DALLAS — Texas is preparing to issue a record $7.8 billion of tax and revenue anticipation notes as legislators confront the largest budget shortfall in state history.

The one-year notes, issued through the Texas Public Finance Authority, will be auctioned electronically Aug. 24 with bids to the state comptroller's office through the Grant Street Group website.

The previous largest issue was $7.4 billion sold in 2003 at the end of the first recession of the new century. After the invasion of Iraq that year, oil prices began their climb to record levels, lifting the Texas economy and easing its descent into recession.

Energy prices have since moderated, but rating analysts view the state's dependence on energy as a risk factor.

"Despite the continued diversification of Texas' economy, the energy sector remains one of the state's main economic drivers, which in our opinion increases the potential for revenue and employment volatility in the medium term," Fitch Ratings analysts wrote in assigning their top short-term rating to the notes.

Standard & Poor's and Moody's Investors Service concurred with their top ratings.

"The upcoming note issuance reflects the largest since Texas began its short-term borrowing program and in part reflects the strain that the flow of school aid transfers can have on the state's overall cash position, particularly during an economic downturn and weak revenue performance," wrote analyst Nicholas Samuels of Moody's, which rates the state's general obligation debt Aaa. "It also indicates the challenge the state will face in its next biennial budget."

When lawmakers convene in Austin in January, the budget shortfall for the next biennium could be as high as $18 billion, according to some estimates.

Under orders from Gov. Rick Perry, who is running for re-election against former Houston Mayor Bill White, state agencies began making cuts in spending to try to narrow that gap.

Aid payments to local school districts are projected at $17.3 billion in fiscal 2011, nearly 23% of general fund expenditures.

During the first three months of the fiscal year that begins Sept. 1, 53% of those transfers are made, requiring the issue of Trans.

About 55% of Texas' general fund revenue is generated by the sales tax, which is historically weakest during the first quarter.

September is usually the weakest single month for collections.

The state also makes 25% of the transfers in the fiscal year's last quarter.

Officials expect the deepest daily cash shortfall on Dec. 13, when the mismatch between revenues and expenditures will be $10.8 billion.

In addition to the revenue from the upcoming notes, the state plans to cover the difference through internal borrowing.

Texas has issued Trans every year since 1987.

Despite the financial strain, the state's rainy-day fund balance is expected to reach $9.1 billion by the end of the current biennium and is an important source of alternative liquidity for cash-flow notes.

"With weak operating cash balances expected to continue through the biennium, drawing down the rainy-day fund could limit the state's ability to effectively use short-term borrowing in fiscal 2012 and 2013 absent significant changes in the its expenditures or revenues," Moody's said.

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