DALLAS — As its Legislature prepares to close the state’s biggest budget gap in decades, Texas will test the market’s appetite for $133.5 million of general obligation bonds that carry top marks from two of the three rating agencies.
The deal, expected to price next Tuesday, comes from the Texas Water Development Board, a bond bank for water utilities throughout the state.
Jefferies & Co. is senior manager on the negotiated deal. Bank of America Merrill Lynch, Citi, Coastal Securities Inc., Ramirez & Co., Southwest Securities, and Stifel, Nicolaus & Co. are co-managers.
Public Financial Management Inc. is financial adviser and the law firm of Andrews Kurth is bond counsel.
The bonds, approved by the TWDB last November, mature serially through 2030 with call dates to be set. All of the board’s GO debt, except bonds issued to fund grants under the economically distressed areas program, is self-supporting through loan repayments, but also carries the state’s full faith and credit pledge. The agency has about $1.3 billion of authorized but unissued GO bonds.
The bonds are rated triple-A by Moody’s Investors Service and Fitch Ratings, and AA-plus by Standard & Poor’s. Fitch’s rating reflects the state’s low debt burden, conservative financial operations, and a growth-oriented economy that is rapidly emerging from recent recessionary weakness, according to analyst Douglas Offerman.
“Financial pressures arise from the demand that rapid growth places on the state’s consumption-based tax system, as well as from longer-term transportation needs and an increased state commitment to education,” he wrote. “The state maintains fiscal flexibility both in the form of its rainy-day reserve, the economic stabilization fund, as well as in its demonstrated willingness to make deep spending cuts.”
Standard & Poor’s maintained a stable outlook based on its expectation that the measures likely to be adopted by the Legislature to balance the 2012-2013 biennial budget will not threaten Texas’ future budget stability by excessively relying on one-time measures or the deferral of current contributions to address future liabilities.
“We believe that an upgrade is unlikely within the next two years, absent the adoption of measures that solve the structural budget imbalance that resulted from the school funding changes approved in 2006,” wrote analyst Horacio Aldrete-Sanchez.
“Conversely, the ratings could be pressured if revenue collections perform significantly below current estimates, additional budget gaps develop in the upcoming biennium, and state officials do not take prompt corrective action,” he said.
Facing a $24 billion shortfall of revenue required to keep pace with state agency needs, the Legislature produced House and Senate budgets that are $12 billion apart in outlays over the next two fiscal years.
The Senate version provides $176.5 billion in spending over the next two years compared with $164.5 billion in the House version. The two spending plans are going to conference committee for resolution before the final compromise is approved by both chambers.
Both budgets would cut appropriations for nearly every state agency. Spending would be $23 billion less than current expenditures in the House version and $11 billion less in the Senate proposal.
The House bill reduces the current $76.4 billion in state aid to local education by $6.7 billion, while the Senate version lowers it by $712 million. Current health care spending of $65.5 billion is cut by $11.5 billion in the House bill and by $7.8 billion in the Senate plan.
Transportation and water have always been key ingredients for Texas growth. The Water Development Board was created in 1957 after one of the state’s worst droughts.
Armed with $200 million in bonding authority, the board set out to support new water resources as local water districts began building dams for new reservoirs.
Since then, the TWDB’s lending capacity and mission have greatly expanded.
The board pools loans from local issuers and covers them with its own GO debt, providing low-interest debt.
Since 1957, the Legislature and voters approved constitutional amendments authorizing the agency to issue up to $2.68 billion of water development bonds. So far, the board has sold nearly $1.55 billion of the debt to finance the construction of water- and wastewater-related projects.
In 1987, the board added the clean-water state revolving fund to its portfolio of financial assistance programs. Low-interest loans from the revolving fund finance costs associated with the construction, expansion, or improvement of wastewater treatment and stormwater control.
The revolving fund offers 20-year loans using either a traditional long-term, fixed-rate or a short-term, variable-rate construction period loan that converts to a long-term, fixed-rate loan on completion of the project. With either option, borrowers receive a net long-term interest rate that is effectively 0.7% below the rate the borrower would receive on the open market at the time of closing.
The 0.7% interest rate reduction equates to a savings of about $100,000 per $1 million borrowed during the life of a loan.
The board also administers the drinking water state revolving fund. Through the fund, the agency makes low-interest loans to finance public drinking water systems that help compliance with primary and secondary drinking-water regulations.
Texas has about $13.8 billion of outstanding state GOs divided among its agencies.
“Debt burden is low but has risen due to significant growth-related capital needs, especially transportation,” Fitch said.
The state’s population grew nearly 21% in the decade through 2010, compared to 9.7% nationally. Texas trailed the nation going into the last economic downturn due to growth-related momentum and strong energy sector performance in 2007 and 2008, according to analysts.
But national and international recessionary conditions eventually weighed on the state’s key sectors: energy, construction, and manufacturing. Employment fell 2.8% in 2009, less severe than the national decline of 4.4%, and recovery began in 2010, as employment rose 0.3%, compared to a national decline of 0.8%.
March 2011 employment rose 2.3% over March 2010, well ahead of the nation’s 1%.
State Comptroller Susan Combs forecasts employment growth of 1.4% in 2011, 2% in 2012, and 2.4% in 2013. Personal income is also showing renewed strength. Fourth-quarter 2010 figures are 5.4% higher than the previous year, analysts said.
Oil and natural gas prices are projected to remain steady through the 2013 forecast period.
