obligation, interest on an obligation], or both, or as otherwise authorized by this chapter.

(2) "Eligible project" means:

(A) the acquisition or construction of or an improvement, addition, or extension to a public works, including a capital asset or facility incident and related to the operation, maintenance, or administration of the public works, and:

(i) with respect to a property or a facility for the generation of electric power and energy, fuel acquisition or the development or transportation of power, energy, or fuel;

(ii) with respect to a property or a facility for a public transportation system:

(a) a building, terminal, garage, shop, or other structure, rolling stock, equipment, or another facility for mass public transportation; or

(b) a vehicle parking area or a facility necessary or convenient for the beneficial use and access of persons and vehicles to a station, terminal, yard, car, or bus, or for the protection or environmental enhancement of a facility for mass public transportation; and

(iii) with respect to a property or a facility for a port facility, a wharf or dock, a warehouse, grain elevator, or other storage facility, a bunkering facility, port-related railroad or bridge, floating plant or facility, lightering facility, cargo handling facility, towing facility, or any other facility or aid incident to or useful in the operation of a port facility;

(B) a causeway, bridge, tunnel, turnpike, highway, or combination of those facilities, including:

(i) a necessary overpass, underpass, interchange, entrance plaza, tollhouse, service station, approach, fixture, accessory, or item of equipment, or a storage, administration, or other necessary building; and

(ii) a property right or other interest acquired in connection with those facilities;

(C) a public improvement owned by a county that serves the purpose of attracting visitors and tourists to the county, including a civic center, auditorium, exhibition hall, coliseum, stadium, or parking area;

(D) a project for which there exists authorized but unissued obligations approved by a majority of the voters of the issuer or for which the issuer is authorized to issue other indebtedness[, including obligations] payable from ad valorem taxes;

(E) a project for which an issuer is authorized to issue revenue bonds secured, in whole or in part, by revenue derived from or related to student loans; or

(F) an approved venue project under Chapter 334 or 335, Local Government Code.

(3-a) "Interest rate management agreement" means an agreement that provides for an interest rate transaction, including a swap, basis, forward, option, cap, collar, floor, lock, or hedge transaction, a similar transaction, or any combination of those types of transactions. The term includes:

(A) a master agreement that provides standard terms for transactions;

(B) an agreement to transfer collateral as security for transactions; or

(C) a confirmation of transactions.

(4) "Issuer" means:

(A) a home-rule municipality that:

(i) adopted its charter under Section 5, Article XI, Texas Constitution;

(ii) has a population of 50,000 or more; and

(iii) has outstanding long-term indebtedness that is rated by a nationally recognized rating agency for municipal securities in one of the four highest rating categories for a long-term obligation;

(B) a conservation and reclamation district created and organized as a river authority under Section 52, Article III, or Section 59, Article XVI, Texas Constitution;

(C) a joint powers agency organized and operating under Chapter 163, Utilities Code;

(D) a metropolitan rapid transit authority or regional transportation authority created, organized, and operating under Chapter 451 or 452, Transportation Code;

(E) a conservation and reclamation district organized or operating as a navigation district under Section 52, Article III, or Section 59, Article XVI, Texas Constitution;

(F) a district organized or operating under Section 59, Article XVI, Texas Constitution, that has all or part of two or more municipalities within its boundaries;

(G) a state agency, including a state institution of higher education;

(H) a hospital authority created or operating under Chapter 262 or 264, Health and Safety Code, in a county that:

(i) has a population of more than 3.3 million; or

(ii) is included, in whole or in part, in a standard metropolitan statistical area of this state that includes a county with a population of more than 2.2 million;

(I) a hospital district in a county that has a population of more than two million;

(J) a nonprofit corporation organized to exercise the powers of a higher education loan authority under Section 53B.47(e), Education Code;

(K) a county:

(i) that has a population of 3.3 million or more; or

(ii) that, on the date of issuance of obligations under this chapter, has authorized, outstanding, or any combination of authorized and outstanding, indebtedness of at least $100 million secured by and payable from the county's ad valorem taxes and the authorized long-term indebtedness of which is rated by a nationally recognized rating agency of securities issued by local governments in one of the four highest rating categories for a long-term obligation;

