DALLAS — After achieving its lowest short-term rates ever on $9.8 billion of tax and revenue anticipation notes, Texas will see what the long-term market has to offer in a $116 million deal next week.
The upcoming issue from the Texas Water Development Board, backed by the state’s general obligation pledge, represents a cool sip of water in a parched bond market. Austerity measures have sharply reduced the ability of state and local governments to issue debt after the Build America Bond program lapsed at the end of 2010, industry experts said.
With long-term bond issuance down 38% through August, debt from state governments has fallen 51%, and state agencies are 39% behind the same period in 2010, according to Thomson Reuters. The August and year-to-date numbers reported last week were the lowest since 2000.
Through the first half of the year, issuance from Texas was down 33%, and the state ranked eighth among all issuers in the Southwest.
In next week’s deal, Piper Jaffray & Co. is book-running senior manager. Fidelity Capital Markets Services, Loop Capital Markets, Morgan Stanley, and Raymond James & Associates are co-managers.
At its Aug. 18 meeting, the TWDB approved a one-year extension of its contract with its pool of underwriters.
First Southwest Co. is financial advisor on the upcoming transaction and McCall, Parkhurst & Horton LLP is bond counsel. Cost of issuance is estimated at $285,000, or $5.75 per bond.
The short-term market showed a strong thirst for Texas debt last month when $9.8 billion of Trans drew a yield of 0.27%, the lowest the state has ever received on its annual short-term notes, according to Comptroller Susan Combs.
“Buyers bid about $31 billion — more than three times the amount offered for sale,” Combs said.
The TWDB, which issued $133 million of bonds in May, carries top credit with backing not only from the state’s GO pledge, but from the water utilities in its loan portfolio, many also highly rated.
The board’s bonds are rated triple-A by Moody’s Investors Service and Fitch Ratings. Standard & Poor’s rates Texas AA-plus with a stable outlook.
Republican Gov. Rick Perry, who is running for president, often boasts of the “Texas Miracle” in the form of lower unemployment than most of the nation and modest levels of taxation.
“This session we further strengthened our state’s robust economy the way we said we would: by living within our means, balancing our budget without raising taxes, and protecting the rainy-day fund,” Perry said last week in hailing a new series of laws taking effect in September.
Analysts generally agree with Perry’s assessment of the overall health of the state finances, but they also credit federal stimulus funds and the state’s energy economy that predates Perry’s nearly 12 years in office.
“Reliance on federal stimulus funds for near-term budget balance in the current biennium delayed making difficult fiscal decisions,” said Moody’s analyst Nicholas Samuels.
At the beginning of the legislative session in January, Texas faced a $15 billion gap in its 2012-2013 biennial budget. State revenues were projected to fall $27 billion short of requests from state agencies just to maintain existing service levels.
The $9 billion in the state’s rainy-day fund provided legislators with some flexibility to reduce the budget gap. However, their refusal to raise taxes or other revenues forced $15 billion of spending cuts, including the first for education in the state. Thus, the budget fell 8%.
“However, we do not consider all of the expenditure measures adopted by the Legislature as long-term structural solutions to the state’s budget,” Samuels wrote in his report on the TWDB bonds.
Budget gimmicks include postponement of $2.3 billion for education.
“In our opinion, Texas’ approved biennial budget failed to achieve structural solutions to the state’s long-term budgetary pressures,” Samuels said. “Chief among these potential sources of persistent imbalances is education funding.”
Texas has $13.2 billion of GO debt outstanding, according to Moody’s. In addition to the TWDB, the other major issuers of GO bonds are the Texas Public Finance Authority and the Texas Transportation Commission.
To replenish the supply of loans to the state’s water utilities and economically developing areas, the state is seeking voter approval of Proposition 2 bonds worth $6 billion on Nov. 8. The TWDB will use the bond proceeds to make loans to political subdivisions in Texas for a variety of water, wastewater, and flood control projects.
Since the agency was created in 1957, the Legislature and voters have approved constitutional amendments authorizing it to issue up to $4.23 billion of bonds to finance water-related projects, of which $3.29 billion has been issued, including more than $1 billion in the last three years.
The agency estimates that its existing bond authority will be exhausted within a year or two.
Created in response to the severe drought of the 1950s, the agency has played a major role in keeping the fast-growing state supplied with water. With severe drought again gripping the state, the importance of maintaining adequate water supplies is a high priority.
The agency is authorized to issue and sell GOs to support financial assistance programs for the planning, design, and construction of water supply, wastewater treatment, stormwater and source pollution control, flood control, and agricultural water conservation projects.
Despite the importance of its mission, the TWDB also had to take a cut in general revenues that is expected to mean lower subsidies for water utilities that borrow from the agency. If it approves a staff recommendation in September, the subsidy will be halved to 100 basis points from 200. The new rate will provide $100 million in subsidized water infrastructure fund loans over the budget years 2012-13, staff members say.
“The demand for WIF loans with a 200 basis point subsidy has been extremely high,” a report to the board said. “Staff believes that a 100 basis point subsidy, combined with the TWDB’s demonstrated ability to sell its bonds at low market rates, will continue to attract a high level of interest from potential applicants.”
