At the beginning of the year, we wrote about the impact of falling oil prices on the financial health of select states. We focused on the states and tax revenue sources that would win or lose from crude oil prices holding at $50 to $60 per barrel. Now that crude oil is below $50/bbl (the current price of West Texas Intermediate is about $44/bbl), does this change our perspective? Overall, the drop in crude oil prices will have a muted impact on municipal credit, except for names in remote locations that have a narrow tax base concentrated in the oil services or extraction industries. For example, Kern County, California, is a moderate risk because it has a narrow tax base concentrated in oil production. The state of Texas, on the other hand, is relatively insulated from the drop in crude oil because of its large financial reserves and diversified economy. However, Fidelity Capital Markets zeroed in on specific locations within Texas that are at risk, such as Zapata County and Culberson County Hospital District. Each of these credits is far removed from the robust Dallas-Fort Worth, San Antonio and Houston regional economies. The Houston area is a hub for the nation’s oil and gas industries. The University of Houston’s Institute for Regional Forecasting projects that the 2015/16 job outlook for Houston is gloomy, but national economic trends and secular growth in shale gas supports a positive long-term outlook. What is most important to our clients is that any small local Texas credit with a concentrated tax base represents a risk, and a primary group of credits that could fall into that category are school districts. Fortunately, SNWAM focuses on school districts supported by the Texas Permanent School Fund (PSF). The PSF is a unique state sponsored insurance program that supports school district debt. There is currently around $30B of assets in the PSF, which can be used to pay bondholders should a local school district in Texas fail to meet its obligations. This backing allows smaller districts to access the debt markets on similar terms to large districts in the state. So the next time you look at your SNWAM bond portfolio and see any local Texas school district credits, know that we are prudently evaluating the credit worthiness to ensure it is well insulated from the risks associated with falling crude oil prices.
Sources: SNWAM Research, Fidelity Capital Markets, University of Houston – Institute for Regional Forecasting (http://www.bauer.uh.edu/centers/irf/houston-updates.php)