DALLAS – Amid an increasingly worrisome economy, Texas leaders and bond industry executives gather in Austin Monday at The Bond Buyer's Texas Public Finance Conference to explore factors that could affect state and local debt.
Among those
Economist James Galbraith of the University of Texas' Lyndon B. Johnson School of Public Affairs is expected to detail his projections for lower growth, given the systemic damage that occurred in the 2008 global financial crisis.
Falling oil prices are being felt in the Lone Star State.
While Texas' economy has grown increasingly diverse since a 1986 oil price collapse that wiped out the state's banking sector and led lawmakers to create the $10.4 billion rainy day fund, few bond issuers in the state are ignoring the implications of the current slump.
"As prices find new lows, budget pressure has started to grow even for Texas," according to Moody's analyst Nicholas Samuels who co-authored a Jan. 28 report on the state's outlook.
"As oil prices remain low, sales tax collections in the first four months of the state's fiscal year are down 2% compared to the prior year," he wrote. "For the biennium sales are estimated to grow 6.5%.
"Considering these trends and the state's conservative approach to its finances, we also expect Texas will make spending cuts at some point during the biennium," Samuels wrote. "Absent any spending cuts, the budgeted cushion would be depleted by December 2016 if sales tax collections remain at December 2015 levels and outflows continue to exceed forecasts at a similar pace."
At the local level, assessed valuation of Texas counties in the Eagle Ford Shale and Permian Basin producing regions fell 6% in fiscal 2016, according to Moody's.
"The prolonged rout in prices, along with curbed production in certain areas, will strain the income potential of mineral-producing properties and reinforce the downward trend of property values," analysts wrote. "Tax bases with high mineral values relative to total market value will see the most significant declines."
Sales tax revenues distributed to local governments in the two regions were down 0.9% in 2015 from the prior year due to reduced spending in the oil and gas industry, analysts said.
"Weaker consumer spending will pressure sales tax revenues throughout the year," Samuels wrote.
The lower oil prices affect spending plans in transportation under a new funding mechanism that diverts a percentage of funds from the $10.4 billion Rainy Day Fund made up of tax revenue from oil and gas production in the state. While the fund is at the highest level since its creation in 1988, it is below the $11.1 billion forecast in 2015 by Texas Comptroller Glenn Hegar.
The Texas Department of Transportation will also for the first time receive a percentage of sales tax revenue based on a formula approved by voters as Proposition 7.
Starting in 2018, once state sales tax revenue exceeds $28 billion in a fiscal year, the next $2.5 billion of revenue will be directed to the State Highway Fund. Then, beginning in 2020, 35% of the state motor vehicle sales and rental tax revenue in excess of $5 billion will be directed to the State Highway Fund.
For calendar year 2015, Texas sales tax revenues were virtually flat at $28.59 billion.
Texas Department of Transportation executive director James Bass and Texas Transportation Board Commissioner Jeff Austin III are expected to tell the conference about bond issuance plans to finance expansion of the state's roadways, particularly in congested urban areas.
In previous years, one of the top concerns was paving roadways in the oil and gas producing regions, where a number of traffic accidents had claimed lives. With the rig count down, activity in the fields is expected to diminish with the lower prices.
Despite the falling prices, Texas ports are continuing expansion and dredging projects in anticipation of new locks at the Panama Canal and new laws allowing exports of oil from the United States. Amid rising production in the U.S. Congress lifted the 40-year-old ban at the end of 2015. While oil producers had hoped that exports would improve prospects, the diminishing spread between the price of West Texas Intermediate crude and Brent Crude from the North Sea has blunted the incentives.
"Port Corpus Christi's deep draft ship channel and strategic location to some of the largest production areas in the US provides a secure and competitive supply chain to markets worldwide," port executive director John LaRue said in a prepared statement after the first U.S. overseas oil shipment left the port. "Future capital improvements including deepening the ship channel will accommodate larger vessels that are required to cost effectively supply US crude oil to global markets."
LaRue, who is scheduled to appear on a panel discussing energy issues, is also working with TxDOT on replacing a bridge at the port that could cost about $1 billion.
Up the coast, the Port of Houston is also ready for bigger things.
In 2016, the Houston Port Authority expects to commit $314 million for various capital projects. At the port's Barbour's Cut cargo facility, a $700 million project will include new cranes, lights and dock improvements to continue to improve cargo handling.
