If California is the poster child for fiscal irresponsibility (which I'd certainly argue it is), then Texas would seem to be it's polar opposite, an argument I made in this Texas vs. California blog post earlier this year. To be sure, Texas is by no means perfect on the fiscal front, but generally speaking, the structure and operations of Texas state government are designed to be relatively lean and mean. And there are some important checks on spending—most notably the constitutional provision that empowers the state's strong Comptroller General with the ability to enforce realistic revenue projections by sending overly optimistic budgets back to the legislature.
Turns out the markets are paying attention to frugal Texas, as evidenced by two recent events. First, Governor Rick Perry's office issued a press release today noting that Standard & Poor's has taken a favorable view of the state's fiscal management and has accordingly raised the state's credit rating:
Standard & Poor's (S&P) has raised Texas' issuer credit and general obligation credit ratings to AA+ from AA based on the state’s strong and diverse economy and strong leadership from the governor and Legislature that has left a projected $9 billion in the state's Rainy Day Fund. S&P also raised its rating on the state’s appropriation debt to AA from AA-.
"The ratings continue to reflect our opinion of the state's large and steadily diversifying economy, which despite the recession continues to perform better than the nation in terms of both economic activity and employment," S&P credit analyst Horacio Aldrete-Sanchez said. "Furthermore, we expect that the Texas economy will recover earlier and at a faster rate than most other states given its continued population growth and relatively low cost of doing business, which we expect will contribute to gradual employment gains in 2010, particularly in the health, education and services sectors."
S&P's decision was based on Texas’ 2010-11 biennial budget, the state’s strong Rainy Day Fund, and Texas’ low tax-supported debt burden. The higher rating means Texas will pay lower interest on money it borrows, saving of millions of taxpayer dollars.
"In light of the economic downturn affecting the nation, this session we continued to make wise choices, such as cutting taxes on 40,000 small businesses and maintaining a multi-billion dollar balance in our Rainy Day Fund that have helped our state sustain its overall economic strength," Gov. Perry said. "These prudent and fiscally conservative decisions continue to pay off for our taxpayers."
Second, according to the San Antonio Business Journal, ratings agencies have given the state's planned issuance of $5.5 billion worth of short-term Tax and Revenue Anticipation Notes (TRAN) the highest possible credit rating:
The state sells short-term debt to help it manage its cash flow between the start of the fiscal year on Sept. 1 and the arrival of tax revenues later in the year. [...]
Standard & Poor’s rated the debt SP-1+, Moody’s Investors Service rated the debt MIG 1 and Fitch Ratings Inc. assigned the debt a F1+ rating. In every case, these ratings reflects the highest possible credit-rating scores by each respective organization.
"Texas is in an enviable position," Texas Comptroller Susan Combs says. "Certainly, our economy has slowed, but our housing market and business community are not as hard-hit as other states. And our state government continues its commitment to be fiscally responsible by spending taxpayer dollars wisely. This commitment is reflected in the bond rating firms' confidence that Texas TRAN notes are a solid investment."
For Texas, this means that the state's strong fiscal footing will translate directly into lower borrowing costs and an opportunity to do more with limited taxpayer dollars than would otherwise be achievable. Contrast this with the news we're hearing from other states:
- Last month, both Moody's and Fitch downgraded California's credit rating to a "B"-level grade, just a few ratings above "junk" status, or no longer investment-grade in quality. And the state dodged a bullet today when Standard & Poor's opted not to downgrade the state's credit rating in light of its recent budget agreement.
- Moody's downgraded New jersey's credit rating last week, citing budget pressures brought about by the depletion of the state's rainy day fund, the enactment of temporary tax increases, and the state's reliance on non-recurring expenditure reductions.
- In Illinois, Moody's has already downgraded the state's credit rating once this year, and in July the agency put Illinois on review for another possible downgrade, citing the state's long-term budget challenges, history of general-fund operating deficits, and limited liquidity in the fund.
- In the last few months, Moody's has downgraded ratings for Nevada and Ohio, two states hit hard by the recession and widespread foreclosures.
Yet again, Texas offers an example of why policymakers should prioritize measures to advance fiscal responsibility—not only does it pay off today, but it pays off tomorrow as well.