Advance refunding ban a factor as Texas projects reduced issuance

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DALLAS -- A 26% drop in bond volume is expected from state agencies and universities in the current fiscal year, according to the Texas Bond Review Board.

The anticipated $2.04 billion decline in Texas to $5.7 billion is in line with national forecasts of a 20% drop in volume for the calendar year based on a survey by the Securities Industry and Financial Markets Association.

SIFMA attributed the lower anticipated national volume in part to new federal tax law that eliminates advance refundings.

The BRB forecast is based on surveys of state agencies and universities done twice a year, according to the board that reviews state bond issues and compiles data on local issuance. But actual results can vary from the forecast, with refundings playing a role in the unpredictability.

For the 2017 fiscal year, the board anticipated a 25% drop in issuance, but refundings brought a 19% increase.

The Texas fiscal year begins Sept. 1 and ends Aug. 31.

“We do expect to see a reduction in state issuance,” said Rob Latsha, interim director of the BRB. “In the last Texas legislative session, there were no new debt authorizations, and then there will be the impact of new federal tax law ending advance refundings. We don’t know how much that will affect issuance, but there will be an impact.”

The report does not differentiate between advance and current refundings, but Latsha said state analysts and bond lawyers are digging into the issue in the wake of the new tax law.

“Once everybody’s had a chance to digest that tax bill, we’ll probably get a clearer picture,” Latsha said.

Jonathan Leatherberry, bond counsel at the law firm of Bracewell in Dallas, said the prediction of a 26% drop-off echoes what he’s hearing.

“I think you’re going to see a significant falloff in 2018,” Leatherberry said. “There’s going to be a number of bond attorneys and underwriters who are not going to have a lot to do.”

Leatherberry noted that the new law not only ends advance refundings but also has a direct impact on health-care deals. The tax bill ended a tax penalty for failing to acquire health insurance.

Moreover, it is going to take time for bond lawyers and tax attorneys to understand the intended and unintended consequences of the new law to produce preliminary official statements for bond deals, Leatherberry said.

“It’s a time when I think that everyone should be very careful so that the tax law does not create a situation where you say ‘uh-oh’ a year from now,” Leatherberry said. “The securities law doesn’t care if you don’t understand the new tax law.”

At the end of fiscal year 2017 on Aug. 31, Texas’ total debt outstanding, including conduit debt, grew 6.6% to $53.01 billion compared to $49.75 billion in fiscal 2016 and $47.09 billion in fiscal 2015, the BRB reported.

Bonds issued by Texas state agencies, colleges and universities during fiscal year 2017 increased by 19.1% to $8.65 billion compared to $7.26 billion issued in fiscal 2016.

Fiscal year 2017 issues included $5.33 billion in new-money and $3.32 billion in refunding bonds. Other debt issued included $1.35 billion of commercial paper.

The refunding bonds, which made up more than 38% of total issuance, increased by more than 23% in the fiscal year compared to $2.69 billion the previous year. Net present value savings from fiscal 2017 refundings totaled $226.6 million.

The largest issuers of new money bonds in FY 2017 were the Texas Transportation Commission with $1.47 billion, Texas A&M University System with $770 million, the Texas Water Development Board with $626.7 million and the Texas State University System with $380.3 million.

Of the $3.32 billion in refunding bonds issued in fiscal 2017, the University of Texas System accounted for nearly 40% with $1.32 billion, followed by the TTC with $859.5 million or 25.9%. The Texas Public Finance Authority’s $458.7 million made up 13.8%. The University of North Texas System issued $118.3 million.

Authorized but unissued state debt dropped by 9.7% to about $14 billion at the end of fiscal 2017. About $2.93 billion of the authorized but unissued amount is considered not self-supporting and includes general obligation and non-GO debt payable from general revenue.

Among local issuers, fiscal 2017 was a low year for refundings at $11.56 billion, a decrease of 49.7% from the record total of $23 billion issued during fiscal 2016, according to the annual report.

Over the past five fiscal years, more than 96% of local governmental refundings achieved both a cash and present value savings, the report showed. One percent provided only a net present value savings with a cash loss, and 1.3% resulted in a loss in both.

“In the latter cases, the primary objective was to restructure debt service requirements to more evenly match budget flows and thus avoid raising taxes during times of economic weakness,” the report said.

Since fiscal 2013, refundings for Texas local issuers achieved cash savings of $12.44 billion with a present value savings of $9.39 billion including $2.25 billion in cash savings and $1.49 billion in present value savings realized in fiscal 2017.

Texas ranked second among the ten most populous states in terms of local debt per capita, fourth in total state and local debt per capita and seventh in state debt per capita.

Total tax-supported debt per capita grew by 3.8% from $4,921 in fiscal 2016 to $5,110 in fiscal 2017, the report said.

Over the past 10 years debt per capita has increased by 26.6% or $1,074 while the state’s population has increased by 16.6% or 4 million.

Over the past decade, total local debt outstanding, excluding conduit debt, increased by 46% from $149.39 billion to $218.03 billion. During that period, debt for school districts grew 47% from $54.28 billion to $79.91 billion.

Other notable increases included other special districts, such as municipal utility districts, which increased 95% from $8.89 billion to $17.35 billion and hospital districts which increased 89% from $1.77 billion to $3.36 billion.

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Refunding bonds General obligation bonds Trump tax plan State of Texas Texas A&M University System Board of Regents The University of Texas Board of Regents Texas Transportation Commission Texas