Texas to price largest TRANs deal in five years

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DALLAS – Texas will price its largest issue of tax and revenue anticipation notes in five years with an Aug. 22 sale of $7.2 billion.

The amount matches the issuance of 2013 but is $2.2 billion below the record $9.8 billion issued in 2011 and 2012. Flush with cash in 2015 and 2016, the Lone Star State did not need to issue the short-term notes in those years. Before that, Texas had sold TRANs every year since 1987.

In last year’s $5.4 billion issue, the Comptroller's office received 66 bids worth $20.5 billion, 3.8 times the amount offered for sale, Texas Comptroller Glenn Hegar said.

Texas issues TRANs to cover uneven cash flow to the state’s 1,031 school districts over the course of the fiscal year that runs from Sept. 1 to Aug. 31. Texas is one of the largest issuers of the notes among states.

Hegar projects the maximum temporary cash shortfall will arrive on Dec. 13 at an estimated $15.2 billion to application of the note proceeds and intrafund and interfund borrowing.

As expected, the state received top ratings on the notes equivalent to its triple-A general obligation rating from four agencies.

Hegar, who oversees the sale of the notes, said the ratings reflect efforts to maintain fiscal discipline in a rapidly growing state.

“Our diversified economy, rising employment and solid revenue growth, coupled with Texas’ history of sound fiscal management and responsible cash-flow projections, contribute to these ratings, which are crucial tools to reduce borrowing costs and save taxpayer dollars,” Hegar said. “These are the result of conservative economic leadership and sound policies.”

Texas is on pace to collect record sales tax revenues, with record tallies every month of the current calendar year.

Hegar’s recent revision to the Certification Revenue Estimate (CRE) by $2.67 billion is another sign of the state’s robust economic growth over the past 12 months. It was the first time a Comptroller has ordered a revision to the estimate for a reason other than a legislative session in three decades. Hegar said the latest CRE fulfills a promise Hegar had made to keep legislators and the public aware when the revenue outlook changes significantly.

“We believe the state comptroller’s office has developed conservative cash-flow projections consistent with the state’s strong financial management policies and practices,” said S&P analyst Oscar Padilla, who noted the state’s “robust economic growth” and “sizable rainy day fund” as key elements of its rating.

Texas' credit rating “reflects strong balances forecasted to be available to repay the notes when due, including robust alternate liquidity that the state comptroller can divert to noteholders if necessary,” according to Moody’s Investors Service.

“While the oil and gas industry is still a significant part of the economy and fluctuations in oil and gas market prices impact employment and economic activity in the state as well as state revenues, we believe that the State’s economy has diversified and expanded well beyond its past reliance on this sector,” analysts at Kroll observed.

Analysts also warned of potential risks to the state’s economy and echoed warnings Hegar delivered to lawmakers regarding the dangers posed by ongoing trade tensions and lingering balance-sheet issues.

“Though current economic indicators remain positive, the State economy is also potentially subject to risks posed by changes in federal trade policy, particularly as it impacts U.S. participation in the North American Free Trade Agreement,” Kroll analysts said.

S&P predicted that “Texas’ growing prosperity is not likely to abate within the short term,” but that “emerging trade tensions could have a pronounced effect on the state.”

As the country’s leading exporter, Texas’ economic industries are strongly part of the global supply chains and related business services that support local economies.

Texas will also “wrestle with how to fund agency expenditures related to Hurricane Harvey recovery and cleanup efforts, as well as other policy areas requiring supplemental appropriations including Medicaid,” Padilla said. The Texas note sale comes three days before the anniversary of Harvey’s landfall, an event that has shown no long-term damage to most local credit ratings and did little to slow the state’s booming economy.

To avoid potential risks to the health of the state’s finances and to maintain its triple-A credit rating, Hegar has recommended a more prudent and fiscally responsible approach to managing the state’s $11 billion Economic Stabilization Fund, commonly known as the “rainy day fund.”

Hegar has urged creation of a Texas Legacy Fund, a permanent endowment for the state that would earn investment income to begin paying down Texas’ long-term obligations and safeguard the state’s savings account against future economic fluctuations.

In a separate report, Moody’s analyzed a decision by the Board of Trustees of the Teacher Retirement System of Texas to lower its assumed rate of investment return to 7.25% from 8% and deemed the move credit positive for the state as well as school districts, universities and community college districts.

“TRS has reduced the risk that investment returns will consistently fall below target and concurrently increased the likelihood that the state will act to improve ongoing pension contribution shortfalls,” analyst Thomas Aaron said.

The lower discount rate will increase the reported unfunded liability of TXTRS to about $45 billion from $34 billion, as of its August 2017 actuarial portfolio.

Ranked by assets, TX TRS is the fifth-largest U.S. public pension system, per Moody’s.

“Public pension systems with discount rate assumptions of 8% or higher are an increasingly shrinking minority nationwide, and compared to the other largest U.S. public pension systems, TX TRS has kept a far more aggressive discount rate assumption for some time,” Aaron noted.

The California Public Employees' Retirement System, California State Teachers' Retirement System and New York State & Local Retirement System each have 7% reported discount rates. The Florida Retirement System's actuaries recently mandated the use of a 7.1% discount rate for that system's accounting disclosures because they considered its 7.5% investment return assumption unreasonable.

“Pension asset risk of participating governments in TX TRS will not decline in conjunction with its lower discount rate assumption because the system will not alter its investment allocation,” Aaron said. “Instead, TX TRS is lowering the risk that its current investment portfolio will consistently miss its investment return target, which is still positive for sponsoring governments' credit quality.”

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