Texas Fiscal Strength Earns Top S&P Grade on $14 Billion

Texas, the second most-populous U.S. state, won Standard & Poor’s top rating on $14 billion of general-obligation debt because of its ability to maintain deep reserves after the longest recession since the 1930s.

S&P raised its grade on the state one step to AAA and gave it a stable outlook, the New York-based company said yesterday in a statement. Texas now has top scores from S&P, Moody’s Investors Service and Fitch Ratings, one of a handful of states ranked at the top by all three.

“The upgrade is reflective of the state’s ability to manage and maintain its reserves through the Great Recession,” Horacio Aldrete-Sanchez, an S&P analyst in Dallas, said in a telephone interview. “For some states the recession led to reductions in reserves. We expect Texas to continue to do better than other states.”

The recession that began in December 2007 forced many states to cut spending, raise taxes and reduce reserves as they dealt with falling revenue even after the slump ended 18 months later. California amassed deficits exceeding $100 billion, bringing its budget in balance with a $6 billion tax increase last year. As revenue rebounds, U.S. states plan to boost spending this year to the highest levels since the downturn, the National Governor’s Association said in a June report.

Higher ratings can reduce the cost of borrowing as investors demand smaller premiums to own bonds deemed less risky. Texas last month sold $7.2 billion of one-year notes at a record-low yield of 0.201 percent, to manage its cash flow, according to data compiled by Bloomberg.

‘No Accident’

Governor Rick Perry, a Republican, said the upgrade “is no accident, but further proof that the Texas model of conservative fiscal discipline is a key element of our strong economy.” The top mark reflects restrained government spending and low taxes, he said in a statement.

Susan Combs, the state comptroller, said it was the first time Texas has had top scores from all three companies. ``These bond ratings reflect Wall Street’s confidence in the Texas economy, the state’s revenue growth and disciplined cash management and budgeting,'' she said in a statement.

The Lone Star state’s current $196.9 billion two-year budget includes $94.6 billion of general-fund appropriations. Texas this year restored money to schools and health-care programs after cuts were made in the previous spending plan in 2011, according to S&P. The government in Austin has proposed using $2 billion from reserves for water projects, which must win voter approval.

Even with the restored spending, Comptroller Susan Combs, a Republican, has forecast reserves to reach $7.6 billion by Aug. 31, 2015, the end of the fiscal year, or about 8.1 percent of general-fund spending, S&P said.

Before it's here, it's on the Bloomberg Terminal.