Texas, the second most-populous U.S. state, borrowed $1.1 billion to reimburse the federal government for jobless benefits, cutting its credit cost by more than a third.
The Texas Workforce Commission, which administers the state’s unemployment insurance program, borrowed at yields below 3 percent, according to data compiled by Bloomberg. That compared with the 4.5 percent it expected the government to charge, according to September estimates as the sale was being prepared.
More than half of U.S. states have run out of money in their unemployment trust funds, financed by payroll taxes, because of soaring joblessness from the recession that began almost three years ago. Texas had an 8.1 percent unemployment rate in September, when the national level was 9.6 percent.
The commission borrowed at yields of 2.63 percent on its longest maturity of July 2017, Bloomberg data show. Demand allowed Texas to lower yields during the sale, by as much as 5 basis points in some cases, said Dwight Burns, executive director of the state’s public finance authority, which sold the debt on behalf of the state. A basis point is 0.01 percentage point.
“In spite of a very challenging municipal market, TPFA’s bond sale was three times oversubscribed,” Burns said in a prepared statement.
The Texas deal follows a selloff in top-rated municipal securities that drove 10-year yields to the highest in more than four months, according to Municipal Market Advisors.
States have borrowed $40.9 billion from the federal government, which has been providing the cash, without charging interest, under the economic stimulus plan enacted after President Barack Obama took office.
The transaction shows how states are benefiting from the Federal Reserve’s decision to hold the key interest rate it sets near zero, which has pushed down municipal borrowing costs.
The workforce commission estimates it will need $2 billion by year-end to reimburse the federal government for advances on payments to unemployed workers. The commission plans to sell about $800 million more debt in December, Burns said. Tax-exempt securities offer the lowest-cost financing for the state to repay the government.
The bonds, marketed by firms led by Bank of America Merrill Lynch, come with Standard & Poor’s top rating and the second-highest grades from Moody’s Investors Service and Fitch Ratings.
States will need to make payments on the federal debt beginning next year. California, which has borrowed $8.7 billion, the most by any state, may face a $362 million interest bill next September, according to its Employment Development Department.
Texas issued a similar bond in 2003 to cover about $1.4 billion of loans from the government. At the time, the state estimated it would save $10 million to $20 million a year in interest costs.
About half a dozen states have tapped the public debt markets since the 1970s to finance their unemployment trust funds. Others lack laws authorizing the practice, according to Loop Capital Markets LLC, the Chicago-based underwriter.