Fitch Rates Texas' $6.4B Series 2008 TRANS 'F1+'

2008-08-07 01:29:04 -

- Fitch Ratings assigns an 'F1+' rating to Texas's $6.4 billion tax and revenue anticipation notes (TRANs), series 2008. The TRANs, dated Aug 28, 2008 and due Aug 28, 2009, are for bid on Aug. 19th and are not callable.

The 'F1+' rating reflects sound legal protections from set-asides, good coverage for each set-aside payment, substantial borrowable resources and conservative economic and revenue assumptions. These factors offset risks associated with a sales tax dependent revenue structure and the state's assumption of increased education funding.

Texas regularly issues TRANs for cash management, with the series 2008 notes selling under an $11.2 billion fiscal 2009 authorization. While not general obligations of the state, they are payable from deposits in the sinking account in the note fund. The sinking account is derived from investment earnings and transfers from the general revenue fund. The notes represent 9.7% of fiscal 2009 revenues. Fiscal 2009 is the second full year when the state's education expenses equal its 50% share. The projected $2 billion general revenue fund ending fiscal 2009 cash balance is 9.2% of cash flow after repayment of the notes. The balance increases to $9.4 billion when borrowable funds are included. Additionally, the economic stabilization fund balance is $6.6 billion. Coverage from ending general fund cash for each set-aside is good, ranging from 2.1times (x) in July to 15.8x in March. Coverage for the entire note issuance from projected closing cash balance is 1.3x rising to 2.8x including borrowables.

Texas has an excellent record of cash management, and revenue estimates tend to be conservative. The Texas economy has enjoyed strong growth in recent years with gains since 2004, well ahead of the nation. Employment rose 2.9% in calendar 2007 and rose 2.3% in June 2008 from a year earlier. Personal income growth also has been strong, rising 6.7% in the first quarter of 2008, compared to 6.7% nationally. The sales tax, Texas' main revenue source, is up 6.1% from the same period lat year for ten months of fiscal 2008 through June 30, 2008 from the same period last year and is 5.6% over forecast. Oil and gas tax collections continue to rise above the same period a year ago and are $1.4 billion above projections. The expanded franchise tax is in its first full year of collection. Excess amounts are transferred from the general fund to the property tax relief fund. Collections are $1.7 billion above current forecasts but below initial estimates. The projected fiscal 2008 ending balance of $5.5 billion is above $1.1 billion as originally estimated due to stronger revenue growth. Fiscal 2009 tax revenues are projected to rise 1.8% with sales taxes projected to gain 2.2% and 2.9% for the franchise tax.

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 fiscal 2008 from 36% in fiscal 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. Funding shortfalls would be absorbed by a combination of general fund revenues, surplus balances and revenue growth. These sources are projected to generate $8 billion for the property tax relief fund for the fiscal 2009. With performance above expectations these sources are now expected to be sufficient to fund property tax relief during the 2008-2009 biennium.

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