(L) an independent school district that has an average daily attendance of 50,000 or more as determined under Section 42.005, Education Code;

(M) a municipality or county operating under Chapter 334, Local Government Code;

(N) a district created under Chapter 335, Local Government Code; [or]

(O) a junior college district that has a total headcount enrollment of 40,000 or more based on enrollment in the most recent regular semester; or

(P) an issuer, as defined by Section 1201.002, that has:

(i) a principal amount of at least $100 million in outstanding long-term indebtedness, in long-term indebtedness proposed to be issued, or in a combination of outstanding or proposed long-term indebtedness; and

(ii) some amount of long-term indebtedness outstanding or proposed to be issued that is rated in one of the four highest rating categories for long-term debt instruments by a nationally recognized rating agency for municipal securities, without regard to the effect of any credit agreement or other form of credit enhancement entered into in connection with the obligation.

(5) "Obligation" means a public security as defined by Section 1201.002 or other [special] obligation that may [authorized to] be issued by an issuer and that is expected to be rated, and before delivery[,] is rated, by a nationally recognized rating agency for municipal securities in one of the three highest rating categories for a short-term debt instrument or one of the four highest rating categories for a long-term debt instrument. The term does not include an obligation payable wholly or partly from ad valorem taxes unless:

(A) issuance of the obligation or an obligation refunded by the obligation has been approved by the voters of the issuer in an election held for that purpose; or

(B) the issuer:

(i) is authorized by law to issue public securities payable wholly or partly from ad valorem taxes for the purpose for which the obligation is to be issued; and

(ii) has complied with any conditions imposed by law before its pledge of ad valorem taxes to pay the principal of or interest on the obligation [except as specifically permitted by this chapter].

(7) "Project cost" means a cost or expense incurred in relation to an eligible project. The term includes:

(A) design, planning, engineering, and legal cost;

(B) acquisition cost of land or an interest in land;

(C) construction cost;

(D) cost of machinery, equipment, and other capital assets incident and related to the operation, maintenance, and administration of an eligible project; and

(E) financing cost, including:

(i) interest on obligations and payments on credit agreements during and after construction;

(ii) underwriter's discount or fee; and

(iii) cost of legal, financial, and other professional services.

(8) "Public works" means property or a facility for:

(A) the conservation, storage, supply, treatment, or transmission of water;

(B) the treatment, collection, or disposal of water-carried wastes or solid wastes;

(C) the generation, transmission, or distribution of electric power and energy;

(D) the acquisition, distribution, or storage of gas;

(E) a transit authority system, as defined by Section 451.001, Transportation Code, or a public transportation system, as defined by Section 452.001 [Chapter 452], Transportation Code;

(F) an airport as defined by Section 22.001, Transportation Code;

(G) a port facility, including a facility for the operation or development of a port or waterway or in aid of navigation or navigation-related commerce in a port or on a waterway;

(H) a project as defined by Section 284.001, Transportation Code; or

(I) the carrying out of a purpose or function for which an issuer may issue public securities.

SECTION 2. Subsection (a), Section 1371.003, Government Code, is amended to read as follows:

(a) This chapter is wholly sufficient authority within itself for the issuance of obligations, the execution of a credit agreement, and the performance of the other acts and procedures authorized by this chapter or under any agreement, without reference to any other laws or any restrictions or limitations contained in those laws. Any restrictions or limitations contained in other laws do not apply to the procedures prescribed by this chapter or to the issuance of obligations, the execution of credit agreements, or the performance of other acts authorized by this chapter.

SECTION 3. Section 1371.051, Government Code, is amended to read as follows:

Sec. 1371.051. AUTHORITY TO ISSUE OBLIGATION. As authorized and approved by the governing body of an issuer, the governing body may issue, sell, and deliver an obligation to:

(1) finance a project cost;

(2) refund an obligation issued in connection with an eligible project; or

(3) finance all or part of a payment owed or to be owed on:

(A) the establishment of a [an interest rate lock, interest rate hedging agreement, or other] credit agreement; or

(B) the settlement or termination, at maturity or otherwise, of a [an interest rate lock, interest rate hedging agreement, or other] credit agreement, whether the settlement or termination occurs:

(i) at the option of the issuer or the other party to the credit agreement; or

(ii) by operation of the terms of the credit agreement.

