Fitch Rates Texas' $50MM GO Water Development Bonds 'AAA'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AAA' to the following general obligation (GO) bonds for the State of Texas (the state):

--$49.82 million water financial assistance bonds, series 2010D (economically distressed areas program).

The bonds are expected the week of Oct. 4 via negotiated sale. In addition, Fitch has affirmed the following ratings:

--$13.2 billion outstanding state GO bonds at 'AAA'.

The Rating Outlook is Stable.

RATING RATIONALE:

--The state's debt burden is low but has risen due to large capital needs, especially for transportation. Amounts for debt service are constitutionally dedicated;

--Though the economy has diversified, the cyclical energy industry remains significant and is currently experiencing a deep downturn;

--Financial operations are conservative, although the current downturn has eroded cash balances. The state has a sizable reserve balance;

--Finances are dependent on consumption-based (primarily sales) taxes; spending pressures include school finance, property tax relief and capital needs.

KEY RATING DRIVERS:

--Continued economic strength out of the current downturn.

--Ability to meet rising school funding and property tax relief requirements.

SECURITY:

--General obligations to which the state pledges its full faith and credit.

CREDIT SUMMARY:

The state's 'AAA' GO rating reflects its low debt, conservative financial operations and an economy that has expanded and diversified amid recent recessionary conditions. Financial pressures arise from the demand that rapid growth places on the state's consumption-based tax system, as well as from longer-term transportation needs and an increased state commitment to education. Recessionary weakness appears to be moderating, although the downturn has weighed on collections of sales and natural resource taxes.

The state maintains a sizable budget reserve. The enacted fiscal 2010-2011 budget achieved balance by lowering planned spending from the prior biennium and relying on federal stimulus. Following weaker than forecast tax collections and the comptroller's downward revenue forecast revision in November 2009, spending cuts of 5% have been implemented to ensure balance through the fiscal 2010-2011 biennium. Cash balances narrowed considerably through fiscal 2010. A structural gap of up to $18 billion is forecast in the next biennium, to be addressed by the next legislature beginning in January 2011.

The state's GO bonds are payable from a constitutional appropriation out of the first moneys coming into the state treasury not otherwise appropriated, $34.7 billion at fiscal year-end 2009. Water financial assistance bonds are issued under a 1997 constitutional amendment which consolidated various authorizations of the water development board, with proceeds supporting water conservation and infrastructure projects. By policy, the water financial assistance program is generally self-supporting from repayment of loans made to local subdivisions for various water development projects and income received from investments, although certain programs - including the economically distress areas program, state participation program and the water infrastructure fund - receive general fund support.

The state's net tax-supported debt burden is low, with approximately $12.7 billion as of May 2010 equal to 1.4% of 2009 personal income. There are $13.2 billion in GO bonds outstanding, of which $9.9 billion are self-supporting. The debt burden has risen with issuance for transportation needs, including $6.1 billion in GO bonds and $4.2 billion in highway revenue bonds. Pensions are well-funded.

Fiscal management is conservative, with the state now maintaining a sizable rainy day fund, the economic stabilization fund (ESF). Planned transfers have brought the ESF balance to a sizable $7.7 billion, or 9% of fiscal 2009 all-funds net revenue; the balance is expected to rise to $8.2 billion at fiscal 2011 year-end.

Revenue collections underperformed in the latter half of the fiscal 2008-2009 biennium given recessionary conditions and lower energy prices. Tax collections in fiscal 2009, which ended Aug. 31, 2009, slipped 8.4% from the prior year, to $37.9 billion, with a 2.7% decline in sales taxes, the state's largest source of collections, joined by sharp declines in natural resources receipts. The budget benefited from $2.3 billion in federal stimulus receipts.

The revenue forecast for the fiscal 2010-2011 biennium was revised downward in November 2009 to incorporate actual tax collections underperforming in fiscal 2009 and additional forecast weakness in fiscal 2010. Tax collections were forecast to drop 1.4% in fiscal 2010 to $37.3 billion, followed by an increase of 8.4% in fiscal 2011 to $40.4 billion. Sales tax collections were expected to grow 0.7% and 6.9%, respectively, in fiscal 2010 and 2011.

Actual general revenues through August 2010, the fiscal year-end, were below forecast, with total revenues 8.3% below forecast and sales tax collections 9.3% below forecast. The enacted fiscal 2010-2011 biennium spending plan appropriated $182.3 billion, 7.4% over appropriated fiscal 2008-2009 levels, including $12.1 billion in federal stimulus. The state implemented 5% cuts to biennial appropriations in response to revenue weakness. The state's legislative budget board forecasts the need to resolve a significant baseline gap in the fiscal 2012-2013 biennium of as much as $18 billion. Longer-term pressures include the state's expanded funding commitment to education enacted in 2006, which was only partially offset by simultaneously enacted tax reforms.

The state's economy has expanded rapidly and diversified over the last two decades, although natural resources remain important. The state trailed the nation into the current downturn given its recent rapid growth and the momentum provided by energy sector performance in 2007 and 2008, but thereafter national and international recessionary conditions weighed on the state's key energy, construction and manufacturing sectors.

State employment rose 2% in 2008 from the prior year, versus a U.S. decline of 0.6% during the same period; employment fell 2.8% in 2009, less severe than the U.S. decline of 4.3%. The state's economy appears to be improving, with August 2010 employment up 1.3% from August 2009, compared to growth of 0.2% nationally over the same period. Unemployment was 8.3% as of August 2010, up from 8% in August 2009, but well under the 9.6% national rate. Personal income fell 1.6% in 2009, but rose 1.4% in the first quarter of 2010, less robust than the 1.9% growth recorded for the nation. The comptroller's economic forecast from summer 2010 anticipates a return to growth in 2010 in the state's gross state product and personal income, although employment growth will be limited; growth is expected to accelerate in 2011.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 16, 2010).

For information on Build America Bonds, visit 'www.fitchratings.com/BABs'.

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605

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