Perry’s Failed Texas Prayers Drive Water Borrowing: Muni CreditDarrell Preston and David Mildenberg
Texas Governor Rick Perry asked residents to pray for rain in 2011 during the worst drought in state history. Now he wants voters to approve spending $2 billion on top of a record borrowing to boost water supplies.
The Republican governor has been urging support for a ballot measure to tap state reserves for water projects. The money would be used to reduce debt costs for as much as $6 billion of unissued bonds that voters passed two years ago.
Localities accessing the program will benefit from Texas’s declining relative borrowing costs after it won a AAA grade from Standard & Poor’s last month, making it one of nine states with the top mark from all three major credit companies. Yield spreads of the second-most-populous state are the lowest since at least January, data compiled by Bloomberg show.
“The water bonds would be viewed as very secure investments” because of the top ratings and an economy aided by oil and gas, said Dick Berry, who manages more than $100 million in municipal obligations at Brasada Capital Management LP in Houston.
Almost a third of the country is suffering at least moderate drought, according to the National Oceanic and Atmospheric Administration. About 94 percent of Texas, home to 26 million people, is experiencing some level of drought, based on measures such as rainfall, soil moisture and crop damage, according to the Texas Water Development Board.
State officials want to use the funds for reservoirs, desalination plants and distribution systems as the population is forecast to grow by 83 percent to 47 million in the next 50 years, said Carlos Rubinstein, chairman of the Water Development Board, which would oversee the program. In 2011, the state had its worst drought on record, with all 254 counties included, said Rubinstein.
The impact can be seen in damaged wheat, corn and cotton crops, falling lake levels and heightened fire risks. San Angelo, a central Texas city of about 96,000, may run out of water next year. The disaster caused almost $9 billion of agricultural losses in 2011, according to a 2012 report by Comptroller Susan Combs.
“We need to invest if we want to be prepared for growth and any reductions in capacity,” Rubinstein said. “It drives every aspect of our economy.”
Proceeds from the bonds, which may include general-obligation and revenue debt, will be loaned to localities developing new supplies, Rubinstein said. The $2 billion would give borrowers flexibility to pay over a longer period or at lower interest rates.
Texas voters on Nov. 5 will consider whether to change the state constitution to allow use of the $2 billion. The state will move forward with the $6 billion of issuance regardless, said Merry Klonower, a spokeswoman for the Water Development Board.
Top-rated munis are beating the $3.7 trillion municipal market in 2013 as Detroit’s record bankruptcy filing has penalized weaker credits. While the broad market has lost 3.8 percent, on pace for the worst year since 2008, AAA local debt is down only 2.2 percent, Bank of America Merrill Lynch data show.
Texas should benefit from that backdrop, said Andrew Garvey, senior managing director at Dallas-based Orix USA, which manages about $25 billion.
“The market is hard if you are a lower-rated credit, but Texas is a premier credit,” Garvey, said. “That kind of credit should have no problem in this market.”
Texas 10-year obligations yield about 2.71 percent, or about 0.13 percentage point less than benchmark debt, Bloomberg data show. Interest rates on the state’s borrowings haven’t been that far below the average AAA muni since at least January.
Before voters cleared the $6 billion in 2011, the Water Development Board had sold about $3.3 billion of the $4.23 billion authorized for water projects since 1957, according to board documents.
If voters approve use of the reserve fund, the state projects it would still have $7.6 billion in rainy-day cash in 2015, about 8.1 percent of general-fund spending.
The expanding Texas economy, which is fueling demand for water, has helped boost the reserves, which gets money from taxes and extraction of oil and natural gas. The state collected a record $4.5 billion in such levies in the year ended Aug. 31, according to the Austin-based Texas Taxpayers and Research Association, a nonpartisan group that studies state and local fiscal policies.
“The fiscal health of the fund is strong and will not be harmed,” the association said in an Oct. 8 statement. Next year, voters will be asked to use part of the fund for transportation needs.
A political action committee led by House Speaker Joe Straus, a Republican, has raised about $950,000 to urge voters to support the measure, according to Texas Ethics Commission reports. Dow Chemical Co., which owns a petrochemical plant in Freeport, Texas, and the Associated General Contractors, have contributed more than half the total.
The measure faces opposition from Tea Party groups who are against spending the rainy-day fund, and from environmentalists who say it will do little good.
Linda Curtis, a political activist who organized news conferences opposing the bond measure, said the proceeds may be used to fund projects favored by Perry and business leaders instead of those that have the most merit.
“Projects with the biggest political pull will get funded,” she said.
Voters support the measure by a 2-to-1 margin, according to a poll by the University of Texas and the Texas Tribune released Oct. 14. Those surveyed favored the measure by 52 percent to 19 percent. About one-fourth said they hadn’t decided. The margin of error was 3.46 percentage points.
Perry, 63, issued his proclamation calling for three days of “prayer for rain in the state of Texas” in April 2011 after the state hadn’t experienced any rainfall for three months. During that time more than 8,000 wildfires took several lives and burned about 1.8 million acres of land, including 400 homes.
“Occasionally, drought is part of our lives in Texas,” Perry said at an Oct. 10 news conference at Lake Travis near Austin to tout the plan.
“Other states are watching what we are doing,” he said. “When we compete with them for a major expansion site or a relocation for major employers, you better believe water is part of the conversation.”
Issuers nationwide have scheduled about $9.5 billion of bond sales in the next 30 days, close to a two-month high, as borrowing picks up after the agreement to raise the U.S. debt ceiling.
Localities are borrowing as the interest rate on AAA 10-year munis is 2.84 percent, the highest since Sept. 20, Bloomberg data show. That compares with 2.59 percent on similar-maturity Treasuries.
The ratio of the yields, a gauge of relative value, is about 110 percent, compared with an average of 94 percent since 2001. It has exceeded 100 percent since June 24. The higher the figure, the cheaper munis are compared with federal securities.
Following is a pending sale:
Minnesota plans to sell about $768 million in general-obligation securities next week, with some proceeds marked for highway projects and refinancing, Bloomberg data show. The securities will be sold through competitive bidding.
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