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Texas Drives Nearly $1B of Transportation Bonds to Market

DALLAS — The Texas Transportation Commission is pricing its largest general obligation bond issue of the year Tuesday, with $839.3 million of tax-exempt debt selling through negotiation and $100 million of taxable bonds offered competitively.

The deal is the second-largest on the bond calendar this week, just shy of New Jersey’s $1.2 billion transportation bond issue.  New volume for the week is expected to reach about $8.36 billion.

The negotiated deal is led by Wells Fargo Securities with Bank of America Merrill Lynch as co-senior manager. Retail orders opened Monday, with institutional pricing Tuesday. Public Financial Management Inc. is financial advisor on the competitive deal, with bids due Tuesday. McCall, Parkhurst & Horton is bond counsel.

The tax-exempt 2012 Series A bonds will mature from 2019 to 2042.

The taxable Series B bonds mature from 2014 to 2019.

Both series carry Texas’ triple-A general obligation ratings by Moody’s Investors Service and Fitch Ratings. Standard & Poor’s rates the credit AA-plus. Outlooks are stable.

The deal comes to market a month before the Texas Legislature convenes for its biennial 2013 session in Austin.  While ratings analysts credited the state with a stronger economy and a milder recession than most states, Standard & Poor’s factored the state’s school funding formula legal challenges into the outlook.

“While we expect that the state’s economy will continue to outperform the nation’s in the near future, we believe that an upgrade is unlikely within the next two years absent the adoption of legislative measures that alleviate the potential sources of liquidity pressure related to the timing of required payments to schools,” wrote analyst Horacio Aldrete-Sanchez.

With a lawsuit underway in Austin over the school funding issue, Texas lawmakers are keeping an eye on how the state district court rules as they budget for the state’s 1,032 school districts. 

“The constitutionality of the state’s school finance formula and the education spending cuts are being challenged in court and could create negative credit pressure, depending on the outcome,” noted Moody’s analyst Nicholas Samuels.

Lawmakers have already begun filing bills for the session that begins in January.

Last month, the Texas Legislative Budget Board adopted a plan to limit increases in state spending from non-dedicated revenue to less than 11% over the next two years.

The outlook would increase to $77.9 billion the portion of the fiscal 2014-2015 budget funded by taxes and fees not dedicated to a specific purpose. Non-dedicated spending accounts for $70.4 billion of the $173.5 billion state budget for fiscal 2012-2013.

Republican lawmakers who are seeking to reduce the size of government are looking for ways to place even tighter restraints on the spending through new formulas.

A constitutional amendment approved in 1978 requires that increases in non-dedicated spending not exceed growth in the Texas economy, but does not specify how economic growth should be determined. Generally, lawmakers peg the budget growth at the rate of personal income growth.

Along with education, transportation funding is often one of the most divisive issues in the legislature. The Republican-controlled legislature typically faces conflicts over its desire to shrink government and the demand for new highways in the growing and increasingly congested state.

Increasingly, highways in the state are carrying goods to and from Mexico, Canada and the U.S. due to NAFTA — the North American Free Trade Agreement. Shipments of oil and natural gas from the resurgent fields of West Texas and new energy plays in south and north Texas have also added stress to infrastructure. Until new pipelines can be built, most of the transportation of energy will be via trucks.

In addition to those sources of traffic, the state’s ports on the Gulf of Mexico are ramping up for the expansion of the Panama Canal in 2014 with new locks capable of conveying larger container ships from China. The Texas Department of Transportation, which operates under the supervision of the Texas Transportation Commission, is increasingly dealing with multi-modal issues.

To finance transportation growth, voters in Texas approved $5 billion of general obligation bonds for the TTC in 2007. This week’s deals represent the third and fourth issues from that authorization. The TTC expects to about $1 billion in additional GO transportation bonds within the next year.

The commission issued $977.8 million in two series of bonds in 2010, with $957.65 million currently outstanding.  Under the Second Supplemental Resolution, the commission authorized up to $4 billion in additional bonds.

In 2011, the Texas Legislature specified that $3 billion of the general obligation bond program be used to fund projects that will relieve congestion, enhance bridge and roadway safety, and connect the state’s population centers.

Lawmakers earmarked $300 million for acquisition of right-of-way and feasibility studies on the most congested highways, $600 million for metropolitan and urban mobility projects designated by the state’s regional planning organizations, $1.4 billion for rehabilitation and safety projects and $500 million to fund bridge projects.

As one of nine states that does not have an income tax, Texas does not offer in-state buyers of its debt the double tax exemption found in the other 41 states.

Almost two-thirds of Texas’ revenue comes from taxes on retail sales. The next largest revenue sources are the franchise tax, insurance taxes, and oil and gas taxes. Texas revenues are cyclical and sensitive to swings in economic conditions. States with personal income taxes tend to have more stable sources of revenue, analysts say.

In the previous session, lawmakers reduced the general revenue budget to $80.47 billion, down 2% or $1.6 billion from the previous biennium. The all funds budget for the current biennium that ends next year is $172 billion, representing a decline of $15 billion or 8.1% from the 2010-2011 budget.

Sales tax collections rose 12.6% in fiscal year 2012 that ended in August compared to the previous fiscal year. That rate was more than double forecast growth of 5.4%. Overall general fund revenues were 11.9% greater than fiscal 2011 and were 10.4% greater than forecast.

For the first two months of fiscal 2013, sales taxes collections are running 9.8% higher than the same period in the prior year, compared to the state’s conservative full fiscal year forecasted growth of 0.4%.

For fiscal 2012, overall cash outflows were 2.1% greater than forecast, reflecting higher costs for public assistance, largely Medicaid, and school aid, according to Moody’s.

“The pressures from those costs demonstrate the downside to the high population growth that has come with the state’s strong economy,” Samuels wrote. “Texas’ population increased by 1.7% in 2011, but as its population grows, demand for social services and education spending does too.”

Like other states, Texas is facing uncertainty over the so-called “fiscal cliff” at the federal level that would eliminate tax cuts originally passed at the behest of President George W. Bush. Some economists fear that a rising tax burden could slow the economic recovery, which would, in turn, affect state and local tax revenues.

“The most significant risk to state credit in 2013 comes from action, or lack thereof, at the federal government level,” Fitch Ratings wrote in a special report Monday. “State revenue systems quickly reflect economic conditions, and the fiscal cliff would materially lower revenues and open budget gaps.”

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