DALLAS - The north central Texas town of Graham in the oil and gas producing Barnett Shale took a one-notch Standard & Poor's downgrade to BBB-plus with the threat of another drop in the credit rating.
"The downgrade reflects ongoing general fund budgetary deficits and the possibility that we could lower the rating again within the next year if future financial performance falls short of current expectations," S&P analyst Omar Tabani wrote to explain the negative outlook.
About 45 miles northwest of Fort Worth, Graham is the county seat of Young County and has a population of about 9,000.
"While the city's property and sales tax bases have demonstrated net growth over the past two years, volatility related to natural gas production on the shale has made it difficult to correctly forecast sales tax revenues," Tabani said. "As a result, revenues have lagged budgeted amounts in the past few years."
Analysts from S&P and other rating agencies have cautioned that falling oil prices would have a widespread impact on local credits in Texas.
Graham has issued about $15 million of debt since 2013 insured by Build America Mutual.
S&P raised Graham to A-minus in 2012, citing improving financials after a series of deficits in the wake of the 2008 recession. With the collapse of oil prices, spending cuts have returned.
"We believe the city has demonstrated structurally imbalanced budgets, with fiscal 2014 representing the sixth year (out of the past seven) of general fund drawdowns," Tabani said. "Management primarily attributes these drawdowns to tax revenues coming in under budget and the funding of various capital projects."
For fiscal 2015, the city has cut general fund spending by $350,000. As a result, officials expect to end fiscal 2015 with a $100,000 increase in its year-end general fund balance. For fiscal 2016, officials are proposing a roughly 3% increase in the property tax rate to generate additional general fund revenue. The city does not anticipate reducing its fund balance further in fiscal 2016.
"While current projections from the city for fiscal 2015 and 2016 demonstrate improved financial performance, we note that past performance estimates have been overly optimistic," Tabani said. "If the city, however, is able to improve its financial performance and sustain it, we could revise the outlook back to stable."
