DALLAS — The Texas Public Finance Authority approved plans Tuesday to issue more than $2 billion of revenue bonds to repay an advance from the U.S. Treasury Department for unemployment compensation.
The bonds will be issued on behalf of the Texas Workforce Commission in two negotiated deals. Pricing of $1.2 billion of Series A bonds is planned for next week. The $524 million Series B and $300 million Series C are expected to price the first week in December, said Dwight Burns, executive director of the TPFA.
Bank of America Merrill Lynch and Citi will be co-senior managers on the two deals. Loop Capital Markets Inc. and Estrada Hinojosa & Co. are co-managers with a syndicate of eight other underwriters.
First Southwest & Co. is financial adviser. Vinson & Elkins and Bickerstaff Heath Delgado & Acosta are bond counsel. Fulbright & Jaworski is underwriter’s counsel.
With 10-year maturities at fixed rates, Burns expects the bonds to attract institutional investors who are focused on the short end of the yield curve.
“We are expecting very good demand, especially with our ratings,” Burns said.
The bonds earned AAA ratings from Standard & Poor’s, Aa1 from Moody’s Investors Service, and AA-plus from Fitch Ratings.
“The rating reflects our opinion of the authority’s strong dedicated source of revenue, which is derived from a large and diverse employment base, and its strong track record of high collection rates for similar assessments levied by the TWC,” said Standard & Poor’s analyst Horacio Aldrete-Sanchez.
Debt service on the bonds comes from payroll taxes, including a special obligation portion dedicated to paying off the bonds, Burns said.
Moody’s analysts said that “the high-quality ratings reflect the notably broad $84 billion taxable wage base on which Texas’ unemployment obligation assessment will be levied.”
Like 30 other states, Texas borrowed federal funds to provide unemployment compensation as the recession began to take a toll on the state’s economy.
Normally, federal advances are interest free if the loans are repaid by Sept. 30, the end of the federal fiscal year. The American Recovery and Reinvestment Act temporarily changed the due date to Dec. 31.
Bond proceeds will also fund a portion of projected cash shortfalls in the state’s unemployment trust fund during the first quarter of 2011, Burns said.
The commission has approval to issue up to $3.5 billion, but a separate series of bonds cannot exceed $2 billion.
The Texas Workforce Commission has said it plans to limit the issuance of unemployment compensation revenue bonds to the Series 2010 bonds.
While Texas has ridden out the recession better than many of the other large states, it still faces a budget crisis when lawmakers return to Austin in January. The anticipated deficit could climb as high as $25 billion, making Texas’ situation worse than California’s on a percentage basis.
Now that the election is over, the re-elected Gov. Rick Perry and Republican incumbents who control the Legislature are expected to address the shortfall.
Comptroller Susan Combs, a Republican, resisted Democrats’ calls to assess the state’s actual fiscal condition before the election, saying the revenue estimates were not due until January.
In a special comment this week on the fiscal condition of states and local governments, Standard & Poor’s pointed out that political stalemates pose a threat to states facing large budget adjustments.
“Texas has what we consider to be a very low net debt burden,” Standard & Poor’s said. “Still, we believe the state will likely face ongoing budget challenges beyond this year and next, chief among them being education funding.”
