Wednesday, July 11, 2007


NEW YORK, Jul. 11, 2007 (Business Wire) -- Fitch assigns an 'AA+' rating to the following general obligation (GO) bonds of the state of Texas:

--$121 million GO water financial assistance refunding bonds, series 2007A;

--$19.5 million GO water financial assistance refunding bonds, series 2007B (state participation program);

--$23.3 million GO water financial assistance bonds, series 2007 C (economically distressed areas program).

The series A bonds are scheduled to sell via negotiation with Goldman, Sachs & Co. on Aug. 9. The series 2007A bonds will mature Aug. 1, 2008-2027. The series 2007B and 2007C bonds are scheduled to sell via negotiation with Ramirez & Co., Inc. on July 24. The series B bonds will mature Aug. 1, 2008-2019; the series C bonds will mature Aug. 1, 2011-2025. Redemption provisions for all three series have yet to be determined. Fitch also affirms the 'AA+' rating on approximately $9.7 billion in outstanding GO bonds of the state. The Rating Outlook is Stable.

The 'AA+' rating on Texas GO bonds reflects the state's low debt, conservative financial operations and an economy that has expanded and diversified. Financial pressures include the demands that rapid growth place on the state's consumption-based tax system. The general fund remains vulnerable to recurring shortfalls arising from property tax relief in the form of increased state funding of school finance, although resolved for the fiscal 2008-2009 biennium. The Stable 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 in an amount sufficient to pay principal and interest. By policy, the general water financial assistance program is self-supporting from repayment of loans made to local subdivisions for various types of water development and income received from investments. However, general fund support is provided for bonds in the state participation loan program, including series 2007B bonds, and for facilities in economically distressed areas, including the series 2007C bonds. A 1997 constitutional amendment allowed consolidation of various bond authorizations of the water development board. Bonds issued since that time, including the new bonds, are water financial assistance bonds, and all bonds issued prior to 1997 have been defeased.

The State of Texas' debt remains low in relation to resources. Prior to this sale, net tax-supported debt of $10.2 billion is equal to $433 per capita and 1.3% of personal income. Most debt is GO, with the bulk of GO considered self-supporting, including water loans, the veterans' loan program, and loans to college students. Debt levels are rising with issuance of $4 billion in GO bonds for transportation purposes.

Financial performance in fiscal 2007 is strong, as general fund revenues have risen 8.9% through May 2007 from a year earlier, led by sales tax collections up $1.5 billion, or 11.5% above a year ago; sales tax collections are 7.5% over estimates. Franchise tax collections are $412 million, or 17.9%, above the prior year, while oil and gas production tax collections are $508 million, or 20.4%, below the prior year's very strong levels, but still over forecast. General revenue fund cash balances, at $9.9 billion as of May 31, 2007, are $5 billion over projections, equivalent to 20% of revenues.

During the 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. These sources are projected to generate $8 billion for the property tax relief fund for the 2008-2009 biennium. While the projected balances are sufficient to cover requirements through the current biennium ending Aug. 31, 2007, funding shortfalls thereafter were originally expected to be absorbed by a combination of general fund revenues, surplus balances and revenue growth. More recent forecasts estimate such resources to be sufficient to fund property tax relief during the 2008-2009 biennium. The 2008-2009 biennial budget provides $14.2 billion in property tax relief from the property tax relief fund and general fund surplus.

The Texas economy has enjoyed solid growth in recent years. Employment rose 3.2% in 2006, compared to 1.8% for the U.S. Employment rose 2.3% in May 2007 compared to a year earlier, above the 1.4% U.S. gain over the period. While the state's employment gains are above comparable national rates, the pace of growth has slowed over the past year. Personal income growth continues to be strong, rising 8.2% in 2006 and 7.2% in the first quarter of 2007.

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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