DALLAS – The Texas Transportation Commission is preparing to issue $624 million of top-rated general obligation bonds in the state’s largest deal so far this year.
The negotiated sale through bookrunner Bank of America Merrill Lynch & Co. is expected in early April. The issue is on the calendar for approval by the Texas Bond Review Board on March 17.
At a Jan. 28 meeting, the Texas Transportation Commission, which governs the Texas Department of Transportation, authorized more than $1.4 billion of Highway Improvement General Obligation bonds, dubbed HIGO bonds.
The bonds are issued under a 2007 constitutional amendment that authorized $5 billion of total issuance. Debt service is supported from state general revenue fund resources.
Proceeds from this issue will go toward capital projects, particularly those designed to relieve congestion in the major urban areas.
In recent years, TxDOT has been the major issuer of debt in Texas and the Southwest region.
The agency issued $3.3 billion of bonds in 2015. The largest single issue of $1.6 billion came Jan. 21, 2015 as TxDOT sought to take advantage of record low interest rates.
The agency’s 2015 issuance was about 40% below the record $5.5 billion issued in calendar year 2014.
However, volume could pick up with new revenue streams approved by voters.
Texans approved a highway funding measure known as Proposition 7 in the November election. The measure redirects up to $2.5 billion of sales tax revenue to highways, but the money will likely not be available until the 2018 fiscal year, state officials say.
Under Proposition 7, the Texas Department of Transportation would gain access to the funds only if total sales tax revenues for the year exceed $28 billion.
The 2018 fiscal year would be the first in which funds would be diverted, and the amount estimated for TxDOT is about $2.5 billion, according to state researchers. Sales tax revenue for fiscal year 2015 came to $28.9 billion, according to the state Comptroller's Office. However, sales tax revenues have fallen in 2016 with the decline in oil prices.
A year before voters passed Proposition 7, they approved Proposition 1, a measure that diverts a portion of oil and gas severance tax revenue from the rainy day fund to highway projects.
The Texas Comptroller of Public Accounts certified that $1.74 billion was available for transfer to the State Highway Fund for the last fiscal year.
TxDOT began awarding contracts for Prop. 1-funded projects in March 2015, with all of the funding allocated by the end of the year.
With oil and gas prices falling, the revenue from Prop. 1 dropped to $1.1 billion last year and is expected to drop to $600 million this year.
One impetus for the Proposition 1 funding – the rapid deterioration in the state’s oil-producing regions – has weakened as activity in the fields has declined. In some rural counties, heavily laden trucks are no longer rumbling along deeply rutted roads.
However, the deeply rutted roads remain in many counties.
The use of general sales tax revenue for transportation projects under Proposition 7 is a first for Texas, which has heretofore relied on motor fuel taxes and fees for licenses and other permits. The falling oil prices have actually increased motor fuel revenues for the state by encouraging more driving. For most of 2016, regular unleaded gasoline pump prices have stayed well below $2 per gallon.
The falling fuel prices have not threatened the state’s triple-A general obligation rating so far.
“The Texas general fund budget is not as directly exposed to oil and gas severance taxes as some states are,” according to Moody’s Investors Service analyst Nicholas Samuels. “While oil and gas severance taxes were 11.2% of general fund tax revenue in fiscal 2014 as the energy boom ended, that decreased to 9.0% of tax revenue in fiscal 2015 and is estimated to be 6.0% in fiscal 2016.”
With no state income tax, sales taxes remain the largest single general fund tax revenue source providing about 62% of revenue.
Sales taxes grew 12.6% in fiscal 2012, 7.2% in fiscal 2013 and 5.5% in fiscal 2014. Fiscal 2015 growth was 5.5%, well above the state's 2.4% forecast, although there was some volatility during the year reflecting the impact of lower oil prices on the state's revenues.
“That impact is more evident in fiscal 2016,” Samuels said. “Through January cumulative collections are 2.5% lower than the prior year, compared to full year forecasted growth of 1.2%.”
While tax revenues are slowing, the state’s population is still growing.
“Longer-term fiscal pressures stem from having to adequately fund the state's rapid growth,” said Fitch Ratings analyst Douglas Offerman. “This includes expanded transportation, school funding, and water needs.”
With diminishing pressure on rural roads in the oil fields, Texas is turning its attention to congestion in the major cities.
At the Jan. 28 meeting, the TTC announced plans to spend $1.3 billion on 14 highway projects in its five largest cities as the first phase of a long-term effort to reduce traffic congestion.
Funding will come from $1 billion of state gasoline and sales tax revenues that had been diverted to law enforcement agencies and the general fund, and $300 million of other commission funds.
The program includes $443.3 billion of projects in the Houston area, with the remainder earmarked for highway work in four cities along traffic-clogged Interstate 35. The allocations include $364 million for Dallas, $170.3 million for San Antonio, $163.8 million for Fort Worth, and $158.6 million for Austin.
More than two-thirds of Texans live in or near the five cities and those areas contain 99 of the most congested roads in the state, according to the TTC, which describes the 14 projects being funded over the next two years as the first step in long-range plan to reduce congestion on Texas highways.
TxDOT chief engineer Bill Hale said the state will save $457 million by beginning work on projects that had been delayed for lack of full funding.
