DALLAS - Moody's Investors Service downgraded Polk County, Texas, general obligation debt to A2 from A1 and maintained a negative outlook, citing continuing financial struggles related, in part, to a private jail that defaulted on $49 million of bonds.
"The downgrade to A2 is reflective of the county's consistent structural imbalance related to capital expenditures," analysts said. "The rating also incorporates the county's recent tax base expansion and economic concentration tied to the oil and gas industry."
With its county seat in Livingston, 70 miles north of Houston, Polk County is home to about 45,000 people.
The downgrade affects $7.6 million rated by Moody's. The county has an additional $20.2 million in debt that is not rated by Moody's.
Analysts cited the fiscal uncertainty surrounding the recent IAH Public Facility Corp. bonds default. The bonds are not liabilities of the county, but the county receives significant financial support from the corporation that issued debt for a for-profit jail.
IAH entered into principal payment forbearance on the 2004 and 2006 bonds. The forbearance period is from Feb. 1, 2015 through Jan. 31, 2016.
During that time, the corporation will not make principal payments, and all revenues flow to the operator after the county agreed to forgo receipt of the per inmate administrative fee.
The 1,054-bed jail has been steadily losing inmates and held only 358 this month, representing 35% of capacity.
Unable to turn a profit, the facility's previous operator, Civigenics-Texas, Inc. informed the county and trustee in December 2014 it would not renew its operating agreement upon expiration. Bondholders found a new operator and agreed to defer the payment on the principal portion of the bonds.
The county's fiscal 2015 budget included $850,000 in administrative fee revenues from the jail, in line with the average collection since 2009. For the current year, the county will collect approximately $150,000, a reduction of $700,000.
"County management has asked departments to be mindful of resource allocation but to date has not undertaken any formal steps to minimize the effects of a revenue shortfall," Moody's noted. "The lack of internal controls to mitigate the effects of a revenue shortfall, coupled with the uncertainty surrounding the performance of the detention facility, create significant negative pressures."
Moody's noted the county has not included any administrative fee revenue in the preliminary fiscal 2016 budget.
"The degree to which the loss of this revenue affects the county's reserve position will be a factor in future rating reviews," analysts said.
