MuniLand – Drilling Down into Texas

Over year-end we published a series of notes on the impact of falling crude oil prices on municipal credits. We predicted that Texas would be a marginal winner driven by rising consumption due to savings from low fuel prices and because the economy is diversified enough to withstand a pullback from oil investments. Outside of the State itself, and state supported debt, SNWAM has exposure to major cities such as Austin, Dallas, Fort Worth, Houston and San Antonio. As such, our credit review includes governmental purpose obligations, the vast majority of which are LTGOs, along with their affiliated utilities, including airports, electric power systems and water/wastewater systems.

There are several common themes among these credits. First, Texas cities are subject to a state constitutional tax limit of $2.50 per $100 of “taxable assessed valuation,” which includes taxes for debt service. The constitutional limit can be tightened by home rule charter, and in fact Fort Worth has done so, enacting a $1.90 limitation. However, none of the 5 cities reviewed is currently anywhere close to its applicable limit. This means they have capacity in their taxing authority to support outstanding debt. Second, all 5 cities have high-quality water/wastewater utilities as well as affiliated airport operations, although the latter are uniformly of lesser credit quality. Only Austin and San Antonio have municipal electric utilities, but both are superb credits. As it turns out, Austin and San Antonio both make substantial use of their utilities to support their governmental operations. In FY 2013, Austin’s General Fund derived $145 million, or 18.6% of its revenues, from transfers from municipal utilities (electric and water); San Antonio’s General Fund received more than $300 million, or 32.9%, from its electric system alone. We view the lavish use of transfers from utilities as a credit negative for governmental purpose credits, but do not see any material impact on the utilities from the transfers. A third common theme involves what we have come to characterize as the general carelessness in Texas about unfunded pension and OPEB liabilities. In 4 of the 5 major cities (Austin, Dallas, Fort Worth and Houston), unfunded liabilities for pensions exceed total LTGO debt outstanding, and, in Austin and Fort Worth, unfunded OPEB liabilities do too. At the moment, Texas municipalities are riding high, but neglect of unfunded liabilities for OPEBs and especially pensions is a looming material credit issue that grows closer by the day.