Texas Leads in 2014 Debt Sales as Population Swells: Muni CreditBrian Chappatta
Texas and its localities are taking on more debt this year than any other U.S. state, outpacing New York and California for the first time in at least a decade as a growing population pushes lawmakers to bond for projects.
Municipalities in the state, home to seven of the 15 fastest-growing U.S. cities, issued about $19 billion of bonds in the first half of 2014, up 24 percent from the same period last year, according to data Bloomberg began compiling in 2003. Texas is one of 11 states where issuance is climbing, in contrast with a market-wide slowdown even as borrowing costs are close to generational lows.
Texas, whose governor is Republican Rick Perry, leaves it to localities and school districts to pay for new infrastructure such as classrooms and water lines as the second-most-populous state adds residents. The state has never toppled California’s bond lead for a full year. In 2009, issuers in the Lone Star State borrowed $32 billion to the Golden State’s $67.6 billion.
“Historically, there is a more conservative approach to debt in Texas, but with the population increases going on, it’s demanding that certain long-term projects be financed,” said John Bonnell, a fund manager who helps oversee $20 billion of munis at USAA Investment Management Co. in San Antonio. “The state is very smart to borrow now when rates are low.”
Texas has the highest grades from the three biggest rating companies. Its fiscal health has left Texas localities in a position to tap borrowing costs close to the lowest since the 1960s.
California and its localities have issued $17.4 billion in debt this year, second-most, and down from $27 billion in the same period of 2013.
Moody’s Investors Service last month raised the most-populous state to Aa3, fourth-highest, after it fell to three steps above junk in 2009. Democratic Governor Jerry Brown cut new debt sales and took the state from a $25 billion deficit to a record surplus.
Third is New York, where municipalities have sold $14.5 billion, or $886 million less than last year’s pace. Moody’s boosted New York in June to its second-highest rank, Aa1. The company cited Governor Andrew Cuomo, a Democrat, winning his fourth straight timely budget and slowing spending growth.
“Other areas have a more austere environment -- there’s still a hangover of that,” Bonnell said. Texas “is issuing a lot of debt, but you’re not seeing a penalty on its borrowers.”
Lucy Nashed, a spokeswoman for Perry, didn’t respond to e-mails seeking comment.
“Communities benefit from population and economic growth through increased sales and property taxes,” Nashed said in an e-mail last month. “The responsibility for making local financial decisions rests squarely with local officials, as it well should because they are the ones best suited to determine the future of their communities.”
Texas bonds have outpaced the strongest start for the $3.7 trillion municipal market since 2009, gaining 5.9 percent to the 5.6 percent return for the entire market, Barclays Plc data show. State and local debt has advanced this year as supply nationwide is 16 percent below 2013 levels.
The seven fastest-growing Texas cities are San Marcos, Frisco, Cedar Park, Georgetown, Odessa, McKinney and Pearland, Census Bureau data show. Each of the municipalities has issued general-obligation debt in the past 12 months, according to data compiled by Bloomberg. All have a Standard & Poor’s rating of AA- or higher.
Most of the cities experiencing explosive growth are on the outskirts of the Houston, Dallas, San Antonio and Austin metropolitan areas. Perry has said the state gains about 1,000 residents a day.
In Sugar Land, a Houston suburb where the population has grown 6.5 percent in three years, “we never really slowed down” in borrowing, said Jennifer Brown, the finance director. It’s eclipsing Texas’s 5.2 percent growth rate. “This is a good time to be in the market.”
The governments are borrowing for public works as Perry and legislators are luring businesses with subsidies from the Texas Enterprise Fund.
Toyota Motor Corp. announced in April that it was moving its U.S. headquarters from California, highlighting job-creation efforts under Perry, who is considering running for president again after his final term ends next year.
The state lured the carmaker with $40 million of incentives and Plano approved $6.75 million of grants and discounts on property taxes. Occidental Petroleum Corp., Apple Inc. and Comerica Inc. have also moved operations to Texas.
“You almost can’t turn around without hearing about some company moving into Texas,” said Matt Dalton, chief executive officer of White Plains, New York-based Belle Haven Investments, which oversees $2.1 billion in munis, including bonds from Texas. “While a lot of debt is being held up, their economy has allowed them to issue debt and move forward.”