Saturday, September 28, 2013

Texas Gets S&P's Highest Credit Rating

Yesterday, Standard and Poor issued a statement revising the credit rating of the Republic of Texas. The state's credit rating is at the highest level S&P grants (AAA), "based primarily on its budgetary and cash management discipline, which allowed the state to preserve a strong level of reserves throughout the Great Recession," according to S&P's report (link requires registration). Meanwhile, the US Government's credit rating has dropped more than once over the past 4 years.

Texas must be doing something correct. Business in Texas is booming while other states, like Michigan and Illinois, continue to suffer. Texas has no state level income tax. The corporate taxes and state level payroll taxes are among the lowest in the country. Yet businesses like X-Cor are flocking to Texas from states such as California.

S&P's report on Texas stated the following among their reasons for the increased rating:
  • Strong revenue forecasting and cash management practices, including comprehensive monthly revenue and expenditure cash monitoring and forecasts, as well as a willingness to maintain strong liquidity to meet its constitutionally defined priorities, including the repayment of debt service;
  • Low overall net debt and below-average unfunded retirement liabilities; and
  • Potential long-term budgetary pressures, which are primarily related to the growing proportion of school revenues Texas is required to fund, as well as insufficient new sources of recurring dedicated tax revenues to support the increased education funding.
Riding the state's good-credit coattails, the following subordinate accounts will also see increased favorable credit ratings in the near future, according to S&P:
  • Texas Water Development Board;
  • Texas Higher Education Coordinating Board;
  • Texas Transportation Commission;
  • Texas Public Finance Authority;
  • Texas Veterans Land Board.

In reaction to S&P's announcement, Texas Governor Rick Perry issued the following statement:

"S&P's decision to raise Texas' credit rating to AAA is no accident, but further proof that the Texas model of conservative fiscal discipline is a key element of our strong economy, and a stark contrast to the out-of-control spending and rising debt ceilings of Washington, D.C. In Texas, we adhere to the powerful combination of keeping taxes low and government spending in check, ensuring Texas remains the best place in the country to live, work, raise a family and build a business."
In Washington, the US Senate has failed to pass a budget since the FY09 one passed in 2008, while President George W. Bush was still in office. Even when the Democratic Party controlled the majority in both houses of congress, they failed to pass a budget. Instead  they fight over a continuing resolution to maintain the FY09 budget with increases to spending, including spending on the so-named "Obamacare" law that the US cannot afford and the majority of US citizens do not want. 

Meanwhile, for the 7th time in 5 years, Obama has demanded that congress raise the federal credit limit. The US is already nearly $17T in debt, representing the highest percentage of GDP in history. In short, the US Government already owes more than it can afford to pay. Yet they continue to spend money of frivolous things such as studies of shrimp on treadmills and doomed businesses such as Solyndra. The US Constitution does not allow federal revenue to be invested in private businesses in the first place.

The US Government's credit rating remains a AA+ for long term credit and AA- for short term. These are still viewed as positive and stable ratings. However, some indicators within the (re)insruance securities market may alter those ratings (potentially downward) once Obamacare is fully implemented.

The City of Detroit is the shining example of where the federal Government's current economic and fiscal policies are headed. Their credit rating was dropped to a "C with negative outlook", according to S&P and Global Credit.

Perhaps, the State of Texas is the example they should be following, instead, since, according to S&P, Texas is headed in the correct and responsible direction.