Texas has once again received the highest credit ratings for this year’s Texas Tax and Revenue Anticipation Notes (TRAN), which will allow the state to manage cash-flow needs for fiscal 2019.
“I am proud that once again Texas has received the highest short-term credit ratings on these notes,” Texas Comptroller Glenn Hegar said. “Additionally, the ratings agencies maintain Texas’ AAA long-term credit ratings, reflecting the highest possible level of creditworthiness. Our diversified economy, rising employment and solid revenue growth, coupled with Texas’ history of sound fiscal management and responsible cash-flow projections, contribute to these ratings, which are crucial tools to reduce borrowing costs and save taxpayer dollars. These are the result of conservative economic leadership and sound policies.”
Texas’ 2018 TRAN issuance is rated SP-1+ by Standard & Poor’s (S&P), F1+ by Fitch Inc., MIG 1 by Moody’s Investors Service and K1+ by Kroll Bond Rating Agency.
This year’s $7.2 billion TRAN sale is Aug. 22. These annual, one-year notes are sold to help fund school payments and manage cash flow between the start of the fiscal year and the arrival of tax revenue later in the year.
The ratings come on the heels of the Comptroller’s recent revision to the Certification Revenue Estimate (CRE) by $2.67 billion, which several firms cited as a sign of the state’s robust economic growth over the past 12 months. It was the first time a Comptroller has ordered a revision to the estimate for a reason other than a legislative session in three decades, fulfilling a promise Hegar had made to keep legislators and the public aware when the revenue outlook changes significantly.
S&P said, “We believe the state comptroller’s office has developed conservative cash-flow projections consistent with the state’s strong financial management policies and practices.” And S&P noted the state’s “robust economic growth” and “sizable rainy day fund” as key elements of its rating.
Fitch cited solid economic and fiscal trends and steadily rising employment and revenue collections while stating, “The fiscal 2019 forecast assumes continued economic momentum, with trade, technology and other services driving gains alongside renewed growth in energy-related activity.”
Moody’s Investors Service noted Texas’ credit rating “reflects strong balances forecasted to be available to repay the notes when due, including robust alternate liquidity that the state comptroller can divert to noteholders if necessary.”
Kroll stated, “The economy of Texas is very strong based on an increasingly broad and diverse employment base, ongoing robust population growth and above average growth in gross state product. While the oil and gas industry is still a significant part of the economy and fluctuations in oil and gas market prices impact employment and economic activity in the State as well as State revenues, we believe that the State’s economy has diversified and expanded well beyond its past reliance on this sector.”
Several agencies also noted potential risks to the state’s economy and echoed warnings Comptroller Hegar delivered to lawmakers regarding the dangers posed by ongoing trade tensions and lingering balance-sheet issues.
Kroll commented, “Though current economic indicators remain positive, the State economy is also potentially subject to risks posed by changes in federal trade policy, particularly as it impacts U.S. participation in the North American Free Trade Agreement (NAFTA).”
Similarly, S&P noted, “While Texas’ growing prosperity is not likely to abate within the short term, emerging trade tensions could have a pronounced effect on the state. As the country’s leading exporter, Texas’ economic industries are strongly intertwined with global supply chains and ancillary business services which support local economies.”
S&P also reminded investors that the state “will wrestle with how to fund agency expenditures related to Hurricane Harvey recovery and cleanup efforts, as well as other policy areas requiring supplemental appropriations including Medicaid.”
To avoid potential risks to the health of the state’s finances and to maintain its triple-A credit rating, Hegar has recommended a more prudent and fiscally responsible approach to managing the state’s $11 billion Economic Stabilization Fund — the “rainy day fund.” Hegar has pushed for the creation of a Texas Legacy Fund, a permanent endowment for the state that would earn investment income to begin paying down Texas’ long-term obligations and safeguard the state’s savings account against future economic fluctuations.
