NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'F1+' rating to the following state of Texas tax and revenue anticipation notes (TRANs):
--$7.2 billion TRANS, series 2013.
The TRANs, which are dated Sept. 3, 2013 and due Aug. 28, 2014, are for bid on Aug. 27, 2013 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, paid monthly beginning in March 2014. The comptroller also covenants to forecast remaining fiscal year receipts on a monthly basis beginning in April, 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 high. Assumptions for economic and revenue performance in fiscal year 2014 appear conservative.
STATE'S GENERAL CREDIT STANDING: Fitch rates the state's long-term general obligation (GO) bonds 'AAA' with a Stable 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 2013 TRANs reflects ample coverage for each set-aside payment from projected general revenue and borrowable resources and a history of conservative economic and revenue assumptions. Since the last recession, the state has benefited from a solid economic recovery relative to other U.S. states, accompanied by resurgent sales tax and resource-related revenues. Cash balances have likewise expanded, both in the general revenue fund (GRF) and in borrowable funds.
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 $7.2 billion series 2013 notes selling under an $8.2 billion fiscal 2014 authorization. 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 $7.2 billion in series 2013 TRANs is lower than the $9.8 billion in TRANs borrowed in the current fiscal year and the lowest TRAN par amount since fiscal 2010.
TRANs repayment is derived primarily from transfers from the GRF to the sinking and payment accounts, with six scheduled payment dates. The final set-aside of $1.8 billion takes place on Aug. 21, 2014, and the fiscal year ends on Aug. 31, 2014. 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 $11.6 billion per month through fiscal 2014. Coverage from GRF cash and borrowable resources on each set-aside date is good, ranging from 65.4 times (x) on March 31, 2014 (the high is 69.2x on April 30, 2014), dropping to 8.4x on Aug. 21, 2014, the final set-aside payment date.
Borrowable resources include the Economic Stabilization Fund (ESF), currently funded at $6.04 billion after a transfer out of $1.75 billion in July 2013 to correct a one-month deferral of foundation school fund expenditures that was used for gap-closing in the original adopted fiscal 2012-2013 budget, as well as a transfer of $186 million for wildfire suppression needs.
The fiscal 2014-2015 budget, which was adopted in June 2013, included a second ESF draw of $2 billion to establish a water revolving fund, subject to voter approval in November 2013. Oil and natural gas production taxes, the source of deposits to the ESF, have continued to over-perform earlier estimates; a deposit of $2.37 billion is forecast in November 2013. The state's fiscal 2014 cash forecast assumes voter approval of the water revolving fund, which would leave the ESF balance at $6.41 billion through fiscal year-end.
The state has customarily forecast cash flows conservatively. Excluding borrowable resources, the fiscal year 2014 GRF cash balance is forecast to begin at $4.4 billion and end at $2.8 billion, after the final TRAN set-aside payment. The series 2013 TRANs represent 8.8% of forecast fiscal 2014 cash receipts. The fiscal 2014 forecast assumes continued economic growth, with the state benefiting from continued economic gains and the strength of the energy sector. However, the pace of gains is expected to slow from recent levels, with energy sector activity moderating even as the broader labor market continues to expand. The state has a history of over-performing prior forecasts.
Projected 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. In addition to establishing a water revolving fund from a $2 billion ESF balance transfer to be placed on the state ballot in November 2013, as noted earlier, the legislature authorized the diversion of a portion of oil and gas receipts that now flow to the ESF to fund highway needs instead. The partial oil and gas diversion will be placed on the state ballot in November 2014. The diversion requires voter approval (as with the water revolving fund draw), but would not affect ESF cash receipts in fiscal 2014.
Fiscal 2013 actual performance through June was well ahead of forecast expectations. Revenues were 2.1% higher than forecast, driven largely by sales and oil production taxes. The $9.8 billion in TRANs issued for fiscal 2013 cash needs will mature on Aug. 30, 2013. All scheduled set aside payments have been made to date. The state estimates a year-end GRF cash balance of $4.4 billion, compared to a forecast balance of negative $1.6 billion upon issuance. Borrowables as of year-end are currently estimated at $9.5 billion, including the $4.4 billion ending cash balance.
For further information on the State of Texas, please see Fitch's press release 'Fitch Rates Texas $105MM Water GOs 'AAA'; Outlook Stable,' dated June 27, 2013, on www.fitchratings.com.
Additional information is available at 'www.fitchratings.com'
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. Municipal Short-Term Debt' (Nov. 27, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. State Government Tax-Supported Rating Criteria
Rating U.S. Municipal Short-Term Debt