DALLAS — The Texas Transportation Commission will refund $1 billion of general obligation bonds in what is likely the commission's last debt sale of the year.
The deal consists of $750 million of Series A bonds scheduled to price the week of Sept. 14 and $250 million of Series B that will be privately placed, according to the Texas Department of Transportation, the agency governed by the TTC.
With this issue, TTC will remain the largest volume issuer in The Bond Buyer's Southwest region with $3.4 billion of new money and refunding bonds in 2015.
The TTC has $6.4 billion of outstanding Mobility Fund bonds, a number that, because of new legislative restrictions, will not grow.
The triple-A-rated bonds are authorized under a 2001 constitutional amendment that created the Mobility Fund, with revenues from motor vehicle inspection fees, driver record information fees, driver's license fees, and certificate of title fees.
As of Sept. 1, the TTC is not allowed to issue any more bonds backed by the Mobility Fund for new projects. However, refunding issues are still permitted.
The new restrictions were part of House Bill 122, signed into law in June by Gov. Greg Abbott.
Despite the ban on new debt, Mobility Fund revenues will continue to grow.
Revenues increased by 4.2% in fiscal 2014 and are estimated to have decreased by 0.7% in fiscal 2015.
Texas Comptroller Glenn Hegar, using what he describes as conservative estimates, predicts that Mobility Fund revenues will grow by approximately 2% annually through 2045.
In the next fiscal year, Mobility Fund collections are estimated to provide 1.3 times debt service coverage, according to Moody's Investors Service.
Originally, Mobility Fund bonds were limited to an outstanding balance of $4 billion at any time. However, the master resolution authorized the commission to expand the program's issuance without bondholder consent, as long as the 110% minimum debt service coverage level was maintained.
The resolution has been amended three times since 2001 to increase the amount of bonds allowed to be outstanding.
The current limit of $7.5 billion will not be reached, since only $6.4 billion is currently outstanding and no new issues are allowed.
"While the Mobility Fund bonds are intended to be self-supporting, the commission also has implemented the state's general obligation pledge," Moody's analyst Nicholas Samuels wrote. "The practice of having self-supporting bond programs that also carry the GO pledge is common in Texas."
The limits on Mobility Fund bonds were offset by new sources of funding approved by the Legislature and awaiting voter approval in November.
Proposition 7 would amend the constitution so that $2.5 billion of state sales tax revenue can be funneled into the State Highway Fund beginning Sept. 1, 2017.
Beginning Sept. 1, 2019, 35% of revenue from the sales and use tax on motor vehicles exceeding $5 billion would be dedicated to the State Highway Fund annually. For example, if $6 billion came in, then 35% of $1 billion, or $350 million, would be dedicated to the fund. The allocation would expire on Aug. 31, 2029.
Texas voters generally support funding measures such as Proposition 7.
Last year, they overwhelmingly approved the ballot measure known as Proposition 1, diverting oil and gas tax revenues that typically go into the state's rainy day fund to the State Highway Fund.
Hegar certified that $1.74 billion would be available for transfer to the State Highway Fund for fiscal year 2015.
The TTC on Aug. 27 awarded more than $304 million worth of roadway projects from Proposition 1 funds. The commission has now approved final contract awards on 115 of the 200 planned Proposition 1 projects across the state.
At the same meeting, the TTC approved a $12 billion operating budget based on funding from the legislature.
Passing a budget for the 2016 fiscal year beginning Sept. 1 was relatively easy for Texas lawmakers after one of the most prosperous years in Texas history. But trend lines for declining oil and gas revenue have prompted caution from analysts.
"In our view, the volatility in the energy sector presents a potential downside risk to the state's economy and an extended contraction in oil prices could have a significant impact on employment and other areas of economic growth in the state," Standard & Poor's analysts Eden Perry and Kate Choban wrote in affirming S&P's AAA rating and stable outlook.
"A continued decline in exports due to the strong dollar and weak demand could have an overall impact on the state's employment base and economic performance," they wrote. "However, we also believe that the growing diversity of Texas' economy will help mitigate the impact of a decline in energy prices, although additional declines from the current level could increase the negative economic impact."
Hegar's latest revenue update assumes that the taxable price of oil will be $64.35 per barrel in fiscal 2015, which is about 35%-40% above the current taxable oil price.
However, S&P notes that oil production taxes comprise only 5% of Texas' general revenues in the fiscal 2016-2017 biennial revenue estimate, with natural gas production taxes comprising another 3%.
"In our view, declines in oil and gas revenues will limit the increases in the economic stabilization fund -- also known as the rainy day fund -- and state highway fund but have a more limited impact on general revenue spending, given the funding formula for the state's ESF and SHF," Perry and Choban wrote.
Through June 2015, the tenth month of the fiscal year, Texas' unrestricted general revenues were $79.2 billion or 2% greater than the forecast, and expenditures were $73.1 billion or 3% greater than forecast for the same period.
Oil and natural gas production taxes were below forecast by a combined $1.42 billion, or 40% below projections.
"Texas' long-term 'AAA' GO rating reflects its low debt burden, conservative financial operations and a growth-oriented economy that has outpaced national averages throughout the current expansion," Fitch Ratings analysts Douglas Offerman and Marcy Block wrote in their Aug. 29 ratings report. "The oil price plunge that began in late 2014 has slowed the state's economic and revenue momentum, although broad growth continues despite modest weakness in some regions and sectors."
Texas' net tax-supported debt has risen with issuance over the last decade for transportation needs, but remains low measured against personal income, according to Fitch.
"On a combined basis, net tax-supported debt and pension liabilities attributable to the state as of Fitch's 2014 state pension update report equaled 6.1% of personal income, roughly in line with the median for U.S. states," Offerman and Block said.
"Liquidity is ample, and the state is not undertaking cash flow borrowing in fiscal 2016 to meet intra-year cash needs for the first time in decades," they said. "The state has been a leader in economic growth for decades, diversifying Texas' economy well beyond the resource sectors that were dominant during the last severe oil price shock, in the 1980s. Rapid growth and the concomitant demand for public services, including for transportation, education and water, continue to pose a long-term fiscal pressure."
JP Morgan is book-runner on the Series A deal, with executive director Jamie Scranton as lead banker. Piper Jaffray is co-senior manager. The Series B bonds will be privately placed with Citibank. Paul Jack, executive vice president at Estrada Hinojosa, is financial advisor.
