Fitch Rates Texas $1 Billion GO Mobility Fund Bonds 'AAA'; Outlook Stable
--\\$750,000,000 mobility fund refunding bonds series 2015-A;
--\\$250,000,000 mobility fund refunding bonds series 2015-B (private placement).
The series 2015-A bonds are expected to sell via negotiated sale the week of September 14th. The series 2015-B bonds are being privately placed.
In addition, Fitch affirms the state's outstanding GO bonds and related debt ratings as noted at the end of this release.
The Rating Outlook is Stable.
SECURITY
The bonds are general obligations to which the state pledges its full faith and credit.
KEY RATING DRIVERS
LOW DEBT: The state's debt burden remains low despite 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 continues to grow at a pace ahead of national averages despite recent energy industry slowing. The state's oil and gas sector remains a significant source of economic activity and is subject to volatility.
SIGNIFICANT RESERVE BALANCES: Financial operations are generally conservative. The state maintains a sizable budget reserve, with a portion of natural resource receipts dedicated to funding it.
SALES TAX DEPENDENCE: Finances are dependent on consumption-based (primarily sales) taxes; 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, school funding, and water needs.
RATING SENSITIVITIES
ECONOMIC GROWTH AND AMPLE FLEXIBILITY: Texas' 'AAA' GO rating and Stable Outlook assume continued economic gains and the maintenance of ample fiscal flexibility both in its conservative approach to budget management and its high reserve balances. The rating could be pressured in the event of the state's unwillingness to address potential fiscal challenges in an effective and timely manner.
CREDIT PROFILE
Texas' long-term 'AAA' GO rating reflects its low debt burden, conservative financial operations and a growth-oriented economy that has outpaced national averages throughout the current expansion. The oil price plunge that began in late 2014 has slowed the state's economic and revenue momentum, although broad growth continues despite modest weakness in some regions and sectors.
Fitch believes that the state has ample flexibility to absorb near-term economic and revenue volatility, both in the form of its very large reserve balances and a tradition of taking budgetary actions to maintain balance. Liquidity is ample, and the state is not undertaking cash flow borrowing in fiscal 2016 to meet intra-year cash needs for the first time in decades. The state has been a leader in economic growth for decades, diversifying Texas' economy well beyond the resource sectors that were dominant during the last severe oil price shock, in the 1980s. Rapid growth and the concomitant demand for public services, including for transportation, education and water, continue to pose a long-term fiscal pressure.
Texas' GO bonds are payable from a constitutional appropriation out of the first moneys coming into the state treasury not otherwise appropriated. This unrestricted balance equaled nearly \\$48 billion as of Aug. 31, 2014, the fiscal year-end. Transportation needs in the state, driven by rapid population growth and the energy sector expansion of the last decade, have been funded by the Texas Transportation Commission (TTC) via multiple bond programs, including the GO mobility fund bonds, highway improvement GO bonds, state highway fund (SHF) revenue bonds, and various toll road borrowings.
GO mobility fund bonds were authorized by voters under a 2001 constitutional amendment providing for GO bonds supported by mobility fund receipts. The maximum that may be outstanding increased over time to \\$7.5 billion from \\$4 billion originally, and approximately \\$6.4 billion in GO mobility bonds are outstanding at present, although current statute only allows for refunding obligations. Revenues dedicated to the mobility fund, once deposited, are administered by TTC and include all driver record information fees, portions of driver license fees, motor vehicle inspection and certificate of title fees, and certain other miscellaneous revenues. Program funds have been used for construction, reconstruction, acquisition and expansion of state highways and participation by the state in publicly-owned toll roads and other public transportation projects.
LOW BONDED DEBT
Texas' net tax-supported debt burden is low, with approximately \\$15.1 billion as of Aug. 31, 2014 equal to 1.2% of 2014 personal income. This figure includes \\$10.3 billion in GO bonds supported by tax revenues of the general revenue fund (GRF) and the mobility fund, and \\$4.5 billion in state highway fund bonds to which constitutionally-dedicated transportation receipts are pledged. Net tax-supported debt has risen with issuance over the last decade for transportation needs, but remains low measured against personal income.
On a combined basis, net tax-supported debt and pension liabilities attributable to the state as of Fitch's 2014 state pension update report equaled 6.1% of personal income, roughly in line with the median for U.S. states.
SOME PENSION REFORMS IMPLEMENTED
Funded ratios for the state's two major pension systems, covering state employees and teachers, have declined given investment losses in the last downturn and annual contributions that have been consistently below actuarially calculated levels.
