2008-06-17 23:46:29 -

- Fitch Ratings has assigned an 'AA+' rating to the Texas Public Finance Authority's (the authority) approximately $225,000,000 State of Texas (the state) general obligation (GO) and refunding bonds series 2008A. The bonds are expected through negotiation the week of July 7, 2008. Fitch has also affirmed the 'AA+' rating on the state's GO bonds. The Rating Outlook is Stable.

The authority acts as issuer of certain state GO bonds and commercial paper and lease obligations with various state agencies and institutions. The 'AA+' GO bond rating reflects the state's low debt and conservative financial operations and an economy that has expanded and diversified. Financial pressures arise from the demand that rapid growth places on the state's consumption-based tax system, as well as from property tax relief, transportation needs and other state obligations. Although resolved for the fiscal years (FYs) 2008-2009 biennium, the general fund remains sensitive to longer-term, projected funding shortfalls of property tax relief in the form of increased state funding from school finance. However, finances continue their strength with enlarged balances. Through May 31, year to date revenues are generally above projections. The Stable Rating Outlook reflects the state's strong economic and revenue growth and satisfactory balances.

Pursuant to the state constitution, the bonds now offered are GOs and are payable from constitutional appropriations out of the first moneys coming into the state treasury not otherwise appropriated ($36.2 billion in FY 2007) in an amount sufficient to pay principal and interest. Net tax-supported debt of $11.7 billion is equal to $493 per capita and 1.3% of personal income. Most debt is GO, with close to two-thirds considered self-supporting. The state's debt remains low in relation to resources, but is rising with issuance of $4 billion in GO bonds for transportation purposes. Debt levels are expected to remain manageable even with issuance of another $9.75 billion general obligation bonds approved in November 2007.

Since 2004, the state's economy, has experienced robust gains in employment and personal income, rising well ahead of the nation. Employment gains remain strong although the pace of the state's growth has slowed slightly. Employment rose 2.9% in 2007, well above nation's 1.1% gain but below a 3.2% rise in 2006 state employment. Employment rose 2.6% in April 2008 from a year earlier. Preliminary 2007 personal income rose 8%, equal to 129% of the nation, down slightly from 8.4% in 2006 and from 9.3% in 2005. Financial performance in FY 2007 was strong as general fund revenues rose 9.4% from a year earlier, led by rising sales tax, franchise tax and natural resource production tax collections.

General revenue fund cash balances on Aug. 31, 2007 were a healthy $9.4 billion, equivalent to 14.4% of revenues. Including borrowable resources, balances rise to $15.6 billion and include $1.3 billion held in the economic stabilization fund. Biennial revenue estimates for 2008-09 are conservative and project moderate growth in the sales tax of over 4% in each of FY 2008 and FY 2009. Oil and gas prices are conservatively estimated. Revenues for the first nine months of FY 2008 ending May 31, 2008 rose 4.9% from a year ago led by 5.8% rise in sales tax collections which were 5.4% above forecast. Oil and gas production tax receipts were 38% above the same period a year ago and were 48% above forecast. Beginning in FY 2008, the franchise tax rate was changed and the base enlarged to provide funding for property tax relief and school finance reform. The ending cash balance and borrowable resources amounted to $16.2 billion as of May 31, 2008.

During a 2006 special legislative session the state finalized a major reform of the school funding system, in response to a 2005 state Supreme Court ruling that found certain aspects of the system unconstitutional. The reform package lowered local property taxes and increased state education support to approximately 50% by FY 2008 from 36% in FY 2006. The reforms are being funded through new tax revenues, broadening taxes on business, raising the motor vehicle sales and use tax for used vehicles, and raising cigarette taxes. These sources are projected to generate $8 billion for the property tax relief fund for the 2008-2009 biennium although requirements are projected at $14.2 billion; the difference is to be made up from accumulated surplus.

The series 2008A bonds include approximately $161.7 MM refunding bonds and $56.7MM new money bonds. The refunding bonds will refund a portion of GO bonds to refinance projects for the state department of criminal justice, department of mental health and mental retardation and the youth commission. The new money portion of the bonds will fund repairs and renovations to state department of criminal justice facilities and land acquisition and construction and renovation projects for the state department of Public Safety.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

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