Fitch Rates Texas' $222MM GO Water Dev Board Bonds 'AAA'; Outlook Stable
--$221,865,000 State of Texas water financial assistance bonds, series 2015D.
The par amount is subject to change.
The bonds are expected to sell via negotiated sale as early as Oct. 27.
The current series was originally rated on Feb. 26, 2015, although the sale was subsequently delayed.
The Rating Outlook is Stable.
The bonds are general obligations to which the state pledges its full faith and credit.
KEY RATING DRIVERS
LOW DEBT: Texas' debt burden remains low despite significant growth-related capital needs, especially for transportation. Amounts for debt service are constitutionally dedicated.
GROWTH-ORIENTED ECONOMY: The state's economy is large, diverse, and continues to grow at a solid pace despite recent energy industry slowing. The state's oil and gas sector remains a significant source of economic activity and is subject to volatility.
SIGNIFICANT RESERVE BALANCES: Financial operations are generally conservative. The state maintains a sizable budget reserve, with a portion of natural resource receipts dedicated to funding it.
SALES TAX DEPENDENCE: Finances are dependent on consumption-based (primarily sales) taxes; volatile energy taxes are also important.
GROWTH-RELATED SPENDING PRESSURES: Longer-term fiscal pressures stem from having to adequately fund the state's rapid growth. This includes expanded transportation, school funding, and water needs.
ECONOMIC GROWTH AND AMPLE FLEXIBILITY: Texas' 'AAA' general obligation rating and Stable Outlook assume continued 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.
Texas' long-term 'AAA' GO rating reflects its low debt burden, conservative financial operations and a growth-oriented economy that has outpaced national averages through most of the current expansion. The oil price plunge that began in late 2014 has slowed the state's economic and revenue momentum, although broader gains continue despite weakness in some regions and sectors.
Fitch believes that the state has ample flexibility to absorb near-term economic and revenue volatility, both in the form of its very large reserve balances and a tradition of taking budgetary actions to maintain balance. Liquidity is ample, and the state is not undertaking cash flow borrowing in fiscal 2016 to meet intra-year cash needs for the first time in decades. The state has been a leader in economic growth for decades, diversifying Texas' economy well beyond the resource sectors that were dominant during the last severe oil price shock, in the 1980s. A rapidly expanding population and the concomitant demand for public services, including for transportation, education and water, continue to pose a long-term fiscal pressure.
Texas' GO bonds are payable from a constitutional appropriation out of the first moneys coming into the state treasury not otherwise appropriated. This unrestricted balance equaled nearly $48 billion as of Aug. 31, 2014, the end of fiscal 2014.
The TWDB issues GO water financial assistance bonds under constitutional provisions including a 1997 constitutional amendment that consolidated the board's various authorizations, with proceeds supporting water conservation and infrastructure projects throughout the state. As of Aug. 31, 2015, the board has over $6.4 billion in unissued GO bond authorization available for various board programs.
By policy, most GO water financial assistance bonds are self-supporting from repayments of loans made to local entities for water development projects and income received from investments. Certain GO water financial assistance bonds, including for the economically distressed areas program, receive general fund support.
Water infrastructure remains a perennial need in the state given its high growth and scarce water resources. The board's resources and responsibilities for managing water projects were expanded under a constitutional provision approved by voters in November 2013 which included the transfer of $2 billion from the state's rainy day fund to establish the State Water Implementation Fund for Texas (SWIFT), which supports water-related projects. Fitch rated the first bond offering of the associated State Water Implementation Revenue Fund for Texas loan pool 'AAA'/Outlook Stable on Sept. 9, 2015.
For additional information on the GO rating of the State of Texas, please see Fitch's press release dated Aug. 28, 2015, 'Fitch Rates Texas $1 Billion GO Mobility Fund Bonds 'AAA'; Outlook Stable,' which is available at 'www.fitchratings.com'.