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S&P: Texas to Stay Strong

DALLAS — A worsening housing crisis will weaken Texas’ economy in 2008, but not enough to affect the state’s AA credit rating, according to a report to be released today by Standard & Poor’s. The agency affirmed the rating and maintained a stable outlook on the state’s general obligation debt. The action affects roughly $9.9 billion of outstanding debt. The agency released a summary of the report Tuesday, with a more detailed version coming today. Positive factors cited in the report include the state’s steadily growing and diversifying economy, adequate revenue growth and financial position, and low tax-supported debt burden. But the state’s below-average financial reserves and ongoing budgetary pressures related to school finance were cited as negatives. “We believe the Texas Legislature’s recent fiscal priorities will continue and that the state’s financial reserves will remain modest,” said Standard & Poor’s credit analyst Horacio Aldrete. “Without the flexibility provided by a significant increase in financial reserves, supported by a structurally sound budget, however, we are not likely to raise the rating.” The state comptroller’s office expects revenue growth to slow to 3% in fiscal 2009, down from 3.7% in fiscal 2007. The state’s overall employment picture remains healthy, but housing-related sectors have slowed. Texas’ non-farm job growth of 2.9% in fiscal 2007 was nearly twice the nation’s 1.7% rate. Employment growth is projected to remain modest at roughly 2% in 2008. Cash-flow reports indicate that the state ended fiscal 2007 on Sept. 30 with a $7.4 billion net cash surplus, well above the projected $2 billion surplus. The 2008-2009 biennial budget includes $85.1 billion of available funds for general purpose spending, a 12.9% increase over 2006-2007. The budget includes $83.1 billion in general purpose appropriations, resulting in a projected $2 billion balance by fiscal year-end 2009. “The housing crisis is affecting the state but not as much as other states,” Aldrete said. “The concern is that with slowing construction that that may jump to other sectors.” A report released this week by the U.S. Conference of Mayors said the Dallas-Fort Worth area ranks in the top 10 among cities taking a hit to their economies from the housing crisis. Dallas-Fort Worth ranks third behind New York and surrounding cities and Los Angeles-Long Beach-Santa Ana, with an anticipated economic loss of $4 billion. Houston-Baytown-Sugar Land is expected to suffer a $2.3 billion loss, while San Antonio’s loss is expected to be $869 million. San Antonio and El Paso are likely to be cushioned from the housing shock by expansions at their military bases. Fort Bliss in El Paso is expected to gain 20,000 employees, while San Antonio is expected to gain about 10,000 jobs at its Army posts and Air Force bases. Rising oil prices are likely to be a boon to Texas revenues in the short term, but could begin to take a toll on sales taxes as Texans shift more of their income to fuel costs, Aldrete said. Texas has no state income tax. Oil production and processing are major industries in Texas, especially along the Gulf Coast. ExxonMobil, the nation’s largest oil company, is headquartered in the Dallas suburb of Irving. Beyond the short-term concerns, school funding remains a potential threat to budget stability, especially given the limited revenue-generating potential of approved tax measures and the increased reliance on state surplus revenues to cover the school district property tax cuts approved in HB 1, Aldrete said. Still, he noted, Texas maintains a low overall net-tax supported debt at roughly $424 per capita.

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