The last two state legislative sessions achieved consensus on improving contribution practices. In its 2013 session, the legislature adopted teacher plan reforms, including a higher retirement age and phased increases in member, state and district contribution rates, bringing amortization to below 30 years; actual contributions remain below the actuarially-calculated level. The state reports the teacher system liability as a state obligation.
Following minor contribution increases to the state employees' system approved in the 2013 session, the 2015 session approved sizable increases to employer and employee contributions. The bill was estimated to result in amortization of the unfunded liability over 32 years, although this assumes achieving the system's 8% investment return assumption over the long term.
As of Aug. 31, 2014, the most recent valuation date, the reported funded ratio for the state employees' system was 77.2%, and the GASB 67 ratio of net assets to total liabilities was 63.4%. The lower GASB 67 figure reflected a depletion date forecast in 2041 and excluded the beneficial impact of the 2015 legislative changes, which the state estimates will eliminate the risk of depleting system assets. As of the same valuation date, the reported funded ratio for the teachers system was 80.2%, and the GASB 67 ratio was 83.3%. Using Fitch's more conservative 7% discount rate assumption would lower the funded ratios to 69.6% for the employees' system and 72.5% for the teachers' system.
RESERVES PROVIDE LARGE CUSHION
The state maintains fiscal flexibility both in the form of its economic stabilization fund (ESF -- the state's budget reserve), as well as in its demonstrated willingness to make deep spending cuts to maintain budget balance. ESF balances were small relative to the budget until the natural resources boom of the last decade, which led to sizable deposits even with several one-time draws, including for budget relief during the last downturn. As of July 2015, the ESF balance was nearly \\$8.47 billion, equal to 16.1% of estimated fiscal 2015 general revenue-related revenues.
The ESF receives a constitutional dedication of a share of oil and gas production taxes, as well as unencumbered balances at fiscal year-end. High deposits in recent years have led the state to allocate ESF resources to other key needs. These included a one-time, \\$2 billion draw to establish a new loan program for water-related projects, and a second, permanent diversion of half of future dedicated oil and gas taxes to support highway funding. Both measures were ratified by voters. Despite these changes, Fitch believes the current ESF balance provides a material fiscal cushion in the event that more severe economic and revenue risks materialize.
RECENT FISCAL PERFORMANCE SOLID
Finances are generally conservative, though challenges include managing the cyclicality inherent in the state's energy-dominated economy and sustainably addressing long-term growth needs. The state historically has been reluctant to increase taxes and the scope of spending, and fiscal uncertainties periodically have arisen from litigation, adverse court outcomes or incompletely budgeted spending, including for Medicaid in the fiscal 2012 - 2013 biennium.
The state's fiscal performance has been solid through the fiscal 2014 - 2015 biennium, which ends Aug. 31, 2015, despite more recent uncertainty arising from the oil price decline that began late in 2014. GRF and GRF dedicated appropriations in the fiscal 2014-2015 adopted budget totaled \\$102.5 billion, about 10.7% ahead of fiscal 2012 - 2013 biennium appropriations. The adopted budget included significant spending increases for schools, pay raises for state employees, and the higher teacher pension contributions noted earlier. Despite higher school formula funding, litigation regarding the constitutionality of school funding continues.
Actual revenue performance in the fiscal year ending in August 2014 was strong, with total general revenue-related net revenues rising 6.5% from a year earlier; sales tax revenues rose 5.5%. Growth has continued into fiscal 2015 despite some slowing associated with the oil price declines. Total GRF cash receipts through July 2015 year-to-date are 6.3% higher than a year earlier and 3.8% over forecast. Sales taxes year-to-date are 6.2% higher than the same period a year earlier and 2.9% higher than forecast. Oil production taxes, on the other hand, are 23.5% below the prior year and 28.5% below forecast. On a monthly basis, the 1.4% drop in June 2015's sales tax collections compared to June 2014 ended a 62-month streak of sales tax revenue growth, although July 2015 collections returned to growth, up 2.7%.
STATE FORECAST ASSUMES OIL REVENUE SLOWDOWN
The comptroller's biennial revenue estimate (BRE) released with the start of the 2015 legislative session incorporated a diminished outlook for energy-related receipts, while continuing to assume broader economic and revenue gains. Fiscal 2015 is forecast to end with general revenue-related net revenues rising 1.8% from fiscal 2014 actuals; sales tax growth of 6.2% would be partly offset by an oil production tax decline of 28.7%. The certification balance at fiscal year-end before any legislative action was estimated at just over \\$7.5 billion, and the ESF balance was estimated at \\$8.48 billion.
