Fitch Affirms Texas Unemployment Obligation Bonds at 'AAA'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed the 'AAA' rating to the following Texas Public Finance Authority (TPFA) unemployment compensation obligation assessment revenue refunding bonds:
--$525 million in outstanding TPFA unemployment compensation obligation assessment revenue bonds.
The Rating Outlook is Stable.
The bonds are special obligations of the Texas Public Finance Authority and Texas Workforce Commission payable from a first and exclusive lien on pledged revenues, including revenues derived from the levy of the unemployment obligation assessment, amounts deposited to the obligation trust fund and program fund, and any other revenues deposited to the obligation trust fund that are legally available to pay the obligations.
KEY RATING DRIVERS
UNLIMITED ASSESSMENT: The obligation assessment is a broad tax applied to employers in the state, the rate for which is established annually while bonds are outstanding in order to provide a minimum of 1.5x coverage of debt service in the following year, as well as administrative costs; there is no limit on the obligation assessment rate. Bonds are not secured by other assessments that make up the state's unemployment assessment.
HOLDBACK TO ENSURE SUFFICIENT COVERAGE: The structure provides that excess collections after debt service payment be used for early bond redemption. If projected receipts are expected to lag, the resolution provides for the holdback of excess receipts collected in the first quarter, but not needed for immediate debt service, to ensure sufficiency of funds for debt service.
STRONG COLLECTIONS: The state's unemployment assessment collection mechanisms are strong and well-established, with a collection rate approaching 100%. Payments by employers, including the obligation assessment levied for bondholders, are highly seasonal, with the bulk of collections in the first quarter of the year.
ADDITIONAL RESOURCES FOR EARLY REPAYMENT: Any balance in the state's unemployment compensation fund above a maximum threshold is legally available to repay outstanding bonds, although such funds are not specifically pledged.
ESTABLISHED PROGRAM: The bond program was established during the 2002-2003 downturn and has since been strengthened by the addition of the holdback provision and by statutory powers to allow transfer of excess unemployment compensation fund balances to bondholders.
ECONOMIC GAINS SLOWING: The state's economy is large and diverse. Growth continues, albeit at a decelerating pace as the recent energy industry weakness gradually affects overall performance. The state's oil and gas sector remains a significant source of economic activity and is subject to volatility.
The rating is sensitive to any challenges to the smooth functioning of the unemployment compensation rate-setting and collection process as well as any fundamental changes in the state's economy that could materially affect collections of assessments.
The obligation assessment is a legislatively authorized component of Texas' unemployment tax that by covenant must be levied while bonds are outstanding. The assessment is collected with the state's other unemployment taxes on its broad and diverse economic base; collection experience is very strong.
The rate is determined annually by the Texas Workforce Commission at a level sufficient to provide 1.5x coverage of debt service in the next calendar year, with excess collections available for accelerated bond repayment. Under current forecast assumptions, the bonds are projected to be fully repaid in 2018 by scheduled debt service and early redemptions from excess pledged collections.
Obligation assessment bonds were first issued in 2003 and fully redeemed in 2007, well-ahead of original planned maturity. In addition to the excess coverage by the obligation assessment, repayment was accelerated by a 2007 statutory change allowing balances in the trust fund in excess of its statutory ceiling (2% of the state's taxable wages, or about $2.12 billion in 2016) to be used for early bond repayment. Excess trust fund balances are legally available, but not pledged.
The state's trust fund balance was nearly $1.3 billion as of December 2015, and thus none of these excess trust fund balances are currently available for early redemptions under the 2007 statutory change. The 2015 trust fund balance fell from nearly $1.7 billion in December 2014, the result of both lower contributions and higher benefit distributions in 2015, and a reversal of the multiyear trend of rising balances in place through 2014. However, distributions in 2015 remained well below recessionary highs hit in 2009.
HOLDBACK TO ENSURE SUFFICIENT COVERAGE
The resolution includes a holdback provision in effect during the second half of the year, when fewer assessments are received, by which pledged receipts can be directed toward early redemption only if the 1.5x coverage threshold is met for the period through the next debt service payment date and a minimum of $25 million is retained in the debt service account. There is no debt service reserve.
The state's unemployment taxes currently include the general rate, a replenishment tax, and the obligation assessment, among other components. The average combined tax rate in 2016 is 1.46%; the average obligation assessment tax yield for the bonds is 0.17%. Collections are historically very strong, exceeding 98% per quarter. Only the revenues from the obligation assessment are pledged to bondholders.
The obligation assessment rate is reset annually in November by the commission for payment by employers in the following calendar year at a level sufficient to cover debt service by 1.5x and bond expenses. The rate is not capped, nor is legislative approval necessary for the commission to adjust the rate. Texas statute establishes a trust fund balance ceiling of 2% of taxable wages and a floor of either $400 million or 1% of taxable wages as of June 30 for use by the commission in establishing the following year's rates.
The commission deposits collections to the obligation assessment trust fund; payments from the fund do not require appropriation. After transfer of funds for principal, interest and administrative expenses, funds may be used for interest payments on any outstanding federal advances, prior to determining funds available for early redemption.
In Texas, aggregate unemployment taxes are payable quarterly on the first $9,000 of taxable wages. As a result of the limited taxable wage base, collections are highly seasonal, with nearly two-thirds of unemployment tax revenues paid in the first quarter based on first-quarter taxable wages; about 20% of collections are paid in the second half of the year prior to the Jan. 1 debt service payment.
Receipts are deposited to the trust fund, from which unemployment benefits are drawn. Obligation assessments are deposited to a separate obligation assessment trust fund, available only for bondholders.
ECONOMIC GAINS SLOWING
Texas' economy has expanded rapidly and diversified over the last two decades, although the cyclical energy sector still represents a large share of economic activity. Unemployment rates in Texas have been consistently below the nation's over most of the last decade; in 2015, the state's unemployment rate was 4.5%, compared to 5.3% for the U.S., and the February 2016 rate was 4.4% in Texas, compared to 4.9% nationally.
Employment growth in February 2016 was 1.5% year-over-year, compared to 1.9% nationally; weakness in the state's energy sector has gradually deepened and expanded to other parts of the economy, but statewide averages remain broadly positive. Population growth is more than twice the national rate, rising 29.3% since 2000 (compared to 13.3% nationally). Personal income has slowed considerably in recent quarters, but continues to grow, rising 3.2% in the fourth quarter of 2015, compared to 4% nationally. Personal income per capita measured 98% of the nation's in 2015, ranking Texas 22nd among the states.