Fitch Ratings has assigned an ‘AAA’ rating to the following State of Texas highway improvement general obligation (GO) bonds of the Texas Transportation Commission:
–$1 billion highway improvement GO bonds, series 2012A;
–$100 million highway improvement GO bonds, taxable series 2012B.
The series 2012A bonds will sell via negotiated sale on or about Dec. 4, 2012. The series 2012B bonds will sell via competitive sale on or about Dec. 4, 2012. Precise series par amounts will be determined at the time of the final sale.
In addition, Fitch has affirmed the following ratings:
–$14.3 billion state GO bonds, at ‘AAA’.
–$6.5 million state constitutional appropriation bonds (Stephen F. Austin State University), series 2008, at ‘AAA’.
The Rating Outlook is Stable.
General obligations to which the state pledges its full faith and credit.
KEY RATING DRIVERS
LOW DEBT: The state’s debt burden is low but has risen due to significant growth-related capital needs, especially for transportation. Amounts for debt service are constitutionally dedicated.
GROWTH-ORIENTED ECONOMY: The state’s economy is large, diverse, and has resumed rapid growth after the last recession. The state’s energy industry remains significant and is subject to volatility.
SIGNIFICANT RESERVE BALANCES: Financial operations are generally conservative. The state has built a sizable budget reserve funded by a portion of natural resource receipts.
SALES TAX DEPENDENCE: Finances are dependent on consumption-based (primarily sales) taxes, and volatile energy taxes are also important.
GROWTH-RELATED SPENDING PRESSURES: Longer term fiscal pressures stem from having to adequately fund the state’s rapid growth. This includes expanded transportation needs and formula funding for schools.
The state’s long-term ‘AAA’ GO rating reflects its low debt burden, conservative financial operations and a growth-oriented economy that continues to outpace national averages. 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.
The budget for the fiscal 2012-2013 biennium relied on significant cuts to baseline projected spending to maintain balance while leaving the balance of the economic stabilization fund (ESF – the state’s budget reserve) untouched. Actual revenue collections have consistently over-performed previous assumptions.
GO bonds are payable from a constitutional appropriation out of the first moneys coming into the state treasury not otherwise appropriated (equal to $42.3 billion as of Aug. 31, 2012, the state’s fiscal year-end). The Texas Transportation Commission issues highway improvement GO bonds under a 2007 constitutional amendment which authorized $5 billion of such debt. The current sales are the second under this authorization; $957 million of highway improvement GO bonds are currently outstanding. Highway improvement GO bonds are supported by the state’s general revenue fund, with current proceeds intended for capital projects to relieve congestion, among other priorities. Transportation needs in the state, driven by rapid population growth, have been funded by the commission via multiple bond programs over the last decade, including the GO mobility fund bonds and state highway fund revenue bonds.
The state’s net tax-supported debt burden is low, with approximately $14.4 billion as of Aug. 31, 2011 equal to 1.4% of 2011 personal income. There are $14 billion in GO bonds outstanding, much of which are self-supporting and thus excluded from Fitch’s calculation of net tax-supported debt. Net tax-supported debt has risen with issuance over the last decade for transportation needs, including $7 billion in GO bonds and $4.1 billion in state highway fund revenue bonds.
The state’s two major pension systems are well-funded, although annual contributions have been consistently below the actuarially calculated levels. As of Aug. 31, 2011, the reported funded ratio for the state employees’ system was 84.5%. The teachers’ system funded ratio was 82.7%. Using Fitch’s more conservative 7% discount rate (compared to each system’s 8% discount rate assumption), the funded ratio would fall to 76.1% for the employees’ system and 74.5% for the teachers’ system. On a combined basis, net tax-supported debt and pension liabilities attributable to the state are estimated by Fitch at 5.9% of 2011 personal income, slightly below the median of Fitch-rated states.
Finances are generally conservative, though challenges include sustainably addressing long-term growth needs. The state maintains fiscal flexibility both in the form of its rainy day reserve, the ESF, as well as in its demonstrated willingness to make deep spending cuts. The adopted budget for the fiscal 2012 – 2013 biennium (which began on Sept. 1, 2011) relied primarily on spending cuts to address forecast slow revenue growth and expiring federal stimulus aid, but also included one-time underfunding of Medicaid and a school payment deferral to achieve balance.