SECTION 4. Section 1371.056, Government Code, is amended to read as follows:

Sec. 1371.056. AUTHORITY TO ENTER INTO AND EXECUTE CREDIT AGREEMENTS. (a) An issuer [A governing body] may execute and deliver any number of credit agreements in anticipation of, related to, or [authorize the execution and delivery of a credit agreement] in connection with [or related to] the authorization, issuance, security, purchase, payment, sale, resale, redemption, remarketing, or exchange of some or all of the issuer's obligations or interest on obligations, or both, [an obligation] at any time, without regard to whether the:

(1) obligations have been authorized or issued; or

(2) [a] credit agreement was contemplated, authorized, or executed in relation to the initial issuance, sale, or delivery of the obligations [obligation].

(b) Except as provided by this section, a [A] credit agreement must substantially contain the terms and be for the period the governing body approves. A credit agreement may provide that it:

(1) may be terminated with or without cause; or

(2) becomes effective at the option of another party to the credit agreement, if the governing body first finds that the option serves best the interests of the issuer.

(c) The governing body may delegate to any number of officers or employees of the issuer the authority to approve specific terms of, to execute and deliver, or to terminate or amend in accordance with its terms, a credit agreement or transactions under a credit agreement on the behalf of the issuer, subject to any condition the governing body specifies. The delegation must include limits on:

(1) the principal amount or the notional amount;

(2) the term;

(3) the rate;

(4) the source of payment;

(5) the security;

(6) the identity or credit rating of an authorized counterparty;

(7) the duration of the authorization; and

(8) for an interest rate management agreement, the:

(A) fixed or floating rates;

(B) economic consequences;

(C) early termination provisions;

(D) type;

(E) provider; and

(F) costs of credit enhancement.

(d) The cost to the issuer of a credit agreement or payments owed by an issuer under a credit agreement may be paid from and secured by any source, including:

(1) the proceeds from the sale of the obligation to which the credit agreement relates;

(2) any revenue and money of the issuer that is available to pay the obligation;

(3) any interest on the obligation or that may otherwise be legally used; or

(4) ad valorem taxes if the credit agreement is authorized in anticipation of, in relation to, or in connection with an obligation that is wholly or partly payable from or is to be wholly or partly payable from ad valorem taxes [to the extent permitted by this chapter].

(e) [(d)] A credit agreement is an agreement for professional services but is not a contract subject to Subchapter I, Chapter 271, Local Government Code.

(f) If a credit agreement is authorized and is executed in anticipation of the issuance of an obligation described by Section 1371.001(5)(B) because the issuer is authorized by Subchapter C, Chapter 271, Local Government Code, to issue certificates of obligation:

(1) notice required by Section 271.049, Local Government Code, in addition to the other requirements for the notice, must describe the time and place tentatively set for the adoption of the order or ordinance authorizing the credit agreement, the maximum amount and term of the obligations and credit agreement, and the manner in which the certificates of obligation and credit agreement will be paid; and

(2) the issuer may enter into the credit agreement and issue the certificates of obligation only if:

(A) the municipal secretary or clerk or person with similar authority does not receive a petition signed by at least five percent of the registered voters of the issuer that protests the issuance of the certificates of obligation or the execution of the credit agreement before the later of the date tentatively set for the adoption of the order or ordinance to authorize the credit agreement or the date the order or ordinance is adopted;

(B) the issuance and execution are approved at an election held for that purpose conducted as provided for a bond election under Chapter 1251; or

(C) notice is not required by Section 271.049, Local Government Code, before the certificates of obligation are authorized.

