DALLAS - Moody's Investors Service has downgraded Fort Worth, Tex.,one notch to Aa2 from Aa1 amid ongoing accounting-system problems that have delayed audits and forced the city to use private placements for its bond sales.
The rating affects $371 million of outstanding general obligation debt. Moody's also lowered the rating on $21.9 million of 2004 lease revenue bonds to Aa3 from Aa2.
"Despite notable improvement in the quality and quantity of financial personnel over the past two years, antiquated information technology has contributed to significant delays in releasing audited financial statements," wrote Moody's analysts Dwight Burns and Douglas Benton. "Lack of timely information, reviewed by external parties to ensure fiscal integrity, hampers important decision-making by management and policymakers."
Fitch Ratings rates the city AA.
Standard & Poor's rates Fort Worth AA-plus based on unaudited financial statements last year but warned of a downgrade if the audited results varied significantly from the unaudited statement.
The delays began with the fiscal 2004 audit after the city changed auditing firms. An antiquated financial reporting system and insufficient staffing contributed to the delays, which carried over into the following years.
"This snowball effect will likely continue through fiscal 2008," Standard & Poor's said. "Staffing remains an issue because city officials have made audit completion a priority, to the potential detriment of the planned implementation of a new accounting system." Unable to access the public market because of the audit delays, Fort Worth did a private placement of $100 million of GOs last September.
While the interest penalty for going to private placement was relatively small, the financial reporting problems have complicated decision making in the city, according to the Moody's analysts.
"Cost pressures are evident in FY '08, and responding to challenges is complicated by a lack of timely financial reporting," they said. "Management was asked to consider a mid-year salary increase for city employees but then realized that undesignated operating reserves were below 10% of the annual operating budget, which is the policy minimum."
With a population of more than 650,000, Fort Worth has seen its economy diversify from aerospace and defense-related industries. Suburban growth in booming Tarrant County has continued to outpace the city's.
Fort Worth's property tax base has grown to about $34.2 billion in fiscal 2007 from $24.0 billion five years ago. Market value has increased by nearly 25% over five years to $51,732 per capita.
"There are initial signs, however, that residential construction and home buying may be peaking," Moody's wrote. "Housing permits issued from October 2006 through May 2007 were noticeably lower than prior year permits issued during the same period. Also, there are reports that home foreclosure rates in the area have been among the highest in the state. The city's low cost of living, which is usually considered a strength, could pose an economic challenge if tightening mortgage credit standards reduce the sales of affordable single-family homes."
