AUSTIN — Texas has emerged from the recession with its credit intact, but the state faces major adjustments to environmental patterns and demographics that are likely to affect long-term investors, experts told the Texas Public Finance Conference here Monday.
The state’s rapidly growing population means that state and local governments are struggling to maintain services as they adopt austerity measures that were forced by falling revenues in the past three years, said John Heleman, chief revenue estimator and Texas Comptroller of Public Accounts.
While the state has recovered all of the jobs lost in the recession, the unemployment rate has remained around 8% because job creation has not kept up with the increasing population, according to Heleman.
Between 2000 and 2010, the population of Texas grew by more than 20% to 26.2 million, according to Census data.
However, the non-Hispanic white population grew by only 4.2% during that time as the Hispanic population grew at nearly 42%, according to the data.
Rapid growth in the Hispanic population in the United States and Texas has corresponded to lower income and lower levels of high-school graduation, noted Steve Murdock, former director of the U.S. Census Bureau and now a professor of demography at Rice University.
“I think we really have two populations in Texas,” Murdock said. “The aging Anglo population and the young and growing Hispanic population.”
Speaking as an aging Anglo Baby Boomer himself, Murdock said: “We’re going to need the help of that younger generation. And that other population needs help with its future, because it’s the key to the future of Texas and the U.S.”
For investors, the shifting demographics could affect credit quality over the long term, noted Dennis Whittaker, vice president and fixed-income portfolio manager for Arvest Asset Management.
“As we saw from the demographics, things can change in a big, big way over the decades,” he said.
While Whittaker appeared bullish on Texas credits, he acknowledged that he is careful about investing in water and sewer bonds, given the state’s severe drought that has caused rationing in some places.
“We are very concerned about water levels in Texas,” he said. “When Irving issued a water and sewer bond, we actually went out and looked at the reservoir levels before we made a decision to buy.”
According to the Texas Water Development Board, 83% of Texas could be short of water in a drought by 2060 if investment does not keep pace with pace with population.
Every billion dollars in financial assistance provided by the state water plan would generate $1.75 billion in sales revenues in the construction, engineering and materials sectors, according to the water board.
It would also create $889 million in state gross domestic product and add $43.9 million in state and local tax receipts.
As issuers look to record low rates, muni market investors are increasingly returning to the sector as last year’s warning of a muni bond collapse from analyst Meredith Whitney appears overwrought, investment experts said.
Nonetheless, high-profile bankruptcies in Jefferson County, Ala., Vallejo, Calif., and elsewhere continue to create headline risk, they said.
“The headline defaults make for good reading and they set some interesting precedent,” said Bart Mosley, co-president of Trident Municipal Research. “But these are generally cautionary tales of mismanagement and, in some cases, corruption.”
Unlike some industry officials calling for less regulation, Mosley offered support for measures that will increase transparency.
“Market discipline needs to apply to everyone,” he said. “And if there’s a slightly higher cost for access to the market, that’s not necessarily a bad thing.”