Texas Taps Refunding Market as Lawmakers Apply Brakes on Bonds

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DALLAS — As Texas lawmakers look for ways to reduce the state's $44 billion debt, the Texas Public Finance Authority will take a step toward reducing the interest cost with a $218 million refunding of general obligation and revenue bonds.

The finance authority expects to price $136 million of GO bonds in two series on Tuesday, followed Wednesday by $82.2 million of revenue refunding bonds, according to TPFA executive director Lee Deviney.

The GO bonds carry the state's triple-A rating, while the revenue bonds are rated a notch lower at Aa1 by Moody's Investors Service and AA-plus by Standard & Poor's because they are subject to legislative appropriation.

The GO bonds reach final maturity in 2028.  The revenue bonds refund five issues for state agencies with final maturities ranging from 2018 to 2024.

Morgan Stanley and Raymond James are co-senior managers on the GO issue, with Hutchinson, Shockey, Erley & Co., Samco Capital Markets, and Siebert, Brandford, Shank & Co. as co-managers.

Jorge Rodriguez, managing director at Coastal Securities, is financial advisor on the GO's, with Norton, Rose, Fulbright as bond counsel.

Ramirez & Co. is book runner on the revenue bonds, with Mesirow Financial, Loop Capital Markets, and Bosc Inc. as co-managers.

Chris W. Allen, senior vice president at First Southwest Co., serves as financial advisor on the revenue bonds.

With interest rates on municipal bonds at historic lows and concerns about when the Federal Reserve will raise rates, the TPFA went to the Texas Bond Review Board on March 19 for approval of the refunding.

"Our expectation is that now is a very good time to go into the market," Deviney told The Bond Buyer. "Interest rates have held for a long time.  And we think this looks like a good week to price the bonds."

Results from Texas Transportation Commission refundings over the past year offer plenty of encouragement for TPFA, which ranks second behind the TTC in issuance of state general obligation and revenue debt.

The TTC achieved the greatest savings on a single bond deal in the state's history through a $1.68 billion refunding of revenue bonds for the Central Texas Turnpike System Jan. 21. Net present value savings of $380 million, represented more than 21% of the refunded bonds' value.

The January refunding followed a record refunding year for TTC in 2014 that lowered borrowing costs by $425 million. TTC's $5.52 billion in new money and refunding bonds in 2014 placed the agency second behind the state of California in volume for the year.

Deviney said that the fact that the state Legislature was in session was one factor in the timing of the refunding.

"That was part of the timing, to get to a point in our legislative session where we can advise and inform the legislature of this opportunity," he said.  "All we've received is support from the legislature and the governor."

Indeed, Republican legislative leaders have been paying as much attention to debt reduction as they have tax relief. With state coffers swollen from one of the best economic years in the state's history, lawmakers believe they can address both issues while also meeting the fiscal needs of the rapidly growing state.

"We have more money on hand than we believe any legislature has ever had at one moment in time dealing with budget issues," Lt. Gov. Dan Patrick said.  "Our sales tax numbers are still very strong. With the price of oil, it could well be that we will have a slowdown.  But we're not going to allow Texas to be steeped in debt."

Patrick, who presides over the Senate, appeared at a press conference earlier this month with Sen. Jane Nelson, R-Flower Mound, chair of the Senate Appropriations Committee, Sen. Kevin Eltife, R-Tyler, and Sen. Juan Hinojosa, D-McAllen, to discuss legislation that would allow lawmakers to reduce the state's debt or provide taxpayer relief without constitutional restrictions.

Currently, the state constitution counts any use of revenue toward paying down debt or reducing taxes as spending that is restricted by a spending cap. The spending cap is defined as the projected rate of growth of personal income over the next two years.

Passing a budget that exceeds the limit requires a simple majority of the House and Senate. Lawmakers last voted to exceed the spending cap in 2007 to pay for $14 billion in property tax cuts that technically counted as state spending. Aside from that event, the spending limit has rarely come up since voters first approved it in 1978. In most two-year budget periods since 2003, state spending has been more than $3 billion below the limit, according to the Legislative Budget Board.

