DALLAS — With a growing budget crisis on the horizon, Texas is seeking to lower its finance costs with a $342 million tax-exempt refunding deal next week.
The negotiated deal with book-runner Barclays Capital is the first general obligation bond issue from the Texas Public Finance Authority since Moody’s Investors Service and Fitch Ratings upgraded the state to triple-A as part of their new global ratings scale in April. The state was previously rated Aa1 by Moody’s and AA-plus by Fitch.
Standard & Poor’s yesterday affirmed the bonds’ rating at AA-plus with a stable outlook.
“I think the ratings just solidify the fact that the state of Texas’ credit quality is quite strong,” said TPFA executive director Dwight Burns. “We would hope that the fact that we have an unenhanced triple-A would be noted by the investment community.”
Buyers of Texas debt are usually a mix of institutional and retail investors, Burns said. Despite the fact that Texas has no state income tax, “retail has become an increasingly important part of our investment mix,” he said.
Co-managers on the deal scheduled for pricing Tuesday are Cabrera Capital Markets, Jefferies & Co., Loop Capital Markets, Piper Jaffray & Co., Citi, Ramirez & Co., and Morgan Keegan & Co.
Coastal Securities Inc. is financial adviser and McCall, Parkhurst & Horton is bond counsel.
Coming in two series of $191 million and $151 million, the bonds will refund a portion of the authority’s commercial paper notes backed by liquidity facilities from the state comptroller. Some of the proceeds will cover an advance refunding of GOs issued in 2002 and 2003.
The state expects net present-value savings of at least 3%, “but we’re looking to achieve even higher savings,” Burns said.
Though Texas has been in severe budget-cutting mode this year in the face of a potential $11 billion to $18 billion budget shortfall in the legislative session that begins in seven months, this deal arose out of the TPFA’s routine surveillance of savings opportunities, according to Burns.
So far, the state has not considered restructuring its debt by pushing maturities to later dates.
Gov. Rick Perry recently cut spending for the upcoming fiscal year starting Sept. 1 by $1.3 billion. The cuts were based on plans submitted by state agencies for 5% budget cuts. The state’s public education and social services providers were spared the cuts.
Agencies were also told that their fiscal 2012 and 2013 baseline spending requests may not exceed their reduced fiscal 2011 amounts and to submit plans for an additional 10% reduction.
“This request for 10% reduction proposals for the next biennium builds on our ongoing call on state agencies to tighten their belts so Texas can continue our commitment to keep taxes low, attract businesses, and create jobs as we continue to lead the way out of the national economic downturn,” Perry said in calling for the spending cuts.
While Texas was able to balance its current biennial budget using $6.4 billion of federal relief funds to maintain public school and Medicaid services, the next two-year budget will prove more challenging.
Amid lower revenues and the loss of the non-recurring resources, Texas must close a 2012-2013 biennial structural gap estimated at between $11 billion and $18 billion.
“Depending on the depth and duration of the recession in Texas, as well as its ongoing spending demands, structurally balancing the next biennium’s budget will challenge the state and could strain its currently relatively strong financial position,” wrote Moody’s analysts Nicholas Samuels and Maria Coritsidis.
State Comptroller Susan Combs projects that sales tax income will increase by only 0.7% in fiscal 2010, after a decline of 2.7% in the prior year. Through nine months of the fiscal year, however, sales tax collections have declined by 9.1% compared to the same period in fiscal 2009.
Collections increased in both April, when it was up 1.4%, and May, when it was up 0.1% following 14 straight months of declines. In fiscal 2011, the sales tax is forecast to grow by 6.9%.
“This may indicate that a bottom has been reached,” Combs said in releasing the latest figures.
She added that “while overall economic conditions and sales tax revenues appear to be stabilizing, there remains a risk of further deterioration, before a sustained recovery is underway.”
Texas entered the recession later than other states, but its economy has been hard hit in the past year, particularly since oil prices fell from record highs in mid-2008.
After strong growth earlier in the decade, nonfarm employment in Texas decreased by 2.8% in 2009, though the national rate was nearly twice that. The rate of job loss in Texas has fallen since then, declining by 0.5% year-to-date through April, compared with a 1% national decline.
Though Texas’ unemployment rate typically is higher than the nation’s, in 2009 it was 7.5% compared to the national rate of 9.3%, and was 8.3% in April 2010 compared to 9.9% for the nation. Despite those comparisons, unemployment in the state is at its highest levels in more than 20 years.
“Just as the strength of the state’s energy markets and high commodities prices during 2007 and 2008 helped to delay its entry into the downturn, sustained growth in Texas’ economy will track global demand,” the Moody’s analysts observed.
“There is risk in the global forecast, however, and the timing and strength of recovery is uncertain,” they said. “Stronger global demand will help to boost energy prices and bolster the state’s important trade sector (about 20% of Texas non-farm employment).”
Analysts often cite the state’s strengths that support the top credit rating, including a low per-capita debt burden, a diversified economy, conservative fiscal management, and large cash balances.
Of the state’s $12.9 billion of GO bonds, $9.9 billion are self-supporting, Fitch noted.
When the Legislature convenes next year, it will face two chronic funding issues: education and transportation. Education, the largest expenditure in the budget, is supported by property tax levies at the local level.
With property owners facing sharply rising tax levies, lawmakers in 2007 approved a relief proposal in the last session, seeking to replace reduced property tax revenue with tax levies on Texas businesses.
However, the business tax revenue has fallen short of projections, leaving the state with a structural deficit of $9 billion.
The Center for Public Policy Priorities, a nonpartisan think tank in Austin, issued a statement in May opposing the Republican-led Legislature’s “cut and cut again” approach, urging instead that lawmakers tap the $9 billion rainy-day fund.
“Refusing to use the entire rainy-day fund to help us recover from the worst recession since the Great Depression would be like holding back water while your house is burning down,” said executive director F. Scott McCown.
