Fitch Rates Texas Transportation $760MM GO Mobility Rfdg Bonds 'AAA'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned a 'AAA' rating to approximately $760 million in Texas Transportation Commission (TTC) State of Texas general obligation (GO) mobility refunding bonds, series 2017.

The bonds are expected to be offered by negotiated sale on or about the week of Jan. 16, 2017.

The Rating Outlook is Stable.

SECURITY

The bonds are general obligations to which the state pledges its full faith and credit.

KEY RATING DRIVERS

Texas' long-term 'AAA' IDR reflects an economy that continues to grow despite the severe contraction in the state's globally important energy sector, its conservative financial operations and low long-term liability burden. The oil price plunge that began in late 2014 interrupted a long period of economic and revenue growth, but diversification over time leaves the state better positioned relative to past cycles to weather the energy sector downturn.

Economic Resource Base

Texas' economic resource base is large and diverse, although oil and gas remain significant and are subject to volatility. The state has been a population magnet and economic growth leader for decades, resulting in a degree of diversification well beyond the resource sectors that were dominant during the last severe oil price shock, in the 1980s. Service sectors in particular have grown in size and importance. The current energy sector downturn has slowed, but not halted, economic momentum, and Fitch views the state's longer-term economic prospects as strong. Overall employment gains continue, albeit now below national averages, and the unemployment rate remains well below U.S. levels.

Revenue Framework: 'aaa' factor assessment

Texas' revenue growth is expected to be in line with or above the level of U.S. economic growth, driven by rapid population and economic growth over time. Like most states, Texas retains nearly unlimited ability to raise operating revenues. Sales tax is the dominant source of revenue, although transportation, energy and other levies are also important.

Expenditure Framework: 'aa' factor assessment

Similarly to other states, Texas retains ample flexibility to cut spending throughout the economic cycle, an attribute that the state relies on if needed to maintain fiscal equilibrium. Spending pressures from education, Medicaid, transportation, water and other growth-related needs are notable, and litigation has often been a source of uncertainty in the past.

Long-Term Liability Burden: 'aaa' factor assessment

The combined burden of Texas' debt and unfunded liabilities is low relative to its resource base. A reluctance to borrow results in a low burden of net tax-supported debt. Unfunded pensions are a larger but thus far manageable burden. Progress in lowering pension liabilities is unlikely given several factors including higher than average discount rates and contributions that are statutorily fixed instead of shifting with actuarially-calculated needs.

Operating Performance: 'aaa' factor assessment

Financial resilience is strong, with exceptional gap-closing capacity stemming from a willingness to cut even high priority spending and a very well-funded budgetary reserve which receives constitutionally dedicated oil and gas tax revenues. The state has a high level of fundamental financial flexibility despite a historical reluctance to raise operating revenues. To a limited degree, there is some deferral of required spending, notably pension contributions.

RATING SENSITIVITIES

Economic Growth and Ample Flexibility: Texas' 'AAA' IDR and Stable Outlook assume continued strong prospects for 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

GO bonds are issued by various state agencies, with TTC authorized to issue transportation-related GO bonds administered by the Texas Department of Transportation. Transportation needs, driven by the rapid population growth and economic expansion of the last decade, have been funded by the 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; approximately $6.2 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.

Fitch believes the state has ample fiscal flexibility to absorb near-term economic and revenue volatility, in the form of its very large budgetary reserve, the $9.7 billion economic stabilization fund (ESF), and a practice of taking budgetary actions to maintain balance. Although sales tax collections, the state's primary source of revenues, are trending below prior year figures, liquidity remains ample. In fiscal 2016, for the first time in decades, it was unnecessary for the state to undertake cash flow borrowing for intra-year cash needs, and no such borrowing is planned in fiscal 2017, which began on Sept. 1. However, rapid growth and the concomitant demand for public services, including for transportation, education and water, continue to pressure spending, and unresolved litigation has periodically posed further uncertainty.

Fitch expects the downturn in the state's oil and gas sector to continue to weigh on overall state economic performance, but the degree to which this will happen remains to be seen. Job gains continue, albeit now at levels below U.S. averages, while the unemployment rate remains well under the national rate. Employment losses to date are concentrated in natural resources and manufacturing, as well as in geographic regions of the state with significant energy sector concentration.

The state is currently in the second year of its fiscal 2016-2017 biennium. Total general revenue (GR) and GR dedicated appropriations in the adopted budget equal $106.2 billion through the biennium, after adjustments including vetoes. This figure is approximately 12% higher than the comparable figure for the fiscal 2014 - 2015 biennium, based on the legislative budget board analysis of the joint Senate-House budget bill.

Recent revenue collections have trended lower due to weakness in taxes from the oil and gas downturn. Fiscal year-to-date through Oct. 31, total revenues excluding federal funds and interfund borrowing were 2.8% below the forecast level and 0.8% below the prior year's figure. Sales taxes are 6.2% below forecast and 1.7% below the prior year. The state's next revenue forecast is not expected until early 2017, before the next regular legislative session convenes.

Date of Relevant Rating Committee: Apr. 27, 2016

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

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.

Applicable Criteria

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
https://www.fitchratings.com/site/re/879478

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014983

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Contacts

Fitch Ratings
Primary Analyst:
Douglas Offerman, +1-212-908-0889
Senior Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Marcy Block, +1-212-908-0239
Senior Director
or
Committee Chairperson:
Laura Porter, +1-212-908-0575
Managing Director
or
Media Relations:
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New York
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Douglas Offerman, +1-212-908-0889
Senior Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Marcy Block, +1-212-908-0239
Senior Director
or
Committee Chairperson:
Laura Porter, +1-212-908-0575
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com