In the 2015 session, lawmakers want to provide $4.6 billion in property tax relief and to use excess revenue in the rainy day fund to pay down debt.  To avoid having to go on record as busting the spending cap, they want a constitutional amendment that doesn't count those outlays against the limit.

"We all know that the intent of the provision was to control growth of government," Nelson said. "Giving money back to the taxpayers does not grow government.  In fact, I would argue the opposite. It's a no-brainer."

The leaders are urging passage of measures that would exempt tax relief and debt payments from the spending limit. Both the House and Senate have approved bills that would curtail certain types of bond issues.

"We take a lot of pride in our state that we are a pay as you go state and that we don't issue debt," Hinojosa said. "Unfortunately, through the last 10 or 12 years, our debt has grown tremendously."

In less than a decade, the state's debt has increased 188% to $43.5 billion, Hinojosa said. But that is just the principal, he noted. With interest the debt comes to more than $75.5 billion.

In the current session, the legislature is appropriating $3.9 billion for debt service, Hinojosa said.

"At times when we have a capital reserve in our banking account, at times when we have a healthy rainy day fund, we need to pay down that debt," he said.

Eltife is opposing a bill that already passed the House providing $3.1 billion of tuition revenue bonds for colleges and universities, even though the debt service would not count against the spending limit. TRBs have not been approved by any session of the Texas Legislature in the last decade, despite growing demands for the campus construction bonds.

In fiscal year 2014, which ended Aug. 31, the state's total debt increased to $44.33 billion from $43.54 billion in fiscal 2013 and $40.99 billion in fiscal 2012, according to the Texas Bond Review Board.

Bonds issued by Texas state agencies and universities during fiscal year 2014 increased by 25% to $7.91 billion from $6.32 billion issued in fiscal 2013. Of that amount $2.19 billion or 27.7% was issued as new-money bonds, a decrease of $2.79 billion or 56% from $4.98 billion issued during fiscal 2013.

The remaining $5.72 billion or 72.7% was issued as refunding bonds, more than four times the $1.33 billion issued during fiscal year 2013. Fiscal 2014 saw the largest decline in new money issuances during the last decade.

Texas state issuers expect to issue approximately $7.87 billion in bonds, commercial paper and variable rate notes during fiscal 2015. That amount includes $1.1 billion of GO highway improvement bonds expected to be issued by the Texas Transportation Commission.

According to Moody's 2014 State Debt Medians, Texas ranked 38th among all states in net tax-supported debt per capita, up from 39th in the prior year. Texas had $614 in net tax-supported debt per capita compared to the national mean of $1,436.

Texas' net tax-supported debt per capita ranked lower than that of the eight other states rated AAA.

Total debt receiving annual legislative appropriations from state general revenue for debt-service payments increased from $3.15 billion at the end of fiscal 2005 to $4.83 billion at the end of fiscal 2014, an increase of 54%, and a decrease of 0.3% from the $4.84 billion outstanding in fiscal 2013.

Texas ranked 2nd among the 10 most populous states in terms of local debt per capita but 9th in state debt per capita. In state and local debt combined, the state ranked 4th in per-capita terms.

With oil prices less than half of what they were just a year ago, revenue growth will be slower. In January, Comptroller Glenn Hegar released an updated revenue forecast that projects sales tax growth of 6.2% in the current fiscal year. That would exceed the 5.5% growth rate in fiscal year 2014.  However, the growth is expected to slow to 2.5% in fiscal 2016 before increasing to 6.4% in fiscal 2017.

Growth in total tax collections is forecast to slow from 8.2% in fiscal 2014 to 2% in each of fiscal 2015 and 2016 and 5.9% in fiscal 2017.

"The state's economic fundamentals are strong, but new challenges will emerge from low oil prices and the need to keep pace with demand for education, transportation and other spending in the fast growing state amid lower revenue growth," Moody's analyst Nicholas Samuels noted.

As a percentage of personal income, the state's net tax-supported debt is 1.5%, compared to the 50-state median of 2.6%, ranking Texas 40th, according to Moody's.

"The state's debt burden is low compared to others, but it has risen in recent years, pushed upwards in particular by both general obligation and revenue-backed issues for highways," Samuels said. "Approximately $2.4 billion, or 17%, of the state's outstanding net tax-supported debt is variable rate, high relative to most states."

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