(g) Payments received by an issuer under a credit agreement or on termination of all or part of a credit agreement may be used to:

(1) pay the obligations in anticipation of which, in relation to which, or in connection with which the credit agreement was entered into or pay the costs to be financed by the obligations in anticipation of which, in relation to which, or in connection with which the credit agreement was entered into;

(2) pay other liabilities or expenses that are secured on parity with or senior to the obligations in anticipation of which, in relation to which, or in connection with which the credit agreement was entered into; or

(3) after the satisfaction of the obligations or costs described by Subdivision (1) and of the liabilities and expenses described by Subdivision (2) that are due, make payments for any other purpose for which the issuer may issue obligations under this subchapter or that is otherwise authorized by law, unless the credit agreement is paid primarily from ad valorem taxes.

(h) An issuer may agree to pay or receive a payment on early termination of an interest rate management agreement due to a breach or for another reason as provided by the interest rate management agreement. The agreement may specify the payment by a specific amount, by a formula, or by a process or algorithm.

(i) A credit agreement secured in the manner described by Subsection (d)(4) may be executed without an election or the imposition of an ad valorem tax for the credit agreement unless required by the Texas Constitution. If the Texas Constitution requires an election for the credit agreement, the election must be held substantially in the manner provided for an election under Chapter 1251.

(j) An issuer may enter into an interest rate management agreement transaction only:

(1) if the issuer has either entered into at least three interest rate management transactions before November 1, 2006, or has entered into one or more interest rate management transactions with notional amounts totaling at least $400 million before that date; or

(2) as provided by Subsection (k).

(k) An issuer may enter into an interest rate management transaction if:

(1) the governing body has adopted, amended, or ratified during the preceding two years a risk management policy governing entering into and managing interest rate management agreements and transactions that addresses:

(A) conditions, if any, under which the issuer may enter into an interest rate management agreement transaction without independent advice from a financial advisor or swap advisor who has experience in interest rate management transactions; and

(B) authorized purposes, permitted types and creditworthiness of counterparties, credit risks and other risks, liquidity, methods of selection of counterparties, and limits concerning awarding a transaction, monitoring, and exposure;

(2) the issuer has received from the counterparty:

(A) if the transaction was not awarded through a competitive bidding process:

(i) a statement that, in the counterparty's judgment, the difference in basis points between the rate of the transaction and the mid-market rate for a comparable transaction falls within the commonly occurring range for comparable transactions;

(ii) a statement of the amount of the difference as determined by the counterparty; or

(iii) if the counterparty does not know of a comparable transaction or mid-market rate, a statement of another suitable measure of pricing acceptable to the counterparty; and

(B) the counterparty's disclosure of any payments the counterparty made to another person to procure the transaction; and

(3) the governing body or an authorized officer or employee of the issuer has determined that the transaction will conform to the issuer's interest rate management agreement policy after reviewing a report of the chief financial officer of the issuer that identifies with respect to the transaction:

(A) its purpose;

(B) the anticipated economic benefit and the method used to determine the anticipated benefit;

(C) the use of the receipts of the transaction;

(D) the notional amount, amortization, and average life compared to the related obligation;

(E) any floating indices;

(F) its effective date and duration;

(G) the identity and credit rating of the counterparties;

(H) the cost and anticipated benefit of transaction insurance;

(I) the financial advisors and the legal advisors and their fees;

(J) any security for scheduled and early termination payments;

(K) any associated risks and risk mitigation features; and

(L) early termination provisions.

(l) While an interest rate management agreement transaction is outstanding, the governing body of the issuer shall review and ratify or modify its related risk management policy at least biennially [(e) Notwithstanding Subsection (b), the governing body may delegate to an officer or employee the authority, under the terms and for the period approved by the governing body, to:

[(1) enter into a credit agreement and transactions under a credit agreement; and

[(2) execute any instruments in connection with those transactions].

SECTION 5. Section 1371.057, Government Code, is amended to read as follows:

Sec. 1371.057. REVIEW AND APPROVAL OF OBLIGATION, CREDIT AGREEMENT, AND CONTRACT BY ATTORNEY GENERAL. (a) Before an obligation may be issued or a credit agreement executed, a record of the proceedings of the issuer authorizing the issuance, execution, and delivery of the obligation or[, the] credit agreement[,] and any contract providing revenue or security to pay the obligation or [the] credit agreement must be submitted to the attorney general for review.

