AUSTIN - Texas plans to invest heavily in transportation and water projects to meet the needs of the rapidly growing state, despite fiscal restraints and election-year politics, according to key players in the municipal bond market.
Texans, who have consistently supported statewide bond programs, will vote in November on a proposal to use $1.2 billion from the state's rainy day fund to repair and maintain heavily traveled roads in the oil and gas producing regions of the state.
The transportation proposal comes a year after voters agreed to divert $2 billion from the rainy day account to create a water implementation fund administered by the Texas Water Development Board.
The TWDB is actively promoting the new funding under the name SWIFT (State Water Implementation Program) as drought continues to grip the state, said Carlos Rubenstein, chairman of the TWDB.
"In less than 50 years, the Texas population will grow by 82%, and all of those Texans will need water," Rubinstein said. "We are currently traveling the state asking for public input on our newest program, which will begin financing state water plan projects in 2015."
Gov. Rick Perry convinced the Texas Legislature to tap the $11.8 billion rainy day fund for water and transportation by calling two special sessions last June.
But the Republican candidate to succeed him, Attorney General Greg Abbott, is calling for a constitutional amendment to restrict access to the rainy day fund and to require tax refunds when the fund exceeds 10% of the state budget.
Abbot is also promoting a new formula that limits state expenditures to the rate of population growth and inflation. The current formula limits spending to the rate of growth of personal income, which is less restrictive because the state's economy tends to grow faster than population plus inflation.
The tight-fisted approach has led ratings agencies to keep the state at triple-A, but the rapid growth and unmet needs also bring caveats.
"Financial pressures arise from the demand that rapid growth places on the state's consumption-based tax system, including longer-term transportation needs and the state's commitment to education," according to a Fitch Ratings report from November.
Economist Lacy Hunt, executive vice president and economist for Austin-based Hoisington Asset Management, said that the type of debt Texas is taking on for water and transportation is "productive debt," because it generates revenues through increased growth.
"State expenditures in Texas are of a nature that will be productive and that will pay for themselves," he said. "The demographic cycle is almost as important as the business cycle. In this overall poor economic environment, people are moving where the economic opportunity is growing."
For Texas lawmakers, the big issue confronting them in the 2015 legislative session is school funding. In the 2011 session, lawmakers cut $5.4 billion in state funding to schools, an historic move that brought a lawsuit from most of the state's school districts. A state district court judge ruled last year that the cuts violated the state's constitution.
In the 2013 session, lawmakers restored $3.4 billion of the lost funding, prompting State District Court Judge John Dietz to reopen the case to see if his ruling should be revised. Hearings are expected to last about a month.
According to analysis by Chandra Villanueva at the Center for Public Policy Priorities, Texas will spend $761 less per student than it did five years ago.
While near-record levels of energy production in Texas continue to create jobs and economic activity, transportation projects are keeping pace, particularly at airports and ports.
At Dallas-Fort Worth International Airport, officials envision the need for a sixth terminal as they undertake a $2.3 billion remodeling of the four original terminals.
Sean Donohue, chief executive of DFW, said the airport had its sights on a sixth terminal with traffic expected to grow to 70 million passengers by the end of the decade from the current 60 million.
Donohue's remarks came at a North Dallas Chamber of Commerce luncheon at the Frontiers of Flight Museum at Dallas Love Field Airport, which beginning in October will compete with DFW on long-haul flights for the first time.
Bob Montgomery, vice president for airport affairs at Southwest Airlines, is scheduled to talk about plans for Love Field on a panel discussion Tuesday at The Bond Buyer's Texas Public Finance Conference here that will include Mike Phemister, vice president for treasury at DFW.
"We view the elimination of the restrictions at Love Field as a non-event," Phemister said. New service from the freshly merged American Airlines and US Airways, along with the addition of new international flights, "will more than make up for any losses to Love Field," he said.
In Houston, Beaumont and Corpus Christi, port authorities are planning on dredging and other projects to get ready for the expansion of the Panama Canal that is expected to be complete in 2015 encouraging larger ships from Asia to sail to the U.S. Gulf and East coasts.
Jeffrey Powell, principal at the Houston investment firm Capital Maverick, sees the expansion of the Houston port as an opportunity to use social impact bonds, a form of investment designed to solve troublesome social problems in urban areas.
For Houston, a social impact bond might aggregate private capital to improve a once neglected neighborhood. Powell cited the use of private funds for lighting in Houston's Midtown Neighborhood, which has become a trendy section of the inner city.
"There are a lot of communities that are undercapitalized and lack proper infrastructure," Powell said. "However, they are primed for P3 development."
