Fitch Ratings assigns an ‘F1+’ rating to the following state of Texas tax and revenue anticipation notes (TRANs):
–$5.4 billion TRANS, series 2014.
The TRANs, which are dated Sept. 3, 2014 and due Aug. 31, 2015, are for bid on Aug. 26, 2014 and are not callable.
The TRANs are limited obligations of the state secured by a pledge of and lien on amounts held in the proceeds account, the payment account and sinking account of the note fund.
KEY RATING DRIVERS
AMPLE COVERAGE: Projected general revenue and borrowable resources provide ample coverage on each set-aside payment date.
SOUND PROTECTIONS: The note order provides for six set asides, transferred monthly beginning in March 2015. The comptroller also covenants to forecast remaining fiscal year receipts on a monthly basis beginning in April 2015 and to divert all receipts to TRAN repayment if planned transfers are greater than 80% of forecast receipts.
CONSERVATIVE OPERATIONS AND FORECASTING: State financial operations are generally conservative, and cash balances are growing even as cash flow borrowing needs have remained sizable. Assumptions for economic and revenue performance in fiscal year 2015 appear conservative.
STATE’S GENERAL CREDIT STANDING: Fitch rates the state’s long-term general obligation (GO) bonds ‘AAA’ with a Stable Rating Outlook. This reflects its low debt burden, conservative financial operations and a growth-oriented economy that continues to outpace national averages. Longer term fiscal pressures stem from having to adequately fund the state’s rapid growth, including for transportation, schools and water.
SUFFICIENCY OF COVERAGE: The rating is sensitive to the state’s ability to maintain sufficient coverage for note repayment.
The ‘F1+’ rating on Texas’ series 2014 TRANs reflects ample coverage for each set-aside payment from projected fiscal 2015 general revenue and borrowable resources and a history of conservative economic and revenue assumptions. The state continues to benefit from broad economic growth well in excess of U.S. averages, with consistently higher sales tax and resource-related collections boosting cash balances in the general revenue fund (GRF) and in borrowable funds. In particular, the economic stabilization fund (ESF, the state’s rainy day fund) continues to benefit from strong oil and gas production tax collections, and its balance remains ample despite recent draws and a likely future shift in its deposit formula.
The TRANs do not carry a GO pledge but are payable from deposits in the payment and sinking accounts of the note fund. TRANs are issued annually for cash purposes, with the $5.4 billion series 2014 notes selling under a fiscal 2015 authorization for the same amount. The state has issued TRANs annually for more than two decades to address an annual cash flow mismatch tied to the timing of school aid disbursements early in the fiscal year. The $5.4 billion in series 2014 TRANs is lower than the $7.2 billion in TRANs borrowed in the current fiscal year and the lowest TRAN par amount since fiscal 2008.
TRANs repayment is derived from transfers to the sinking and payment accounts from the GRF, with six scheduled payment dates. The final set-aside of $1.35 billion takes place on Aug. 24, 2015, and the fiscal year ends on Aug. 31, 2015. The state comptroller has access to substantial borrowable resources for GRF cash flow needs including the transfers for note repayment. Borrowables are forecast to average $12.7 billion per month through fiscal 2015. Coverage before transfer from GRF cash and borrowable resources on each set-aside date is high, ranging from 97 times (x) on April 30, 2015, dropping to 14.5x on Aug. 24, 2015, the final set-aside payment date.
Borrowable resources include the Economic Stabilization Fund (ESF), currently funded at $6.7 billion. Natural resource-related revenues have consistently exceeded forecast expectations in recent years, resulting in higher ESF balances despite several recent one-time draws for other state needs and a constitutional formula change subject to voter approval this November. The 2013 Texas legislature authorized one-time withdrawals of $3.9 billion for water, educational and fire suppression needs. Additionally, a November 2014 measure would temporarily divert half of current formula deposits instead to highway infrastructure. Even with recent draws and the proposed formula change, which Fitch expects voters to approve, the comptroller forecasts a deposit of $1.7 billion during fiscal 2015, which would bring its balance to nearly $8.4 billion by fiscal year-end, equal to 9.6% of forecast fiscal 2015 GRF cash receipts. Texas’ constitution precludes use of the ESF balance for any purpose on the final day of the biennium.
The state has customarily forecast cash flows conservatively. Excluding borrowable resources, the fiscal year 2015 GRF cash balance is forecast to begin at $6.045 billion and end at $4.988 billion, after the final TRAN set-aside payment. The series 2014 TRANs represent 6.2% of forecast fiscal 2015 cash receipts.
The fiscal 2015 economic forecast assumes continued growth, albeit at a more measured pace compared to the state’s rapid growth pace immediately following the 2008-2009 recession. Real GDP is expected to rise 3.4% in 2014 and 3.6% in 2015, below the 3.7% growth pace of 2013. Nonfarm employment gains are forecast to remain robust, at 3.3% in 2014 and 2.9% in 2015. Oil prices are forecast to drift lower, to $88.3/barrel in 2015 from $96.23/barrel in 2013, while natural gas prices are forecast to exceed recent prices, rising to $4.39/MCF from $3.67/MCF in 2013.
Projected fiscal 2015 expenditures are based on the fiscal 2014-2015 biennium adopted budget which included significant spending increases for schools, pay raises for state employees, and an increase in state contributions to pensions.
Fiscal 2014 actual performance through June was well ahead of forecast expectations. Revenues were 2.2% higher than forecast, driven largely by sales and oil production taxes. The $7.2 billion in TRANs issued for fiscal 2014 cash needs will mature on Aug. 28, 2014, and all scheduled set aside payments have been made to date. The state estimates a year-end GRF cash balance of $6.045 billion, compared to a forecast balance of $2.771 billion upon issuance. Borrowables as of year-end are currently estimated at $17.989 billion, including the $6.045 billion ending cash balance.
Applicable Criteria and Related Research:
–‘Tax-Supported Rating Criteria’ (Aug. 14, 2012);
–‘U.S. State Government Tax-Supported Rating Criteria’ (Aug. 14, 2012);
–‘Rating U.S. Public Finance Short-Term Debt’ (Dec. 9, 2013).
Applicable Criteria and Related Research:
U.S. State Government Tax-Supported Rating Criteria
Rating U.S. Public Finance Short-Term Debt
Tax-Supported Rating Criteria