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Fitch Rts TX PFA $830MM Fixed Rate Bnds 'AA-' & $600MM Var Rate Bnds 'AA-/F1+'.

Business Editors

NEW YORK--(BUSINESS WIRE)--Sept. 3, 2003

Fitch Ratings has assigned a 'AA-' rating to the Texas Public Finance Authority's $830 million fixed rate bonds and a 'AA-/F1+' rating to $600 million variable rate demand unemployment compensation obligation assessment bonds issued. The bonds will be issued in four series through syndicates led by Goldman, Sachs & Co.

The fixed rate bonds are expected the week of Sept. 9, 2003 with $350 million series 2003 A (tax-exempt) due semiannually June 15 and Dec. 15, 2007-2008 and the $480 million series 2003B (taxable) bonds due semi-annually June 15 and Dec. 15, 2004-2007. The variable rate bonds are expected Sept. 29 and include $500 million taxable variable rate demand obligation series 2003C1-C6 and $100 million series 2003D (taxable) bonds. The variable rate demand obligation bonds are due Dec. 15, 2009 and are subject to prepayment at any time. The 'AA-/F1+' rating on the variable rate demand bonds reflects the liquidity provided by the investment accounts held by the Comptroller of Public Accounts of the State of Texas.

The 'AA-' rating reflects the security provided from a newly enacted and legislatively dedicated obligation assessment. The assessment is collected with the state's other unemployment taxes on its broad and diverse economic base; collection experience is strong for existing taxes. The formula is set to provide 1.50x coverage of debt service in the next calendar year. Offsetting these strengths is the limited revenue source (only the dedicated assessment is pledged and not the entire state unemployment trust fund), as well as the lack of statutory authority to make any mid-year adjustments in the assessment rate. There is no debt service reserve fund.

In the past three years the state's unemployment rate has risen by over 2% and the number of beneficiaries has nearly doubled. As a result, the state has borrowed $292 million from the federal unemployment trust fund. Federal advances are interest free for one year, but if not repaid by Sept. 30, interest at over 6% is charged. Additionally, the states' own unemployment trust fund is below the required floor of $750 million. There is a 2% ceiling and the floor is the greater of $400 million or 1% of total taxable wages in the past year. Based on 2002 taxable wages of $74.4 billion, the ceiling is $1.5 billion and the floor is $750 million. To provide funds to repay the federal advances, bring the state fund to the required floor and provide other monies for benefits, in 2003 the state legislature authorized up to $2 billion of ten-year bonds on behalf of the Texas Workforce Commission. Pledged to debt service on the bonds is a new obligation assessment, collected with existing unemployment taxes on the first $9,000 of wages.

The state's unemployment taxes and assessments will now include the general rate, the replenishment tax, the deficit assessment and the obligation assessment. The obligation assessment comprises two parts--for debt service on the bonds issued for the state unemployment trust fund and to repay federal advances. The amount for the unemployment trust fund is set to be sufficient to pay 1.50x debt service on the bonds now being issued and administrative expenses due in the next calendar year. For repayment of federal advances, if needed, up to 2/10 of 1%. It is expected that the deficit assessment and the interest assessment will not be required since bond proceeds will repay federal advances and bring the floor to the required level.

The commission has pledged the assessment obligation revenues to the bondholders. The assessment obligation is included as a line item on the employer unemployment compensation tax bill. The obligation assessment to repay the bonds is not capped, does not require legislative approval to adjust the rate, or to transfer monies to pay debt service on the bonds. The obligation assessment will be set annually in November and payable quarterly beginning the next January. The obligation assessment is projected to yield over $260 million.

Actual collection experience for all of the existing state unemployment taxes is strong, 99%. Of total unemployment taxes, some 55% of annual amounts are received in the first half of the year, expected to provide satisfactory coverage of the June 15th debt service payment. The variable rate bonds are repayable at any time. Projections assume annual retirement of variable rate debt from excess assessments after payment of debt service on fixed bonds and interest on the variable rate bonds.

Despite the state's broad and diverse employment base, deficits have been sustained in the state's unemployment trust fund during periods of rising unemployment. Deficits occurred in 1982-84 and in 1986-87. However, since 2000 rising unemployment has again led to increased benefit recipients. Between 2000-2003, the unemployment rate rose from 4.2% in 2000 to 6.6%, the number of recipients nearly doubled from 90,100 in 2000 to 175,800 in 2003 and the taxable wage base declined by 2.3% from $77.6 billion in 2000 to an estimated $75.8 billion in 2003. As a result the trust fund was in deficit again in 2002 and 2003. To cure these deficits, the deficit tax was again imposed to bring the fund its required level. The average tax rate rose to 1.68% in 2003 from 1.02% in 2000. With the issuance of these bonds, the deficit is amortized by the obligation assessment, expected to be at a lower rate than if the deficit tax and interest rate assessment to cure federal advances were used.
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Publication:Business Wire
Date:Sep 3, 2003
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