(b) If the attorney general finds that the [credit agreement, contract, and other authorizing] proceedings authorizing an obligation or credit agreement conform to the requirements of the Texas Constitution and this chapter, the attorney general shall approve them and deliver to the comptroller a copy of the attorney general's legal opinion stating that approval and the record of proceedings. After approval, the obligation or [and] credit agreement may be executed and delivered, exchanged, or refinanced from time to time in accordance with those authorizing proceedings.

(c) If the [obligation] authorization of an obligation or of a credit agreement provides that the issuer intends to refinance the [an] obligation or a payment [loan] under the [a] credit agreement with refunding bonds issued under Chapter 1207, then the obligation or payment [loan] shall be treated, for purposes of attorney general review and approval, as having the intended term and payment schedule of the refunding bonds.

SECTION 6. Section 1371.059, Government Code, is amended to read as follows:

Sec. 1371.059. VALIDITY AND INCONTESTABILITY. (a) If proceedings to authorize an obligation or credit agreement are approved [On approval] by the attorney general and registered[, registration] by the comptroller, each obligation or [and initial delivery of the obligation, a] credit agreement, as applicable, or[,] a contract providing revenue or security included in or executed and delivered according to[, an initial obligation, and any obligation subsequently issued under] the authorizing proceedings is [are] incontestable in a court or other forum and is [are] valid, [and] binding, and [obligations] enforceable according to its [their] terms.

(b) Notwithstanding Subsection (a) and Section 1371.003, and except as provided by this subsection, an obligation authorized by this chapter is not valid, binding, or enforceable unless the obligation is approved by the attorney general and registered by the comptroller in accordance with Chapter 1202. The attorney general's approval and registration by the comptroller is not required for an obligation:

(1) to which Chapter 1202 does not apply or that is exempt from approval and registration as provided by Section 1202.007(a)(1), (2), (3), (4), (6), or (7); or

(2) that matures within one year after the issuer receives payment for the obligation, regardless of whether the obligation is evidenced by an instrument with a nominal term of longer than one year.

(c) An issuer in the proceedings to authorize obligations or a credit agreement, or in a credit agreement, may agree to waive sovereign immunity from suit or liability for the purpose of adjudicating a claim to enforce the credit agreement or obligation or for damages for breach of the credit agreement or obligation. This subsection does not apply to an issuer that is:

(1) a state agency, including a state institution of higher education; or

(2) a county with a population of 900,000 or more.

SECTION 7. Subchapter B, Chapter 1371, Government Code, is amended by adding Section 1371.061 to read as follows:

Sec. 1371.061. MANAGEMENT REPORTS. (a) If a governing body authorizes an interest rate management agreement transaction, the governing body shall designate an officer of the issuer to monitor and report on the transaction. At least annually, the designated officer shall present to the governing body a written report, signed by the designated officer, on all outstanding interest rate management agreement transactions conducted for the issuer. The report must:

(1) describe the terms of the transactions;

(2) contain a statement:

(A) of the fair value of each transaction;

(B) of the value of any collateral posted to or by the issuer under the transactions with each counterparty at the year's end; and

(C) reviewing the transactions' cash flows;

(3) identify with respect to each transaction the counterparty, any guarantor of the counterparty's obligations under the transaction, and the credit ratings of the counterparty and the guarantor; and

(4) state whether the continuation of the transactions under the agreement would comply with the issuer's interest rate management agreement policy.

(b) This section does not apply to an issuer that has entered into:

(1) at least three interest rate management agreement transactions before November 1, 2006; or

(2) one or more interest rate management agreement transactions with notional amounts totaling at least $400 million before November 1, 2006.

SECTION 8. Subchapter C, Chapter 65, Education Code, is amended by adding Section 65.461 to read as follows:

Sec. 65.461. BOND ENHANCEMENT AGREEMENTS. (a) In this section:

(1) "Bond" or "note" means a bond or note that the board is authorized to issue according to law, including Section 18, Article VII, Texas Constitution, Chapter 55 or 66 of this code, or other applicable law.

