Texas Plans Smallest Note Sale Since ’07 on Surplus: Muni Credit

Texas plans its smallest offering of short-term debt since 2007, signaling that a booming energy industry is filling its coffers and generating more cash for services such as schools and roads.

The second-most populous state, home to seven of the nation’s 15 fastest-growing cities, will sell $5.4 billion of tax-exempt, one-year notes this month, mostly to pay its share of school funding. The size of the sale, held annually, has declined from record highs of $9.8 billion in 2011 and 2012, when Texas was resolving budget strains left by the longest recession since the 1930s.

Municipalities nationwide are finding less need for short-term debt to plug cash shortfalls, even with interest rates close to the lowest in a generation. This year, cities and states have sold $17 billion of fixed-rate notes that mature in 18 months or less, down about 11 percent from the 2013 pace, according to data compiled by Bloomberg. Last year’s note tally of $46 billion was the smallest since 2006.

“Everybody is in much better fiscal shape as compared to a few years ago,” said Dale Hoffman, an assistant vice president of money markets who manages $3.2 billion with USAA Investment Management Co. in San Antonio. “They’re dealing with budget surpluses rather than deficits.”

California Story

The story is the same in the nation’s most-populous state. California, whose fiscal gains won it an upgrade from Moody’s Investors Service in June, plans its smallest note sale since 2006 in September. Los Angeles County and the nation’s capital have also reduced short-term issues.

In Texas, the energy industry is pushing revenue above forecasts and lowering the amount of cash needed to help pay for services, said Chris Bryan, spokesman for Comptroller Susan Combs.

Oil and natural-gas production taxes are about $1.5 billion, or 57 percent, ahead of projections for the first nine months of the fiscal year that ends Aug. 31, state data show. Combs predicted in December that the state would have an almost $2.6 billion surplus when its next two-year budget cycle ends on Aug. 31, 2015. Revenue may rise about 9 percent from the 2012-2013 budget cycle, when the state cut spending because of an anticipated deficit.

Opening Purses

A stronger economy let states and cities increase spending last quarter at the fastest pace in five years, according to government data, signaling an end to an era of budget cuts. Spending from localities rose at an annual pace of 3.1 percent in the three months through June, according to Commerce Department data.

“The cash needs of states and municipalities are getting smaller and smaller,” said Steven Shachat, an asset manager who oversees $1.3 billion of local debt at Alpine Woods Capital Investors in Purchase, New York. “The cost of borrowing money is insanely low.”

Municipalities’ improving fiscal health has driven benchmark city and state interest rates close to zero. Yields on benchmark munis maturing in one year touched 0.11 percent last month, the lowest since at least January 2009.

With top ratings on its long- and short-dated debt, Texas could see even lower rates.

In August 2013, it sold $7.2 billion of one-year notes at a record low 0.201 percent, compared with benchmark yields of 0.35 percent.

Hoffman at USAA declined to comment on whether the company will buy the Texas notes.

“It’s one of the best, but it doesn’t help us on yield,” he said.

To contact the reporter on this story: Darrell Preston in Dallas at dpreston@bloomberg.net

To contact the editors responsible for this story: Stephen Merelman at smerelman@bloomberg.net Mark Tannenbaum, Alan Goldstein

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