Texas Energy Boom Fuels Best Performance Since ’09: Muni Credit

An oil and natural-gas boom in Texas is helping the largest U.S. energy producer pile up a record $11.8 billion in reserves, sustaining the best performance in its debt since 2009.

Municipal securities of Texas issuers earned about 7.9 percent in 2012, eclipsing the 7.4 percent gain for the broader $3.7 trillion local-bond market, which it beat for the first time in three years, Standard & Poor’s total-return data show.

While states and localities are in their best fiscal shape since the recession ended in 2009, Texas, with a top credit rating from Moody’s Investors Service, is doing better than most. The performance is generating debate on how to spend an $8.8 billion projected operating surplus and a rainy-day fund that Comptroller Susan Combs expects to grow by almost 50 percent by August 2015. The state was among just six expressing optimism about its 2013 revenue outlook, according to the National Conference of State Legislatures.

“Texas is the best credit in the U.S.,” said Bill Sirakos, a senior executive vice president at Cullen/Frost Bankers Inc., who manages $9.1 billion in San Antonio. The reserves are “another piece of the picture of a state that takes its financial responsibilities seriously.”

Job Gains

The second-most-populous U.S. state has topped budget projections over the past 15 months. It also leads the nation in employment gains since 2009, adding about 700,000 jobs, data compiled by Bloomberg show. Its 6.2 percent jobless rate is the lowest in four years and below the 7.8 percent national average.

The rainy-day fund relies on taxes on oil and gas production, which makes up 17 percent of Texas’s economy and was the fastest-growing major industry in the past two years, according to Combs. More than 900 oil and gas rigs were pumping in mid-2012, a 180 percent jump from 2009, she said.

Texas sales-tax revenue jumped 14 percent in the third quarter from the same period of 2011, trailing only North Dakota’s 30 percent increase, according to data from the Nelson A. Rockefeller Institute of Government in Albany, New York.

The revenue pickup leaves Texas lawmakers with the task of deciding how and whether to disburse the funds.

Spending Plans

Legislators tapped the reserve fund for $3.2 billion in 2011 to help balance the state’s budget. This year, Lieutenant Governor David Dewhurst, a Republican, is proposing using $1 billion to fund water projects.

Politicians should consider tax cuts and resist groups favoring more spending, Governor Rick Perry, a Republican who has led the state since 2000, told legislators Jan. 8. He also wants stricter limits on spending.

Texas’s effort to reduce spending even as tax revenue rose helped it sell $9.8 billion of one-year notes at a record-low yield of 0.23 percent in August. The money enabled the state to fund school districts when the fiscal year began Sept. 1.

It obtained a lower interest rate that month than California, which borrowed at 0.33 percent on May maturities and 0.43 percent on debt due in June when it sold $10 billion of notes. Both sales had S&P’s highest short-term grade.

Boom Times

The state’s success differs from previous energy-driven economic booms that often were followed by slumps when oil prices declined, said Steve LeBlanc, co-founder of CapRidge Partners LLC in Austin and a former senior managing director at the $110 billion Texas Teacher Retirement System.

Commercial construction should accelerate in Texas over the next few years because of pent-up demand and population growth, he said. Texas’s population grew by about 20 percent from 2000 to 2010, more than double the U.S. average, according to Census data.

“The reason Texas performs is the diversification in one state with oil-patch bonds from Midland or Odessa or debt from highly diversified economies in Houston or Dallas,” said David Jaderlund, who manages $450 million, most of it Texas bonds, as owner of Jaderlund Investments LLC in Santa Fe, New Mexico. “Texas has its own sovereign nature in many ways.”

In trading yesterday, benchmark 10-year munis gained for a fourth-straight day, to yield 1.74 percent, the lowest since Dec. 31, Bloomberg Valuation data show.

Following is a pending sale:

New York’s METROPOLITAN TRANSPORTATION AUTHORITY plans to sell $500 million of revenue bonds as soon as next week, according to offering documents. The proceeds will be used to finance transit and commuter projects. (Added Jan. 10)

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