AUSTIN – Texas state and local governments are generally well positioned financially for a continued slump in oil prices, but further adjustments would be needed if the energy industry remains in decline past 2018, experts told The Bond Buyer's Texas Public Finance Conference.
"Even if there is no growth in the economic stabilization fund, we feel the state is well positioned for the next biennium," Eden Perry, director at Standard & Poor's told the conference.
The economic stabilization fund, better known as the "rainy day fund," was established in 1987 after plummeting oil prices devastated the state's banking and real estate sectors.
"This is not the first time for Texas," Perry said. "The state and many local governments have 'been there, done that' – and learned."
One county where the top administrator has learned about booms and busts in the oil industry is Dewitt County in the heart of the Eagle Ford Shale producing region.
County Judge Daryl Fowler convinced his county commissioners and citizens to stabilize the tax rate after a massive expansion of revenue during the boom cycle.
"In 2013 the county saw a sheer doubling in the value of its tax base," Fowler said. The hydraulic fracturing industry rapidly expanded the need for new roads, law enforcement and other services.
"Our county was totally overwhelmed in our capacity to deal with it," he said. Bold moves needed to be taken."
Rather than taking on debt to manage the demands, Dewitt County is getting out of debt.
"On 9:01 a.m. this Friday, Dewitt County will be debt-free," he said.
For local school districts, however, administrators had to take on debt in order to retain some of the soaring value from the oil and gas production. Under Texas law, property rich districts have to share excess revenue with property poor districts. School districts in the Eagle Ford Shale – formerly property poor – found themselves with an influx of new residents and a gusher of tax revenue. The only way the districts could retain the new income is by issuing debt. The districts are allowed to apply the new revenue to debt service.
"Over $200 million of school debt was issued in Dewitt County," Fowler said. "I do think there's a day of reckoning coming."
Even if oil prices stay low for a prolonged period of time, "South Texas will never be the same," said Leodoro Martinez, a former local government official and now chairman of the Eagle Ford Consortium.
"Knowing that the boom is usually followed by a bust, we took on what we considered a sustainable future," Martinez said.
Communities in the region typically opted for shorter-term debt and call options in the event capital projects met declining demand, he said.
"When the price of oil went down, most of our communities were prepared," he said.
For John LaRue, executive director of the Port of Corpus Christi, the oil boom has brought major expansion projects, including a new Cactus Pipeline that will feed West Texas Intermediate Crude from the Permian Basin of West Texas to the port, where it can be loaded onto tankers.
"That's a big shot of new oil that will be coming into the port," he said.
For the first time in 40 years, U.S. law allows exports of oil and gas from the U.S. While the low prices are not likely to make that a major factor in the industry, many of the new projects at the port are designed for the long run, LaRue said.
The port is working with the Texas Department of Transportation on construction of a new bridge over the port that is expected to cost nearly $1 billion. The port has also improved rail facilities.
"We're going to have the best rail handling system of any port on the Gulf of Mexico," LaRue said.