Actual revenue performance has been well in excess of budget projections. The comptroller’s most recent revenue estimate (released in December 2011) forecasted that fiscal 2012 – 2013 biennium all-funds revenues would rise 0.8%, to $183.1 billion. This reflected a return to tax revenue growth offset by the conclusion of federal stimulus funding. Sales taxes (the state’s largest source of receipts) were expected to gain 10.3% in the biennium after falling 3.5% in the previous biennium. Fiscal 2012, which ended on Aug. 31, saw actual tax revenue collections rise 13.4% on an all-funds basis compared to the 3.8% growth forecast at the December 2011 forecast. Total revenues rose only 0.4% given the expiration of federal stimulus aid.
Actual collections for the first two months of fiscal year 2013 through October 2012 continue the trend of over-performance shown in fiscal 2012. General revenue fund receipts are 4.8% over forecast and 18.3% over prior year figures; sales taxes are up 9.8% year-over-year. The next revenue forecast through the fiscal 2014 – 2015 biennium will be released in January 2013, prior to the start of the 2013 legislative session. Fitch expects a material increase in projected results in light of over-performance to date.
At its 2011 legislative session, the state estimated a cumulative baseline budget gap of $15 billion-$27 billion through the fiscal 2012 – 2013 biennium. This included a $4.3 billion gap through the remainder of fiscal 2011. In response, the legislature in March 2011 passed a bill to close the fiscal 2011 gap via $1.1 billion in spending cuts for the remainder of the fiscal year and a draw of $3.1 billion from the ESF. This left the ESF balance at $5 billion at fiscal 2011 year-end.
The adopted fiscal 2012 – 2013 biennium budget included $173.5 billion in all funds appropriations, 7.5% below fiscal 2010 – 2011 spending. The plan absorbed the impact of expiring federal stimulus funds largely through steep spending cuts in most program areas. Funding was held flat in K-12 education through formula changes that shifted responsibility to local school districts and delayed the final biennium payment to school districts from August 2013 to September 2013. Additionally, expected Medicaid caseload was left underfunded in the latter part of fiscal 2013.
Fitch expects the legislature, which convenes for its biennial session in January 2013, to direct a portion of higher revenues to the fiscal 2013 Medicaid underfunding. Broader budgetary risks include several lawsuits challenging school funding changes enacted in the last legislature. No draws from the ESF are planned during the fiscal 2012 – 2013 biennium. The comptroller forecasts that the ESF balance will rise to $8.1 billion as of the end of the fiscal 2012 – 2013 biennium. As of Oct. 31, 2012, the balance was $6.1 billion.
The state’s economy has expanded rapidly and diversified over the last two decades, although natural resources remain important. Population growth is very rapid, rising nearly 21% in the decade through 2010 (compared to 9.7% nationally). The state outperformed the nation into the last downturn given growth-related momentum and strong energy sector performance in 2007 and 2008. Thereafter, national and international recessionary conditions weighed on the state’s key energy, construction and manufacturing sectors, although Texas still fared better than the nation. State employment fell 2.8% in 2009, less severe than the U.S. decline of 4.4%. Recovery began in 2010, with employment rising 0.4%, compared to a U.S. decline of 0.7%.
Employment gains have accelerated since 2010. Employment for 2011 rose 2.1%, compared to 1.1% nationally. October 2012 employment increased 2.6% year-over-year, compared to a 1.4% gain nationally. Gains remain particularly strong in oil and gas-related sectors. The unemployment rate, at 6.6% in October 2012, is well below the 7.8% rate recorded in October 2011 and 87% of the U.S. rate for the month. Personal income has shown strong growth in recent quarters, tracking employment. Second quarter 2012 personal income rose 4.3%, compared to 3.3% nationally; the state forecasts personal income growth slowing going forward. Personal income per capita measured 95% of the nation’s in 2011, ranking 26th among the states.
The comptroller’s winter 2012 – 2013 economic forecast anticipates non-farm employment growth in calendar years 2012 and 2013 of 2.3% and 2.1%, respectively, higher than the previous forecast. The price of oil is forecast to drift downward through 2013 from its recent high of $91.89/barrel in 2011. Additionally, natural gas prices are expected to remain below the $4.29/MCF level recorded in 2011.
In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from IHS Global Insight.
Applicable Criteria and Related Research:
–‘Tax-Supported Rating Criteria’ (Aug. 14, 2012);
–‘U.S. State Government Tax-Supported Rating Criteria’ (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. State Government Tax-Supported Rating Criteria