Moody's downgrades fiscally troubled La Marque, Texas

Bloomberg News

Financial woes in La Marque, Texas, led to a two-notch downgrade of its issuer rating from Moody's Ratings to A3 from A1. 

Moody's action, announced late on Friday, followed last month's downgrade to A-plus from AA-minus by S&P Global Ratings. Both agencies placed the lower ratings on review for potential further downgrades.

Administrative turnover in the city of about 20,000 — south of Houston in Galveston County — along with a declining and narrow financial position and limited flexibility to raise property taxes to support operations, were cited by Moody's.

"The rating is under review for potential further downgrade, given the potential for further financial deterioration and uncertainty on a path to restore financial health," it said in a rating report.

In a statement on Monday, the city said it is aware of the rating change and is working "to address the cited areas."

La Marque, which delayed Sept. 1 debt service payments for general obligation bonds until Sept. 10 due to staff transitions, started to take steps last month to stabilize its finances.

The city council reduced spending by about $900,000 in the fiscal 2026 budget it passed, along with a higher maintenance and operations property tax rate expected to raise about $340,000.

Last week, Texas Attorney General Ken Paxton ordered La Marque and three other cities to halt their "potentially illegal" tax hikes after complaints were filed with his office alleging the cities did not file their annual financial audits within 180 days of the end of their fiscal years.

If the attorney general verifies the complaints, a new state law prohibits cities from adopting a property tax rate for a tax year that begins on or after Sept. 1, 2025, that exceeds their no-new-revenue tax rate, which would essentially produce the same amount of revenue as the previous fiscal year. In the case of higher assessed property values, the actual tax rate could be lower to offset that growth. 

La Marque's fiscal 2024 financial audit was posted Sept. 24 on the Municipal Securities Rulemaking Board's EMMA website, nearly a year after that fiscal year ended.

In a posting on its website last week, the city said while it is fully cooperating with the attorney general's office, its legal team does not believe the law applies to the 2025 tax year, which began Jan. 1, and therefore would not impact the adopted tax rate. 

Moody's noted the challenge to the city's tax increase in its rating report.