(2) "Bond enhancement agreement" means an interest rate swap agreement, a currency swap agreement, a forward payment conversion agreement, an agreement providing for payments based on levels of or changes in interest rates or currency exchange rates, an agreement to exchange cash flows or a series of payments, or other agreement, including an option, put, or call, to hedge or modify payment, currency, rate, spread, or other exposure.

(b) The board may at any time and from time to time enter into one or more bond enhancement agreements that the board determines to be necessary or appropriate to place the obligation of the board, as represented by the bonds or notes issued or to be issued, in whole or in part, on the interest rate, currency, cash flow, or other basis desired by the board. A bond enhancement agreement is an agreement for professional services and shall contain the terms and conditions and be for the period that the board authorizes. The fees and expenses of the board in connection with a bond enhancement agreement, including any payments due from the board under a bond enhancement agreement, may be paid from and secured by a lien on and pledge of all or any part of any of the revenue funds of the board and its institutions, proceeds of the sale of bonds or notes to which the bond enhancement agreement relates, or from any other source that is legally available for the purpose of paying the bonds or notes and the interest on the bonds or notes or that may otherwise be legally available to make those payments. Payments due from the board under a bond enhancement agreement relating to bonds or notes issued pursuant to Section 18, Article VII, Texas Constitution, are deemed to be for the support and maintenance of The University of Texas System administration and may be paid from the available university fund.

(c) The resolution of the board authorizing a bond enhancement agreement may authorize one or more designated officers or employees of the board to act on behalf of the board in entering into and delivering the bond enhancement agreement and in determining or setting the counterparty and terms of the bond enhancement agreement specified in the resolution.

(d) The resolution of the board authorizing a financing program pursuant to Section 65.46 may include authorization of one or more bond enhancement agreements.

(e) Unless the board or its designee elects otherwise in its authorization or approval of a bond enhancement agreement, the bond enhancement agreement is not a credit agreement for purposes of Chapter 1371, Government Code, or Section 65.46 of this chapter, or any successor to such laws, regardless of whether the bonds or notes relating to the bond enhancement agreement were issued in part under either such law.

(f) This section shall be construed liberally to effect the legislative intent and purposes of this section, and all powers granted by this section shall be broadly interpreted to effect that intent and those purposes and not as a limitation of powers.

SECTION 9. The changes in law made by this Act apply only to proceedings related to authorizing the issuance of obligations or the execution of credit agreements or interest rate management agreements that are adopted on or after the effective date of this Act and to transactions related to the obligations or agreements. Proceedings related to authorizing the issuance of obligations or the execution of credit agreements or interest rate management agreements that are adopted before the effective date of this Act, and transactions related to the obligations or agreements, are governed by the law in effect on the date the proceedings were initiated and the former law is continued in effect for that purpose.

SECTION 10. An agreement described by this section is ratified in all respects, without regard to whether the agreement to waive sovereign immunity is limited to the extent permitted by law, if the agreement:

(1) is entered into before the effective date of this Act by an issuer as defined by Subdivision (4), Section 1371.001, Government Code, that has authority by statute or under its charter to sue and be sued or to plead and be impleaded; and

(2) waives sovereign immunity from suit or liability for breach of an obligation or of a credit agreement authorized by Chapter 1371, Government Code.

SECTION 11. This Act takes effect immediately if it receives a vote of two-thirds of all the members elected to each house, as provided by Section 39, Article III, Texas Constitution. If this Act does not receive the vote necessary for immediate effect, this Act takes effect September 1, 2007.

______________________________ ______________________________

President of the Senate Speaker of the House

I hereby certify that S.B. No. 968 passed the Senate on April 19, 2007, by the following vote: Yeas 31, Nays 0; and that the Senate concurred in House amendment on May 25, 2007, by the following vote: Yeas 30, Nays 0.

______________________________ Secretary of the Senate

I hereby certify that S.B. No. 968 passed the House, with amendment, on May 17, 2007, by the following vote: Yeas 146, Nays 0, two present not voting.

______________________________ Chief Clerk of the House

Approved:

______________________________

Date

______________________________

Governor