Fitch Affirms Texas Unemployment Obligation Bonds at 'AA+'; Outlook Stable
Fitch Ratings has affirmed the 'AA+' rating on the following Texas Public Finance Authority unemployment compensation assessment obligation revenue bonds:
--$871.2 million, series 2010A;
--$549.5 million, series 2010B;
--$46 million, series 2010C.
The Rating Outlook is Stable.
The bonds are special obligations of the Texas Public Finance Authority and Texas Workforce Commission payable from a first and exclusive lien on pledged revenues, including revenues derived from the levy of the unemployment obligation assessment, amounts deposited to the obligation trust fund and program fund, and any other revenues deposited to the obligation trust fund that are legally available to pay the obligations.
KEY RATING DRIVERS
UNLIMITED ASSESSMENT: The obligation assessment is a broad tax applied to employers in the state, the rate for which is established annually while bonds are outstanding in order to provide a minimum of 1.5x coverage of debt service in the following year, as well as administrative costs; there is no limit on the obligation assessment rate. Bonds are not secured by other assessments that make up the state's unemployment assessment.
STRONG COLLECTIONS: The state's unemployment assessment collection mechanisms are strong and well-established, with a collection rate approaching 100%. Payments by employers, including the obligation assessment levied for bondholders, are highly seasonal, with the bulk of collections in the spring.
HOLDBACK TO ENSURE SUFFICIENT COVERAGE: The structure provides that excess collections after debt service payment be used for early bond redemption. If projected receipts are expected to lag, the resolution provides for the holdback of excess receipts collected in the spring months, but not needed for immediate debt service, to ensure sufficiency of funds for debt service.
ADDITIONAL RESOURCES FOR EARLY REPAYMENT: Any balance in the state's unemployment compensation fund above a maximum threshold is legally available to repay outstanding bonds, although such funds are not specifically pledged.
ESTABLISHED PROGRAM: The bond program was established during the 2002-2003 downturn and has since been strengthened by the addition of the holdback provision and by statutory powers to allow transfer of excess unemployment compensation fund balances to bondholders.
STRONG ECONOMIC GROWTH: The Texas state's economy has expanded rapidly and diversified over the last two decades, and recent economic growth has been strong. However, natural resources remain important.
WHAT COULD TRIGGER A RATING CHANGE
A material change from the continued strength of collections and sufficiency of obligation assessments levied for bondholders.
The 'AA+' rating reflects the security provided by the obligation assessment, a legislatively authorized component of Texas' unemployment tax that by covenant must be levied while bonds are outstanding. The assessment is collected with the state's other unemployment taxes on its broad and diverse economic base; collection experience is very strong.
The rate is determined annually by the Texas Workforce Commission at a level sufficient to provide 1.5x coverage of debt service in the next calendar year, with excess collections available for accelerated bond repayment. Since issuance, early redemptions from excess pledged revenues have totaled $254 million.
Proceeds were used to repay in late 2010 approximately $1.7 billion in advances made by the federal government to cover a deficit in the state's unemployment compensation trust fund (the trust fund) and to provide $400 million to replenish the trust fund.
Obligation assessment bonds were first issued in 2003 and fully redeemed in 2007 well ahead of original planned maturity. In addition to the excess coverage by the obligation assessment, repayment was accelerated by a 2007 statutory change allowing balances in the trust fund in excess of its statutory ceiling (2% of the state's taxable wage base, or about $1.8 billion in 2012) to be used for early bond repayment. The state's trust fund balance was approximately $1.2 billion as of October 2012, and thus none of these balances have been used for early redemptions to date.
For the 2010 issuance, the resolution was further strengthened by a holdback provision in effect during the second half of the year (when fewer assessments are received), by which pledged receipts can be directed toward early redemption only if the 1.5x coverage threshold is met for the period through the next debt service payment date and a minimum of $25 million is retained in the debt service account. There is no debt service reserve.
The state's unemployment taxes currently include the general rate, a replenishment tax, and the obligation assessment, among other components. The average combined tax rate in 2012 is 1.96%; the average obligation assessment tax rate for the bonds is 0.27%. Collections are historically very strong, exceeding 99% per quarter. Only the revenues from the obligation assessment are pledged to bondholders.
The obligation assessment rate is reset annually in November by the commission for payment by employers in the following calendar year at a level sufficient to cover debt service by 1.5x and bond expenses. The rate is not capped, nor is legislative approval necessary for the commission to adjust the rate. Texas statute establishes a trust fund balance ceiling of 2% of taxable wages and a floor of either $400 million or 1% of taxable wages as of June 30 for use by the commission in establishing the following year's rates.
The commission deposits collections to the obligation assessment trust fund; payments from the fund do not require appropriation. After transfer of funds for principal, interest and administrative expenses, funds may be used for interest payments on any outstanding federal advances, prior to determining funds available for early redemption.
In Texas, aggregate unemployment taxes are payable quarterly on the first $9,000 of taxable wages. Collections are highly seasonal, with approximately 60% of unemployment tax revenues paid in the first quarter based on first-quarter taxable wages; about 28% of collections are paid in the second half of the year prior to the Jan. 1 debt service payment.
Receipts are deposited to the trust fund, from which unemployment benefits are drawn. Obligation assessments are deposited to a separate obligation assessment trust fund, available only for bondholders.
State economic performance has been solid since the last downturn, with growth rates well in excess of national averages. Unemployment as of September 2012 was 6.8%, compared to 7.8% nationally. Employment growth in September 2012 was 2.5% year-over-year, compared to 1.4% nationally.
The state's economy has expanded rapidly and diversified over the last two decades, although natural resource sectors remain a key part of the state's strong economic performance. Population growth is very rapid, rising nearly 21% in the decade through 2010 (compared to 9.7% nationally). Personal income has shown strong growth in recent quarters, tracking employment. Personal income per capita measured 97% of the nation's in 2011, ranking 25th among the states.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from IHS Global Insight.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. State Government Tax-Supported Rating Criteria
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