DALLAS — As springtime rains replenish depleted reservoirs, the Texas Water Development Board is going back to the well for $137 million of general obligation bonds to finance loans to local utilities.
The board, which typically does two major issues per year, is expected to price its general obligation bonds next week through negotiation with Morgan Stanley as lead underwriter.
First Southwest Co. serves as financial advisor, with McCall, Parkhurst & Horton as bond counsel.
With its strong credit ratings, the TWDB is expecting to tap the low interest rates offered in the muni market for the benefit of utilities whose loans are pooled by the state.
The upcoming deal carries triple-A ratings from Moody’s Investors Service and Fitch Ratings, and AA-plus from Standard & Poor’s, all with stable outlooks.
The ratings apply to $14.3 billion of outstanding Texas GO debt.
“The rating reflects the strong fundamentals of the Texas economy and the expectation that it will continue to perform more strongly than the nation,” wrote Moody’s analyst Nicholas Samuels.
The water board has operated under a policy that most general obligation debt, unless otherwise appropriated for by the state Legislature, should be self-supporting through loan repayments.
Last November, Texas voters approved Proposition 2, which authorizes the TWDB to carry up to $6 billion in outstanding debt.
As of Nov. 30, the board had about $1.06 billion of authorized but unissued GO bonds, according to S&P.
While the Texas economy continues to outperform the nation, analysts caution that the state’s fiscal condition bears scrutiny amid pressures on education spending.
For the first time, Texas legislators lowered education spending ratios in the 2011 session while dipping into the state’s rainy-day fund to soften the impact of falling revenues.
“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,” according to Standard & Poor’s analyst Horacio Aldrete-Sanchez.
In preparation for the 2013 legislative session, a panel of 22 Texas lawmakers is planning a review of the state’s school finance system after five recent lawsuits challenged the funding of school districts.
The study group was authorized in Senate Bill 1, the appropriations budget bill that was passed at the end of 2011’s special legislative session.
The Legislature cut aid to the 1,030 local school districts and 207 charter school operators in Texas by $5.4 billion over fiscal 2012 and 2013.
More money was appropriated than in the previous biennial budget, but due to enrollment growth, lawmakers did not fund local education to the level required by the state’s formula.
Multiple lawsuits challenging the constitutionality of how Texas funds schools have been filed by more than 500 independent school districts with an enrollment of three million.
The suits are expected to be combined into a single trial in a Travis County state district court.
“In our opinion, Texas’ approved biennial budget failed to achieve structural solutions to the state’s long-term budgetary pressures,” Moody’s Samuels wrote. “Chief among these potential sources of persistent imbalances is education funding.”
Texas’ GO bonds are payable from a constitutional appropriation out of the first money coming into the state treasury not otherwise appropriated. Funds available for the debt equaled $38 billion at fiscal year-end 2011, according to Fitch.
The Texas Water Development Board issues financial assistance bonds under a 1997 constitutional amendment that consolidated the agency’s various authorizations, with debt proceeds supporting water conservation and related infrastructure projects.
While the program generally pays for itself, certain programs — including one for economically distressed areas, a state participation program, and the water infrastructure fund — receive general fund support.
Since creation of the TWDB in 1957, the Legislature and state voters have approved constitutional amendments authorizing it to issue up to $4.23 billion of bonds to finance water-related projects.
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 Texas in 2011, the importance of maintaining adequate water supplies became a high priority.
While widespread drought in Texas has eased with recent rains, the impact is expected to be long-lasting, according to economists and scientists.
The Texas AgriLife Extension Service estimates that 2011 production losses amounted to $5.2 billion.
Fires swept over many areas of the state, leaving the Bastrop area near Austin particularly hard-hit.
The Texas Forest Service reported that the drought killed as many as 500 million trees.
In a February report, state Comptroller Susan Combs assessed the economic impact.
“While recent rains have helped put a dent in drought severity in different parts of the state, we’re not out of the woods,” Combs noted. “Texas is prone to cycles of drought which makes it important for residents, businesses and state and local governments to manage water use. Every Texan has a stake in water issues the state faces.”
The TWDB’s 2012 state water plan predicts water demand in Texas will rise by 22% by 2060.
If the state suffers another “drought of record” like the one in the 1950s, it could cost Texas businesses and workers nearly $116 billion in income by 2060, the report estimates.
Combs’ report looks at innovative water-management solutions such as aquifer storage and recovery, used in cities such as San Antonio.
Other programs include the use of treated wastewater for irrigation, and conversion of brackish groundwater into drinking water.
“We also contacted water planners in cities in New Mexico and Arizona that have grappled with water issues since the 1980s and ’90s,” the comptroller said. “Their strategies range from diversified water portfolios that draw water from different sources to rebates for landscaping with native, drought-tolerant plants.”
