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In Texas, What Goes Up...

DALLAS — Texas debt issuance soared 72% in fiscal 2007 to $5.87 billion, but the rate is likely to slow amid growing economic headwinds, according to a report from the Texas Bond Review Board. In its annual report on state and local bond trends released Friday, the board noted that the state’s economy began slowing in the second half of fiscal 2007, which ended Aug. 31. “The comptrollers 2008-2009 certification review estimate states that this slowdown is largely in response to national events and is expected to continue into the 2008-2009 biennium,” the report says. The Texas Bond Review Board approves all state debt issues in amounts of more than $250,000, or with a term longer than five years. At the end of the fiscal year, the TBRB compiles a report on all bond activity in the state. For the current fiscal year that began Sept. 1, debt issuance is expected to grow 33.8% to $9.63 billion, including $1.46 billion of commercial paper and up to $3.6 billion of refunding bonds. The key driver in 2008 will be the Texas Department of Transportation, whose authority under the State Highway Fund was doubled to $6 billion. TxDOT also gained authorization for an additional $5 billion of general obligation debt under Proposition 12 approved by voters Nov. 6, but those bonds are not likely to appear until 2009, agency executives say.

The agency that issues most of the state’s general obligation debt, the Texas Public Finance Authority, will go to market today with $91.4 million of bonds, its last deal of the calendar year. Today’s issue was postponed from October, when it was paired with a $240 million GO refunding. That sale, delayed by a volatile market, is likely to go in January, according to TPFA executive director Kimberly Edwards. The bonds selling today will provide money for repairs and renovations at the Texas Department of Criminal Justice’s hospital in Galveston, along with other projects and capital needs. The TDCJ health facility takes up a floor on the John Sealy Hospital that is served by the University of Texas Medical Branch. Repairs on other facilities include roofing projects, water and wastewater repairs, and security and safety enhancements. In addition, lawmakers provided funding for the conversion of two Texas Youth Commission facilities into adult prisons. With an annual budget of $2.5 billion, the TDCJ operates 106 correctional facilities statewide, including prisons, state jails, and substance abuse felony punishment facilities. The state also contracts with privately operated jails for inmate housing. Even after adding 100,000 beds since the 1980s, the prisons are expected to fall 17,000 beds short of capacity in five years. Projected inmate growth outpaces the population growth in a state that already has the nation’s second highest rate of incarceration at 691 prisoners per 100,000. In the 1990s, Texas sold more than $1.5 billion of bonds to finance the largest prison building binge in its history. New, 2,250-bed maximum-security units were built in Abilene, Beeville, and Jefferson County, with 1,000-bed medium-security sites in Childress, Freestone, and Frio counties. The new TPFA bonds will be sold via negotiation led by Citi, with Estrada Hinojosa & Co., Merrill Lynch & Co., Lehman Brothers, RBC Capital Markets, and Siebert Brandford Shank & Co. as co-managers. Coastal Securities is the financial adviser, with Vinson & Elkins as bond counsel. The bonds carry Texas’ GO ratings of Aa1 from Moody’s Investors Service, AA from Standard & Poor’s, and AA-plus from Fitch Ratings. The TPFA also gained new authorizations in the Nov. 6 election, including $3 billion for cancer research, $1 billion for capital projects, and $500 million to finance student loans. The 80th Legislature also authorized debt service for $1.86 billion in tuition revenue bonds, which are used for construction on college campuses. For fiscal 2007, new-money issues increased 46.2% to $4.08 billion from $2.79 billion in 2006. Lower interest rates boosted refundings 187% to $1.79 billion from $622.4 million in 2006. Local government debt issuance also surged in 2007, according to the Bond Review Board’s report. Volume increased 45.5% to $29 billion, versus $19.9 billion in 2006. About $18 billion was issued for new money, with $11 billion for refunding. Total local debt outstanding rose by 6.7%, to $127.4 billion versus $119.4 billion in fiscal 2006. The state had $26.37 billion of outstanding at the end of fiscal 2007, including $9.59 billion of GO debt. The GO debt represented a 27% increase from the $7.54 billion in 2006. At the end of fiscal 2007, Texas had $11.4 billion of authorized but unissued debt, compared to $9.9 billion at the end of 2006. The unissued debt includes $3.83 billion of GOs, which accounts for 33% of the unissued debt. Total non-GO debt that was not self-supporting fell to $172 million from $304 million. The remainder is made up of revenue bonds and other types of self-supporting debt. Only four state issuers had swap agreements in place at the end of fiscal 2007: the Veterans Land Board, the University of Texas System, the Texas Department of Housing and Community Affairs, and the Texas Transportation Commission. They entered the swap market in 1994, 1999, 2004, and 2006 respectively. The total swaps come to $2.89 billion. Robert Kline, executive director of the Texas Bond Review Board, said the annual report goes to state leadership and legislative committee chairs and serves as an online resource for the bond industry. “If I were an investment banker or a lawyer and I was looking to do deals next year, I would be looking at this to see who is planning new issues,” he said. Kline said the report was expected to be posted by today on the board’s Web site at http://www.brb.state.tx.us/index.html. For Texas, 2007 was a banner year, with a general revenue fund cash balance of $12.25 billion as of Aug. 31, compared to $9.18 billion on the same date last year. “This was the largest closing balance in the past 11 years and continues an upward trend that began at fiscal year-end 2004,” the BRB report said. Total net revenues increased 9%, or $8 billion, to $97.9 billion, while total expenditures rose 11%, or $9.4 billion, to $94.8 billion. Troubling signs continue to appear on the horizon, however. In addition to the growing housing foreclosure crisis, business activity appears to be slowing as well, according to the Federal Reserve Bank of Dallas’ Texas manufacturing outlook survey. “Nearly all current production and general business condition indicators fell into negative territory, continuing a slowing trend that began in early spring,” the Fed report for November said. “Most indexes for activity six months from now are positive but lower, suggesting producers expect growth to remain soft. Upward wage and price pressures persist, and producers continue to report more price pressures on raw materials than finished goods.” Rating analysts noted the troubling signs, as well, while perceiving no threat to the state’s double-A credit. With no state income tax, Texas is dependent primarily on sales and property taxes, which both show signs of slowing. As property values decline, the tax base follows. “The housing crisis is affecting the state but not as much as other states,” said Standard & Poor’s analyst Horacio Aldrete. “The concern is that with slowing construction that that may jump to other sectors.”



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