Trend in the Region

Texas Hole Could Grow Bigger

DALLAS — Texas is emerging from its worst recession in more than 30 years, earlier than other states, but lawmakers find themselves still struggling to recover from the effects as they seek to fill a budget hole that could grow to $15 billion.

John O’Brien, director of the Legislative Budget Board, told a committee of the Legislature earlier this month that the previously estimated $11 billion shortfall could reach $15 billion before the next legislative session in January 2011.

Hanging over discussions of how to balance the budget are November’s elections, including the governor’s race, which pits hard-right Republican incumbent Rick Perry against former Houston Mayor Bill White, a centrist Democrat.

Despite the growing shortfall, rating analysts have not indicated any concern with the state’s outlook, noting its relatively sound fiscal health compared to other states’.

“The AA-plus [general obligation] bond rating reflects the state’s low debt and conservative financial operations and an economy that has expanded and diversified, despite current recessionary conditions,” Fitch Ratings analysts Douglas Offerman and Ken Weinstein wrote in advance of a $250 million Texas Water Development Board bond deal going to market this week and next month.

The TWDB bonds, issued annually for a lending pool to local utilities, will come in three series. The first $20 million this week will be followed by $180 million and $50 million deals the week of April 19. Stifel, Nicolaus & Co. is senior manager on this week’s deal. Coastal Securities, Estrada Hinojosa & Co., and Samco Capital Markets Inc. are co-managers.

Standard & Poor’s also affirmed the stable outlook on its AA-plus rating, citing factors such as the state’s rainy-day fund that Comptroller Susan Combs expects to hit $8.6 billion by next year.

Moody’s Investors Service, affirming its Aa1 rating and stable outlook, noted Texas’ gradually improving fiscal scenario, with total tax revenue expected to fall 2.1% this year, but to rise by 9.1% in fiscal 2011 and sales taxes increasing a projected 6.9%.

“For the first six months of the fiscal year, however, sales tax collections have declined by 8.8% compared to the same period in fiscal 2009, a steep although slowing rate of decline from prior months,” analysts Nicholas Samuels and Maria Coritsidis wrote.

“In response to revenue declines of that magnitude, agencies have submitted plans for 5% budget reductions, although cuts haven’t yet been implemented. It is unlikely that sales tax performance in the remainder of the fiscal year will be enough to meet budgeted growth.”

For Texas, the recession as measured by key statistics in 2009 was worse than those of 1982, 1985, and 2001, according to the report by Dallas Federal Reserve economists Laila Assanie and Pia Orrenius.

The recession that began in 1985 was particularly hard on the local economy because it coincided with falling prices in the state’s key energy sector.

“Texas has been hit much harder by the 2008-09 recession than previous ones,” the Fed economists wrote. “After outperforming the nation the previous four years, the state experienced steep declines in economic activity last year that nearly matched the U.S. free fall.”

At a meeting with business leaders in Dallas last week, Moody’s analysts said Texas’ recession was shallower than those of other states because it experienced less of a housing bubble. Analysts forecast Texas will begin adding jobs lost during the recession by late 2011 or early 2012.

Though Texas is one of 14 states suing to overturn the recently passed national health care reform legislation, Moody’s analysts said the state could significantly increase its employment base as a result of the legislation. Texas has one of the highest percentages of residents who lack medical insurance, they noted.

Heading toward the general election after defeating a fellow conservative, U.S. Sen. Kay Bailey Hutchison, in the Republican primary, Perry hewed closely to his anti-federal government stance as he supported state Attorney General Greg Abbott’s lawsuit against health care reform.

“Our state’s lawsuit is the next reasonable approach to protecting our individual and states’ rights from an unreasonable and unresponsive federal government,” Perry said in his statement. “Left unchallenged, these 2,400 pages of unprecedented federal overreach will seriously diminish the quality of health care, impose onerous new taxes and penalties on individuals and employers, and crush our state budget.”

White, who is running from a base as the popular former mayor of the state’s largest city, has not made any strong endorsements of the health care legislation.

Meanwhile, Perry’s 5% cuts in spending will produce savings of only $1.7 billion, according to O’Brien, forcing Texas to cut deeper or to raise taxes, which most political leaders consider unlikely.

The financial pressures on the state are increasing, in part, due to a continued surge in population growth, officials say. While that provides benefits, it also carries costs in terms of transportation, school, and infrastructure needs.

According to the U.S. Census Bureau, the Dallas-Fort Worth area was the fastest-growing metro area in the nation, with Houston ranked second. Over the past decade, the DFW region added nearly 1.5 million people, with employment opportunities as a key factor, according to demographers.

After the 2010 Census, the state could add as many as three representatives in Congress, officials say.

When lawmakers convene in Austin next year, one of their primary challenges will be fixing the chronically troublesome school funding formula. That poses one of the chief risks to the state’s rating, according to Standard & Poor’s analysts Horacio Aldrete-Sanchez and Kate Choban.

“We believe that the greater share of state funding for schools, and the timing of when these disbursements to school districts are made, can drastically increase the pressure on the state’s cash flows and accumulated reserves, particularly if revenue growth continues to wane during the next two years,” they wrote. “Further changes to Texas’ funding mechanism for schools would require legislative action.”



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