Fitch Ratings assigns an 'AA+' rating to the following State of Texas general obligation (GO) bonds:
--$74.995 million Veterans' Housing Assistance Program Fund II, series 2010A bonds.
The bonds are expected to sell via negotiation on Feb. 17.
In addition, Fitch affirms the following ratings:
--$12.3 billion in outstanding State of Texas GO bonds.
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.
--The economy has diversified, but cyclical energy industry remains significant and is currently experiencing a deep downturn.
--Financial operations are conservative, generating large cash balances.
--Finances are dependent on consumption-based (primarily sales) taxes; spending pressures include property tax relief, school finance and capital needs.
KEY RATING DRIVERS:
--Continued economic strength coming 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; the Veterans' Housing Assistance bonds are intended to be self-supporting.
CREDIT SUMMARY:
The 'AA+' GO bond rating reflects the state's low debt and conservative financial operations and an economy that has expanded and diversified, despite current recessionary conditions. Financial pressures arise from the demand that rapid growth places on the state's consumption-based tax system, as well as from efforts to address property tax relief and transportation needs. The state's economy is currently in recession, resulting in weakened sales and natural resource taxes, although the state currently 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, the governor is seeking spending cuts to ensure balance through the fiscal 2010-2011 biennium.
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. The veterans' program was established in 1946 primarily to make loans to qualifying veterans for the acquisition or improvement of homes and the purchase of land. Administered by the Veterans' Land Board, as of Nov. 30, 2009 there were $1.9 billion in bonds outstanding. Proceeds of the current sale are for the Veterans' Housing Assistance Program Fund II to support the loan program. Debt service is expected to be paid from investment earnings and mortgage payments.
The state's net tax-supported debt burden is low, with approximately $12.2 billion equal to 1.3% of 2008 personal income as of Nov. 30, 2009. There are $12.3 billion GO bonds outstanding, of which $9.9 billion are self-supporting. The state's debt burden has risen with issuance of nearly $5 billion in GO transportation bonds in recent years.
The state's economy grew through 2008, but performance in 2009 weakened rapidly as national and international recessionary conditions affected key energy, construction and manufacturing sectors. State employment rose 2.1% in 2008 from the prior year, versus the U.S. decline of 0.4%. December 2009 employment fell 2.6% from December 2008, compared to a 3% decline nationally. Personal income fell through the first three quarters of 2009, with the third quarter down 1.7% from the third quarter of 2008, more severe than the 1.6% decline recorded nationally for the same period. The comptroller's most recent economic forecast update through 2014 anticipates a return to growth in 2010 after declines in 2009 in the state's gross state product and employment; growth would accelerate in 2011.
Fiscal management is conservative, with the state now maintaining a sizable rainy day fund, the economic stabilization fund (ESF). Revenue collections are continuing to underperform recent experience given recessionary conditions and lower energy prices, although planned transfers have brought the ESF balance to a sizable $7.6 billion, or 9% of fiscal 2009 all funds net revenue. 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 state 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 drop 1.4% in fiscal 2010, to $37.3 billion, then rise 8.4% in fiscal 2011, to $40.4 billion. Sales tax collections grow 0.7% and 6.9%, respectively, in fiscal 2010 and 2011. Actual general revenues are underperforming through December 2009, with total revenues 9.7% below forecast and sales tax collections 10.5% below forecast. The enacted fiscal 2010-2011 biennium spending plan appropriates $182.3 billion, 7.4% over appropriated fiscal 2008-2009 levels, including $12.1 billion in federal stimulus. The governor is seeking cuts up to 5% of appropriated funds through the end of the biennium in response to revenue weakness.
These rating actions reflect the application of Fitch's current criteria which are available at 'www.fitchratings.com' and specifically include the following reports:
--'Tax-Supported Rating Criteria', dated Dec. 21, 2009;
--'U.S. State Government Tax-Supported Rating Criteria', dated Dec. 28, 2009.
Additional information is available at 'www.fitchratings.com'.
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or
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