DALLAS – A prolonged slump in energy markets has tempered the Texas economy, but not enough to cost the state its triple-A ratings.
Despite downgrades for several oil-dependent local issuers, the state retains stable outlooks on the gilt-edged ratings of its top credit.
That is expected to draw investors to $188.7 million of general obligation refunding bonds issued through the Texas Public Finance Authority in a negotiated deal Wednesday.
"It's top-rated Texas general obligation debt," said TPFA executive director Lee Deviney.
"It just doesn't get any better than that, so we expect strong demand from the market," he said.
"Texas employment is still growing but has slowed in recent months as low oil prices began to have a broader impact on the state economy," Moody's Investors Service analyst Nicholas Samuels wrote in an April 27 report.
Starting in October, Texas employment growth slowed to a pace lower than that of the U.S. For the first three months of 2016, Texas employment has grown by an average of 1.6%, compared to the US growth average of 1.9%, Samuels said.
While activity in the Texas oil patch is not expected to rebound anytime soon, recent futures prices of around $45 per barrel for West Texas Intermediate crude indicate that the bottom of the market may have passed, experts say. Samuels noted that a rise in year-over-year sales tax revenue for March was the first in five months for the state. State Comptroller Glenn Hegar confirmed a second month of growth in April.
"The Aaa rating reflects the strong fundamentals of the Texas economy," Samuels said, including "a rainy day fund that provides a healthy budgetary cushion and low bonded debt levels."
Deviney said that an anticipated present value savings of 4.3% or $8.2 million for this week's deal is a conservative estimate. The bonds to be refunded could come from 2009, 2010 or 2011 series, which were already carrying low, post-recession interest rates.
"When we did this a year ago I thought we'd never see this opportunity again, and, sure enough, we do," Deviney said of the continuing low-interest rate environment.
The syndicate is led by John Daniel, managing director at book-runner Barclays Capital. Jorge Rodriguez, head of public finance for Coastal Securities, is the agency's financial advisor.
The state's triple-A rating is invaluable to TPFA, which issues GO bonds for other state agencies. Apart from water and transportation, TPFA is the state's primary GO bond issuer.
Standard & Poor's sees no shortage of downside risk for the Lone Star State. As the nation's largest oil and gas producer and home to the top energy corporations, the economic risks are cyclical and vary in intensity.
On Oct. 13, 2015, Texas Comptroller Glenn Hegar revised the anticipated average price of oil down to $49.48 per barrel for fiscal 2016 and $56.52 per barrel for fiscal 2017. That was down from the report's January estimate of $64.35 per barrel for fiscal 2015 and closer in line with industry forecasts and Standard & Poor's recently revised assumptions on oil and gas prices to be $40 per barrel.
Despite the recent rally in oil prices, legendary Texas oilman T. Boone Pickens recently declared the U.S. industry "dead in the water" amid unrestrained production in Saudi Arabia, Iraq and Iran.
Trade through the state's ports and its border with Mexico also face some handicaps in the global economy, even though oil and gas exports are now legal under federal law.
"A continued decline in exports due to the strong dollar and weak demand could have a negative impact overall on the state's employment base and economic performance," S&P analyst Eden Perry wrote in her April 22 report.
"However, we also believe that the growing diversity of Texas' economy will help mitigate the impact of a decline in energy prices, although additional drops could increase the negative economic impact."
In a separate report on budget outlooks for the 50 states, S&P cited four downgrades and 11 negative outlooks in 2016, up from seven when the year began.
"Most of the 20 states poised for faster economic growth are also those with more rapid population increases—and vice versa," analysts explained. "Arizona, Colorado, Florida, Nevada, Texas, and Utah are all both among in the top 10 in population growth since the end of the recession and have projected economic growth rates through 2020 that are more than one standard deviation above the other states."
While Texas boasts a relatively young median age of 33 years, the median age for Hispanics, who make up 37% of the state's population, is 27. Per capita personal income is 98% of the U.S. level and Texas has the eleventh highest poverty rate among the states.
"Standard & Poor's economists believe that the aging of the population—including the retirement of the baby boom generation—has reduced the annual Gross Domestic Product growth rate by 0.6% annually from 2004-2014" compared to the decade of 1994 to 2004, analysts wrote in the April 27 outlook. "This trend is expected to continue and even intensify. It's possible that demographic factors alone could shave 0.8% from annual GDP growth throughout the next eight years as the baby boomers continue receding into retirement."
For Texas budget planners, the bountiful year 2014 continues to pay dividends.
The state expects to end the fiscal year with a $4 billion fund balance and another $10.4 billion in the rainy day fund. Combined, those funds equal 28% of appropriations, according to S&P.
The net revenue report for the first seven months of fiscal year 2016 issued in March shows total general fund revenues coming in at 4.7% over the same period from the previous year. The report shows actual general revenues up $2.56 billion, or 5.2% above the forecast for the first seven months of the fiscal year.
"This is mainly due to an increase in federal funds, intergovernmental transfers and lottery revenue," Perry wrote. "The report also shows general revenue expenditures exceeding the forecasted expenditures by $3.93 billion, or 7.7% over the forecast."
Hegar reported last week that sales tax revenue for April surpassed that of the same month in 2015, the second month in a row of growth after five months of decline. With no income tax, Texas relies heavily on sales tax revenue.
A pending issue that could heavily impair Texas' financial health involves a business tax on products used in oil and gas exploration.
In March, the Texas Supreme Court heard arguments from the state and the oil and gas industry about the legality of a tax imposed on pipe used in the industry. Oil companies want a refund of previously imposed taxes, claiming that state law exempts the material from taxation.
Hegar has warned state lawmakers that a ruling against the state could trigger a flood of refunds that would erase the state's projected $4 billion budget surplus.
