Texas Board to Issue $153 Million of Water Bonds in Shadow of a Drought

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DALLAS - To help combat drought and despite the sagging economy, Texas will keep funds flowing for water infrastructure with $153 million of general obligation bonds scheduled to price next week.

An attractive credit from a state doing considerably better than most others is expected to meet solid demand, as risk-averse investors continue their flight to quality. The bonds carry ratings of AA from Standard & Poor's, Aa1 from Moody's Investors Service, and AA-plus from Fitch Ratings.

The pricing will begin with a retail order period, followed by institutional orders later on Monday or Tuesday, according to Nancy Banks Marstiller, development fund manager for the Texas Water Development Board.

"We haven't been in the market for new money since June 2008, and the market's changed quite a bit since then," she said. "We're hoping it will be well-received. The new Water Infrastructure Fund loan program is very popular."

"I think high-credit-quality bonds with a steady revenue stream are going to find good bids," said Jeffrey Timlin, portfolio manager for Sage Advisory Services in Austin. While bonds of this type have a chance to be oversubscribed, "a lot of that depends on the tone of the market," he said. "We've seen a bit of softening since the first two weeks of the year."

And with no state income tax in Texas, there is less incentive for retail investors to buy Texas paper above others, Timlin noted.

The negotiated deal is led by Morgan Stanley with eight co-managers. First Southwest Co. is financial adviser.

The bonds are the first of the year from the Texas Water Development Board, one of the state's largest purveyors of general obligation debt, and the second issue under the Water Infrastructure Fund.

The bonds come from $450 million appropriated by the state Legislature in its 2007 session for the Water Infrastructure Fund that provides low-interest loans for local governments with up to 10-year deferrals for planning, design, permitting, and environmental clearance. Last May, the TWDB sold $113 million of bonds for the fund.

The board may issue another $183 million of bonds for the program in May or June, Marstiller said.

As Texas was considering its long-term needs for water amid aggressive population growth, voters approved a state constitutional amendment providing $2 billion of bonds for water development on Nov. 6, 2001. In November 2007, voters approved another $250 million for loans to impoverished areas for water projects. After this issue, the state will still have more than $2 billion of debt authorized but unissued.

"As of today, the TWDB has sufficient bonding authority to address water and wastewater needs for several years to come," the board noted in its funding request for the 81st Session of the Texas Legislature, which opened last month. "However, based on the demand anticipated for new water-supply project funding, additional bond authorization will be needed in the near future."

The board itself was created in 1957 after one of the worst droughts in Texas since the Dustbowl. Since then, it has authorized more than $11 billion in loans. The current 50-year plan that created the 16 planning regions also was born from a severe drought in the 1990s. The TWDB supervises the voter-approved plan for development and conservation of water in the state, approves water plans for 16 regions, and helps resolve conflicts between them.

Based on current projections, demand for water in Texas is expected to exceed supply by 400,000 acre-feet in 2010, growing to seven million acre-feet in 2060. An acre-foot is an acre of water a foot deep.

Texas' quest for water is so aggressive that the Tarrant Regional Water District in Fort Worth filed suit in U.S. District Court in Oklahoma City to invalidate Oklahoma's ban on the sale of water beyond state lines. The 10th U.S. Court of Appeals in October ruled that the suit can proceed.

According to the National Drought Mitigation Center, more than 70% of the state is in some stage of drought, with Central Texas hardest hit. Farmers in the region have limited their planting of winter wheat and may have to do the same with spring wheat, according to the Texas Agri-Life Extension Service.

At the same time, economic uncertainty is growing, as the national recession reaches deeper into Texas. For the first time since 2004, the state's unemployment rate in December rose to 6% with the loss of 25,700 jobs.

"Our state's economy has stood up fairly well during these months of economic uncertainty, but the national economic storm has reached Texas," said Texas Workforce Commission chairman Tom Pauken. "A loss of more than 25,000 jobs in December is a hard hit to our state's economy, which until now has been fairly resilient."

In affirming its rating, Standard & Poor's noted that Texas' diversified economy is outperforming the nation's.

"The state's position as both the nation's leading exporter and the locus for much of its energy sector, contributed to continued economic and employment growth for much of 2008," analysts Horacio Aldrete-Sanchez and James Breeding observed. "However, the decline in oil prices has already affected related industries such as mining, construction, and retail sales. The state comptroller forecasted a loss of 111,000 jobs in fiscal 2009, and a decline in gross state product growth to 1.8%."

As the current Legislature prepares to deal with troublesome education and transportation funding issues, the state enjoys growing reserves, a healthy rainy-day fund, and a low per-capita debt burden. However, Standard & Poor's sees budget pressures increasing from the need for more school funding and a growing reliance on the state to provide it amid weakening revenues.

"The greater share of state funding for schools has the potential to drastically increase the pressure to spend the reserves accumulated over the past two fiscal years, particularly if revenue growth wanes over the next two years," the analysts wrote.

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