The Texas Water Development Board is planning a $1 billion bond sale next week to finance water-related projects for local governments as the drought-prone state awaits a November vote on a constitutional amendment to further support water supply infrastructure.
The State Water Implementation Revenue Fund for Texas revenue bonds are scheduled to price Sept. 27 in a deal headed by Wells Fargo Securities, which recently escaped a ban on underwriting Texas municipal bonds.
The deal will mark the board’s tenth and third largest since the first SWIRFT bonds were issued in 2015. Texas voters in 2013 approved constitutional amendments creating SWIRFT and the State Water Implementation Fund for Texas, or SWIFT, with the latter receiving $2 billion from the state’s rainy day fund. Bolstered by investment earnings, the SWIFT is tapped to reduce the interest rate for local governmental entities funding qualified water projects through SWIRFT bonds.
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The upcoming bond issue will fund 18 projects with the bulk of the proceeds — nearly $532.4 million — financing a drinking water treatment plant expansion for the North Texas Municipal Water District, which is projecting the population it serves will grow to 3.3 million residents from the current 2.12 million by 2060. The other 11 borrowers include the cities of Austin and Dallas and regional water districts and authorities.
The bonds earned triple-A ratings with stable outlooks from Fitch Ratings and S&P Global Ratings.
“We believe the program’s financial risk profile is extremely strong, reflected by the loss coverage score, operating performance, and financial policies,” S&P analyst John Kennedy said in a statement. “The combination of the risk profiles scoring, along with a positive overriding factor due to the lack of any default or delinquencies in the program, leads to the AAA rating.”
The rating agency said a factor supporting “the extremely strong loss coverage score is the generally high credit quality of the participants,” with the top five borrowers in the program to date rated at least A. Ratings for participants in the 2023 issue range from triple-A to single-A, while three are not rated.
Georgia Sanchez, the board’s debt director, said the SWIRFT program’s top ratings and interest rate subsidy incentivize local governments to move forward with projects that are recommended in the state water plan and are subject to a rigorous application process.
“It’s our intent to not take an item forward that wouldn’t have the ability to repay,” she said, noting while the SWIFT, which currently totals about $1.8 billion, is not pledged on the bonds, there is a mechanism to tap the fund in the case of a debt service shortfall.
The board, which also issues state revolving fund revenue debt, had $7.32 billion of SWIRFT bonds outstanding as of June 30 and projects savings of about $1.4 billion for participants in the upcoming and past deals, according to a roadshow presentation.
The state’s susceptibility to drought has been flagged by rating agencies.
Moody’s Investors Service, which has assigned Texas a moderately negative environmental score, said in a report last October that water stress is Texas’ most severe climate exposure based on Moody’s ESG Solutions data, with nearly 80% of Texas counties classified as high risk due to their exposure to scarce water resources.
While the drought eased earlier this year to the point it impacted the least amount of Texas since October 2021, drought conditions have since increased, affecting 86% of the state, according to the water board’s latest weekly report.
With the Lone Star State’s coffers overflowing with cash, lawmakers prioritized water this year, placing a constitutional amendment to create a Texas Water Fund on the Nov. 7 ballot.
The proposition for the water fund is among 14 constitutional amendments on the crowded ballot, which includes a measure to help implement a massive property tax cut that also taps the budget surplus.
If approved by voters, the state would deposit $1 billion into the fund, with a minimum of 25% allocated to a New Water Supply for Texas Fund. Enabling legislation signed into law June 9 by Gov. Greg Abbott directs the water development board to use the supply fund to finance projects that will lead to 7 million acre feet of new water supply by the end of 2033. Projects can include desalination, aquifer storage and recovery, and infrastructure to transport water and can involve public-private partnerships.
Texas Water Development Board
Sanchez said the Texas Water Fund is designed to be flexible and would have the ability to transfer funds to existing board programs. As for the water supply fund, she said it “remains to be seen whether that is a program we would leverage or not.”
Given the state in January projected a $32.7 billion surplus, the size of the appropriation was underwhelming.
“A billion dollars is just a drop in the bucket compared to the state’s water and wastewater needs,” said Sarah Kirkle, director of policy and legislative affairs at the Texas Water Conservation Association, which represents water professionals and organizations. “I think our state leaders understand that investment in water infrastructure will have to be an ongoing conversation because the needs are so great.”
Jeremy Mazur, senior policy advisor at Texas 2036, said $5 billion would have been a better down payment given billions of dollars needed to address aging and deteriorating water infrastructure that has resulted in system failures in the state.
The nonpartisan public policy group had pushed for House Joint Resolution 169, which proposed a constitutional amendment creating a Texas Water Fund with ongoing funding from surplus sales tax revenue and the ability to pay off bonds. The measure passed the House, but ran out of time for consideration in the Senate, according to Mazur.
“We want to continue that conversation with water industry stakeholders and the legislature about the need for having a reliable, sustained financial strategy to address our state’s water infrastructure challenges,” he said.
The latest state water plan points to a population expected to increase 73% between 2020 and 2070, boosting water demand from 17.7 million to 19.2 million acre feet per year.
Existing water supplies are projected to decline from 16.8 million to 13.8 million acre feet per year, primarily due to aquifer depletion. The estimated costs of more than 2,400 recommended projects by 2070 included in the water plan is $80 billion in 2018 dollars.
“If strategies are not implemented, approximately one-quarter of Texas’ population in 2070 would have less than half the municipal water supplies they will require during a drought of record,” the 2022 plan said. “If Texas does not implement the water supply strategies and projects in the state water plan, a severe drought could cause $110 billion of economic damages in 2020, increasing to $153 billion per year by 2070.”
For the upcoming SWIRFT bond sale, Sanchez said Texas paper and triple-A-rated revenue bonds are “always well received” in the municipal market.
Tax-exempt bonds in the deal total $998 million and carry serial maturities from 2024 through 2058, while $5 million of taxable bonds mature between 2024 and 2053, according to the preliminary official statement.
Senior manager Wells Fargo was deemed eligible to underwrite muni bonds by the state Attorney General’s Office, which said last month it was unable to determine that the bank discriminates against the firearm industry under a 2021 state law.
Co-managers are BOK Financial Securities, Mesirow Financial, Ramirez & Company, First Bank, Morgan Stanley, Raymond James, Stifel, Jefferies, Piper Sandler, and Siebert Williams Shank & Company. Bond counsel is McCall, Parkhurst & Horton and financial advisor is Hilltop Securities.