For the fiscal 2016 - 2017 biennium, the comptroller is estimating general revenue-related net revenues rising 2.3% in fiscal 2016 and 5.4% in fiscal 2017. Sales taxes are forecast to rise 2.5% in fiscal 2016 and 6.4% in fiscal 2017, while oil production taxes decline 0.8% in fiscal 2016 and rise 7.5% in fiscal 2017. Under the forecast, total biennium general revenue-related net revenues equal \\$110.4 billion. The ESF balance is forecast at \\$11.1 billion as of Aug. 31, 2017, equal to 19.5% of forecast fiscal 2017 net revenues. The Comptroller is expected to update the state's revenue outlook with the certification of revenues later this year.
FISCAL 2016 - 2017 BUDGET ADOPTED
The legislature finalized the state's fiscal 2016-2017 biennial budget in May 2015. Appropriated spending in the adopted budget totals \\$114.1 billion through the biennium. This figure includes general revenue fund and dedicated spending and is 11.3% higher than the estimated figure for the fiscal 2014 - 2015 biennium, based on the legislative budget board (LBB) analysis of the joint Senate-House budget bill.
The budget includes \\$3.8 billion in additional funding for schools to offset budgeted tax reductions, including a 25% decrease in the state's franchise tax and an increase to the homestead exemption for local property taxpayers. Other bill provisions included employee pay raises and the employees' retirement system contribution increase noted earlier. The legislature increased funding for transportation by shifting other agencies' operating appropriations away from the SHF; moreover, it enacted a shift of portions of statewide sales taxes and other sales taxes to the SHF, subject to voter approval in November 2015, beginning with \\$2.5 billion in fiscal 2018.
Although Texas faces several notable fiscal uncertainties, Fitch views the state as having considerable flexibility to absorb unexpected challenges, as noted earlier. Fiscal uncertainties include the near term direction of energy prices and their impact on state revenues. Additionally, the state's Supreme Court is reviewing a longstanding lawsuit challenging the state's system of school funding, although the timing of a decision is unknown.
ECONOMIC GAINS CONTINUE TO OUTPACE THE NATION
Texas' economy has expanded rapidly and diversified over the last two decades, although the cyclical energy sector still represents a large share of economic activity. Population growth is more than twice the national rate, rising 29.3% since 2000 (compared to 13.3% nationally).
The state outperformed the nation into the last downturn given growth-related momentum and strong energy sector performance, and has continued to outpace the nation through the current expansion. The oil price decline to date has had a modest targeted impact on Texas, although overall state growth continues to exceed the nation. However, lingering lower energy prices may pose a drag on the state's continued high growth as repercussions spread beyond energy-specific sectors and regions.
Employment in Texas rose 3.1% in 2014, compared to 1.9% growth nationally, and gains continue in 2015, with July 2015 up 2.5% from a year earlier, compared to the 2.1% gain reported nationally. Unemployment rates in Texas have been consistently below the nation's over most of the last decade; in 2014, the state's unemployment rate was 5.1%, compared to 6.2% for the U.S., and the July 2015 rate was 4.2% in Texas, compared to 5.3% nationally.
Sectors affected by the oil price decline include natural resources and mining, where employment in July 2015 is down 4.6% year-over-year, and manufacturing, which is showing a 2.1% decline over the same period. Services continue to show sizable growth, with professional and business services rising 3.5% in July 2015 year-over-year, and education and health rising 4.3%.
Personal income has continued to grow at a faster rate than the nation, rising 4.9% in the first quarter of 2015, compared to 4.4% nationally. Personal income per capita measured 98.5% of the nation's in 2014, ranking 24th among the states.
The comptroller's January 2015 economic outlook, extending through fiscal 2017, foresees continued robust economic gains. Oil prices are forecast at \\$64.35 per barrel in fiscal 2015, well under the \\$96.56 level reported in fiscal 2014; prices would remain near the fiscal 2015 level through fiscal 2017. After rising 5.9% in fiscal 2014, gross state product is forecast to rise only 2.5% in 2015 as the state adjusts to the energy slowdown, accelerating again in fiscal 2016-2017. Employment is likewise forecast to rise a slow 1.9% in fiscal 2015, well below the earlier pace of growth. Gains would accelerate thereafter.
RELATED AFFIRMATIONS
Fitch Ratings affirms the 'AAA' ratings on the following outstanding GO bonds and related debt of the State of Texas, consisting of:
--approximately \\$15.1 billion in GO bonds;
--approximately \\$4.5 million in constitutional appropriation bonds (Stephen F. Austin State University) series 2008.
The Rating Outlook is Stable.
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