DALLAS - Schools and local governments in the three major oil and gas production areas of Texas can expect declines in taxable values and weaker economic activity if oil prices do not recover from their current lows, according to Fitch Ratings.
Despite a diversified statewide economy that is expected to cushion the blow of a 50% decline in oil prices, local issuers in the Barnett Shale of North Texas, the Eagle Ford Shale of South Texas and the Permian Basin of West Texas lack that kind of protection, Fitch analysts said.
The number of U.S. oil rigs in use fell by 61 last week - to 1,750 from 1,811 - according to data from oilfield services firm Baker Hughes. Almost half of the oil rigs shuttered last week came from Texas, where 30 rigs were down. Twenty-eight of those rigs were in the Permian basin.
"This slowdown will affect employment, hotels and restaurants, retail, and construction and other related businesses," Fitch analyst Steve Murray wrote Tuesday. "Cities will feel the impact in reduced sales tax receipts, building permits and other economically sensitive revenues."
The prospects for a downturn come at the crest of a boom for the producing regions. The city of Midland, which serves as the hub of the Permian Basin with its sister city Odessa, reported a nearly 16% increase in sales tax receipts this month. That figure represents sales in the month of November, counted by the Texas Comptroller in December and distributed in January.
A number of school districts in the Eagle Ford Shale region of South Texas have issued bonds after dramatic increases in their tax bases. Karnes County has seen its assessed property values grow nearly eightfold from $400 million to $3 billion in five years.
Karnes City Independent School District issued $14.3 million of bonds in August to deal with increased demand but kept the maturity to 10 years, reducing long-term risk. The bonds came with an underlying upgrade from Standard & Poor's to AA-minus from A-plus. With a guarantee from the Texas Permanent School Fund, the bonds carried triple-A ratings.
In a December report, Fitch reported that Texas has the most overvalued home prices in the country and that a correction may be coming due to falling oil prices.
"After largely skirting the excesses and downsides of the last housing boom, significant recent growth has made Fitch cautious on the Texas housing market," Fitch said. "Fundamentals do not appear supportive of current prices and the economy is vulnerable to the energy sector.
"Overall, Fitch views Texas prices as approximately 11% overvalued, with prices in Houston, Austin, and Dallas each growing by over 20% since 2011," Fitch said.
Texas has "vaulted past California and now has the housing markets deemed most overvalued," analysts said.
State Comptroller Glenn Hegar's biennial revenue estimate released Jan. 12 anticipates oil prices at $64.35 per barrel in fiscal 2015, 33% below the fiscal 2014 level, with prices remaining near this level through the forecast period ending Aug. 31, 2017. However, prices of West Texas Intermediate crude were hovering around $45 per barrel on the Nymex Exchange on Jan. 13, representing a greater than 50% drop from the June 2014 peak of more than $106 per barrel.
Texas cities and counties typically maintain tax rates well below statutory and constitutional limits, providing the legal ability to increase rates, Murray noted.
Texas school districts in exploration regions with debt service tax rates at or near the $0.50 per $100 of assessed value statutory maximum for new issuance may be unable to issue new tax-supported bonds if valuations decline materially and tax rates increase beyond the $0.50 cap.
The risk to school district operational funding is limited, as the vast majority of Texas school districts function within the target revenue system for operations. Under this funding approach, the state would make up for losses in locally generated (property tax) revenue to meet established per pupil revenue targets.
"Local governments that have witnessed sharp increases in tax base and/or economic concentration as a result of the exploration boom have more exposure to the effects of a downturn," Murray wrote. "Fitch believes the current ratings of these entities reflect this additional risk, and also notes that a number of these governments have built up significant reserves during the boom that may be needed to close any revenue gap before spending adjustments can be made."
