Fitch Affirms Texas Public Finance Auth State GO Bonds at 'AAA'

NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AAA' long-term rating to the following Texas Public Finance Authority (TPFA) State of Texas (the state) general obligation (GO) bonds:

--$357.41 million GO and refunding bonds, series 2011;

--$285 million GO and refunding bonds, taxable series 2011.

The bonds are expected to sell via negotiated sale, with the tax-exempt bonds selling on July 18, and taxable bonds selling on July 26. In addition, Fitch has affirmed the following ratings:

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

--Approximately $296 million outstanding TPFA GO commercial paper, at 'F1+'.

The Rating Outlook on the long-term ratings is Stable.

RATING RATIONALE:

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

--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.

--Financial operations are conservative, generating large cash balances. The state has built a sizable budget reserve funded by a portion of natural resource receipts.

--Finances are dependent on consumption-based (primarily sales) taxes. Longer-term fiscal pressures stem from the need to adequately fund the state's rapid growth, including funding a court-mandated commitment to schools and property tax relief.

--CP notes are general obligations of the state. Treasury fund assets are more than sufficient to support the liquidity needs of maturing CP notes that are not remarketed.

KEY RATING DRIVERS:

--Continued economic strength out of the current downturn.

--Ability to meet school funding and property tax relief needs.

SECURITY:

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

CREDIT SUMMARY:

The long-term 'AAA' GO rating of the state of Texas reflects its low debt burden, conservative financial operations and a growth-oriented economy that is rapidly emerging from the recent recession. 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 and property tax reductions. The state's budget for the fiscal 2012 - 2013 biennium relies on significant cuts to baseline projected spending to maintain balance, while preserving most of the forecast balance in the economic stabilization fund (ESF), the state's budget reserve.

Proceeds of the current taxable sale are for the Cancer Prevention and Research Institute of Texas (CPRIT), including to refund GO CP notes issued in August 2010 for CPRIT. GO bonds are payable from a constitutional appropriation out of the first moneys coming into the state treasury not otherwise appropriated, $34 billion at fiscal year-end 2010. The state's net tax-supported debt burden is low, with approximately $14.4 billion as of February 2011 equal to 1.4% of 2010 personal income. There are $13.8 billion in GO bonds outstanding, of which $10.1 billion are self-supporting.

The state's debt burden has risen with issuance for transportation needs, including $7.1 billion in GO bonds and $4.2 billion in highway revenue bonds. The two major pension systems are well-funded, although annual contributions have generally been below the actuarially calculated levels. As of Aug. 31, 2010, the reported funded ratio for state employees' system was 85.4%, while the teachers' system was 82.9%; using Fitch's more conservative 7% discount rate (compared to each systems' 8% discount rate), funding would fall to 76.9% for the employees' system and 74.7% for the teachers' system.

Finances are generally conservative, although challenges include sustainably addressing long-term growth needs, particularly in education. The state maintains fiscal flexibility both in the form of its rainy day reserve, the economic stabilization fund (ESF), as well as in its demonstrated willingness to make deep spending cuts. The ESF balance grew rapidly in recent years with higher global energy prices; planned transfers brought its balance to $8.2 billion, or 22% of estimated fiscal 2011 general revenues as of the comptroller's January 2011 revenue estimate.

The fiscal 2012 - 2013 biennial budget relies primarily on spending cuts to address forecast slow revenue growth and the expiration of federal stimulus aid. The comptroller's revenue estimate anticipated that in the fiscal 2010-2011 biennium all funds revenues would grow only 3.5%, to $177.3 billion, with a large decline in tax receipts offset by higher federal and non-tax receipts. For fiscal 2012 - 2013, which begins Sept. 1, 2011, all funds revenues rise only 0.3%, to $177.8 billion, with rebounding tax receipts barely offsetting a decline in federal and other non-tax receipts.

The state estimated a cumulative baseline budget gap of $15 billion - $27 billion through fiscal 2013, including 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 and a draw of $3.1 billion from the ESF, leaving the ESF balance at an estimated $5.1 billion at fiscal year-end. The fiscal 2012-2013 biennium budget includes $172 billion in all funds appropriations, 8.1% below fiscal 2010-2011 spending. The plan absorbs the impact of expiring federal stimulus funds largely through steep spending cuts in most program areas. Funding is held flat in K-12 education through formula changes that shift responsibility to local school districts, while expected Medicaid caseload is left underfunded.

The economy has expanded rapidly and diversified over the last two decades, although natural resources remain important. Population growth is very rapid, with the state's population rising nearly 21% in the decade through 2010, compared to 9.7% nationally. The state trailed the nation into the last downturn given growth-related momentum and strong 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 fell 2.8% in 2009, less severe than the U.S. decline of 4.4%, and recovery began in 2010, with employment rising 0.3%, compared to a U.S. decline of 0.8%. May 2011 employment rose 1.9% over May 2010, well ahead of the 0.7% figure for the nation. Gains are particularly strong in professional and business services, and construction. The comptroller's forecast anticipates employment growth of 1.4% in 2011, 2% in 2012 and 2.4% in 2013. Personal income likewise is showing renewed strength, with first quarter 2011 figures 6.2% higher than the previous year. Oil and natural gas prices are forecast to remain steady through the 2013 forecast period.

The TPFA issues certain state GO notes, bonds and lease obligations on behalf of various state agencies and institutions. Each TPFA CP program is covered by a liquidity agreement with the state's comptroller of public accounts, under which funds from the state treasury will be made available to purchase maturing notes that are not successfully remarketed. The state treasury provides liquidity for several CP programs and variable-rate bonds. As of June 30, 2011, total commitments are $1.4 billion with a maximum daily commitment of $863 million; $897 million was outstanding on all liquidity agreements. The market value of the treasury portfolio was $30.4 billion of which $2.6 billion, or 9%, was in cash and repurchase agreements and 50% was due in three months or less. Cash and repurchase agreements alone exceed all liquidity support provided by the state treasury.

Applicable Criteria and Related Research:

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

--'U.S. State Government Tax-Supported Rating Criteria' (Oct. 8, 2010);

--'Criteria for Assigning Short-Term Ratings Based on Internal Liquidity' (June 20, 2011).

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

U.S. State Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564546

Criteria for Assigning Short-Term Ratings Based on Internal Liquidity

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637129

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