Texas wins 2023 muni bond issuance rodeo for first time in 42 years

With 2023 municipal bond issuance of $59 billion, Texas wrested the title of top volume state from long-time debt behemoths New York and California.

The debt, which was sold by Texas state agencies, cities, counties, schools, and others, and accounted for 15.5% of nationwide issuance, lifted the Lone Star State to the number one ranking for the first time since 1981, when issuers raised $2.9 billion, according to LSEG data.

In 2022, Texas bond volume of $47.66 billion put the state in second place behind New York and ahead of California.

Issuance in 2023 got a big boost from the March sale of $3.52 billion of taxable customer rate relief bonds by the Texas Natural Gas Securitization Finance Corporation, which had expected to bring the debt to market in 2022.

The deal, led by Jefferies, was made possible by a 2021 state law authorizing securitization financing for natural gas providers to extend the period over which their customers pay back sky-high costs due to spikes in demand and prices for the essential commodity during Winter Storm Uri, which pounded Texas and other states with snow, ice, and high winds amid record-low temperatures in February 2021. The Railroad Commission of Texas adopted an irrevocable financing order in 2022, authorizing the bond issuance and charges needed to pay off the debt.

Texas public school districts also piled on debt after voters approved billions of dollars of general obligation bonds in recent years for new or expanded facilities to accommodate growing enrollment, technology improvements, renovations, and enhanced safety measures, particularly in the aftermath of the May 2022 killing of 19 elementary students and two teachers in Uvalde, Texas.

Outstanding Texas public school debt climbed 36.6% since 2019, topping $120 billion in 2023 and accounting for 38.8% of all outstanding local debt, according to the state Bond Review Board’s annual report for the fiscal year that ended Aug. 31.

Austin Independent School District tapped into a record $2.44 billion in bond authorization passed by voters in November 2022 with a $542 million January deal despite not having triple-A backing from the Texas Permanent School Fund’s bond guarantee program. 

Dwindling capacity in the program under a federally imposed limit forced many districts to sell debt based on their own underlying ratings or with bond insurance as the Texas Education Agency prioritized the guarantee for school systems with the lowest property wealth per average daily attendance.

Action taken by the Internal Revenue Service in May to greatly boost the program’s cap made the guarantee once again widely available for all eligible school and charter districts.

More school debt is coming. Texas voters passed about $15.22 billion of the $18.1 billion of school bond propositions on Nov. 7 ballots, according to Bond Review Board data.

In its annual report, the board projected state issuers will sell about $7.86 billion of debt, including $1.1 billion of GO bonds, in fiscal 2024, which would be a 28.5% decrease from projected issuances for fiscal 2023. Texas ended the fiscal year with total outstanding direct and conduit debt of nearly $71 billion, up 10.1% from fiscal 2022.  About $17.3 billion of that debt is backed by the state’s triple-A-rated GO pledge.

The weighted average of issuance costs for state bond issuers rose in fiscal 2023 to $5.69 per $1,000 from $5.53 per $1,000 in fiscal 2022, the report said.

The state remained below its constitutional debt limit, which prohibits annual debt service paid from general revenue from exceeding 5% of the average annual unrestricted general fund revenue for the previous three fiscal years. 

Outstanding debt was at 0.99%, while authorized but unissued debt was at 0.96% for a total of 1.95%, down from 2.25% in fiscal 2022, the report said.

Hefty budget balances, including $48.4 billion at the end of fiscal 2023, have allowed the state to skip annual cash flow borrowings in recent years. Texas last sold tax and revenue anticipation notes totaling $7.2 billion in 2020.

Blockbuster issuance is happening in the shadow of two 2021 Texas laws prohibiting state and local government contracts with companies, including municipal bond underwriters, that “boycott” or “discriminate” against the fossil fuel or firearm industries. 

The laws led to diminished activity or outright bans for some big investment banks. UBS and Citigroup were barred for flunking the state’s litmus tests on fossil fuel and gun policies respectively.

As a result, both banks were removed as co-managers from the natural gas securitization deal. UBS subsequently made plans to exit the negotiated muni underwriting business nationwide. Citigroup announced in December it will close its entire muni division by the end of 2024’s first quarter. 

In August, Wells Fargo eluded a ban after Texas Attorney General Ken Paxton’s office said it was unable to determine that the bank discriminates against the firearm industry — a decision blasted by the National Shooting Sports Foundation.

Paxton’s office announced a crackdown this fall on compliance with the laws and put Bank of America, Barclays, JP Morgan Chase, Morgan Stanley, RBC Capital Markets, and Wells Fargo under review over their involvement with the Net Zero Alliance, which seeks a transition to net-zero greenhouse gas emissions by 2050.

The potential for even more big banks being banned from Texas deals raised concerns that less competition could inflate borrowing costs.

As part of the attorney general’s crackdown, investment banks were given a Dec. 16 deadline to revise their standing letters of compliance with the laws, omitting language that in some way qualifies that compliance. Bond purchase agreements are mandated to include new language that puts the underwriter on the hook should it run afoul of the laws, which pertain to government contracts worth $100,000 or more.