Fitch Rates $2B Texas Unemployment Obligation Bonds 'AA+'

NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA+' rating to the following Texas Public Finance Authority (TPFA) unemployment compensation obligation assessment revenue bonds:

--$1.237 billion, series 2010A;

--$523.8 million, series 2010B;

--$300 million, series 2010C.

The bonds are expected via negotiated sale, with series 2010A selling on or about Nov. 18 and series 2010B and 2010C selling on or about Dec. 6.

The Rating Outlook is Stable.

RATING RATIONALE:

--The obligation assessment is a broad tax applied to employers in the state, the rate for which is established annually while bonds are outstanding in order to provide a minimum of 1.5 times (x) coverage of debt service in the following year, as well as administrative costs; there is no limit on the obligation assessment rate. Bonds are not secured by other assessments that make up the state's unemployment assessment.

--The state's unemployment assessment collection mechanisms are strong and well-established, with a collection rate approaching 100%. Payments of unemployment taxes by employers, including the obligation assessment levied for bondholders, are highly seasonal, with the bulk of collections early in the year.

--The structure provides that excess collections after debt service payment be used for early bond redemption. The resolution provides that a minimum of $25 million in funds be held back after meeting the 1.5x coverage test during the latter part of the year, when fewer receipts are collected, rather than being directed for early redemption.

--Balances in the state's unemployment compensation fund above a maximum threshold are legally available to repay outstanding bonds, although such funds are not specifically pledged and the fund is currently in a deficit position.

--The state's economy is returning to growth after the recent recession. The state's long-term economic prospects are very strong, with the state benefiting from increasing economic diversity despite the continued importance of natural resources-related activity.

KEY RATING DRIVER:

--Continued strength of collections and sufficiency of obligation assessments levied for bondholders.

SECURITY:

Special obligations of the TPFA and Texas Workforce Commission (the commission) payable from a first and exclusive lien on pledged revenues, which consist primarily of the unemployment obligation assessment, a component of employers' unemployment compensation assessments levied by the state while bonds are outstanding.

CREDIT SUMMARY:

The 'AA+' rating reflects the security provided from the obligation assessment, a legislatively authorized component of Texas' unemployment tax that by covenant must be levied while bonds are outstanding. The assessment is collected with the state's other unemployment taxes on its broad and diverse economic base; collection experience is very strong. The rate is determined annually at a level sufficient to provide 1.5x coverage of debt service in the next calendar year, with excess collections available for accelerated bond repayment.

Proceeds will be used to repay advances made by the federal government to cover a deficit in the state's unemployment compensation trust fund (the trust fund) and to cover additional expected benefit payments in the near term. The new bonds are the second time the state has issued bonds under a legislatively-authorized program established in 2003; obligation assessment bonds were first issued in 2003 and fully redeemed in 2007. Repayment of the earlier bonds was accelerated further by a 2007 statutory change allowing balances in the trust fund in excess of its statutory ceiling (about $1.6 billion) to be used for early bond repayment. Moreover, the resolution for the bonds has been strengthened by a holdback provision in effect during the second half of the year (when fewer assessments are received), by which pledged receipts can be directed toward early redemption only if the 1.5x coverage threshold is met for the period through the next debt service payment date and a minimum of $25 million is retained in the debt service account. There is no debt service reserve.

The state's unemployment taxes will now include the general rate, a replenishment tax, a deficit assessment and the obligation assessment, among other components. The average combined tax rate in 2010 was 1.83%; the obligation assessment for the current bonds will be added to assessments due for 2011. Collections are historically very strong, exceeding 99% per quarter. Only the revenues from the obligation assessment are pledged to bondholders. The obligation assessment rate is reset annually in November by the commission for payment by employers in the following calendar year at a level sufficient to cover debt service by 1.5x and bond expenses. The rate is not capped, nor is legislative approval necessary for the commission to adjust the rate. The commission deposits collections to the obligation assessment trust fund; payments from the fund do not require appropriation. After transfer of funds for principal, interest and administrative expenses, funds may be used for interest payments on any outstanding federal advances, prior to determining funds available for early redemption.

In Texas, aggregate unemployment taxes are payable quarterly on the first $9,000 of taxable income. Collections are highly seasonal, with approximately 60% of unemployment tax revenues paid in the first quarter based on first-quarter taxable income; about 24% of collections are paid in the second half of the year prior to the Jan. 1 debt service payment. Receipts are deposited to the trust fund, which is required to hold a balance between a floor of $400 million or 1% of taxable wages (about $800 million) and a ceiling of 2% of taxable wages (about $1.6 billion). Obligation assessments will be deposited to a separate obligation assessment trust fund, available only for bondholders.

The trust fund's balance has fallen steadily in the current downturn as benefit payments exceeded contributions, from approximately $1.8 billion as of June 30, 2007 to an expected deficit of $2 billion by Dec. 31, 2010. Texas has borrowed from the federal government to continue to provide benefits, although these advances will be subject to repayment with interest beginning Jan. 1, 2011. Bond proceeds will repay federal advances and provide additional funds to the trust fund. Unemployment in Texas has risen sharply in the downturn, reaching 7.6% in 2009 from 4.9% in 2008. More recently, rate in September 2010 was 8.3%, compared to a 9.6% level nationally. Although the economy has weakened, the state continues to outperform national averages, and solid employment growth has resumed.

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

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', dated 16 Aug. 2010.

--'U.S. State Government Tax-Supported Rating Criteria', dated 8 Oct. 2010.

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

Applicable Criteria and Related Research:

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564566

Tax-Supported Rating Criteria

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

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