With its finances on the upswing, a Texas Gulf Coast port took action to stop collecting property taxes and instead rely on revenue it generates to pay for operations and debt service on bonds — a move that led to a rating downgrade last week.
Port Freeport, 60 miles south of Houston in Brazoria County, eliminated its maintenance and operations levy starting in fiscal 2024 and in September adopted a zero tax rate for a levy earmarked to make debt service payments on outstanding, voter-approved general obligation bonds.
S&P Global Ratings on July 18 lowered its rating on the port's $195.2 million of senior lien revenue bonds to A from A-plus because "the port
"Following sustained and expected operating revenue growth, the port commission eliminated its GO debt service mill levy in fiscal 2025, and instead will set aside one-twelfth of the annual GO debt service payment from monthly operating revenue," S&P said in a report.
The rating agency provides an additional "uplift" to ratings for transportation entities like Port Freeport when there is explicit and meaningful availability of taxes to support operations, which is no longer the case, according to S&P analyst Bikram Dhaliwal.
"We continue to maintain a stable outlook, which reflects our expectation that the port will maintain strong financial metrics that are supported by generally growing operating revenue and no additional debt plans," he said in an email.
S&P only rates the port's revenue bonds. Its GO bonds are rated by Moody's Ratings.
Moody's declined to comment beyond the affirmation of its Aa2 rating and stable outlook for Port Freeport's GO bonds in June 2024, three months before the port's adoption of a zero property tax rate for the GOs. The port last sold GO bonds in 2023 and had $122.85 million of that debt outstanding as of Sept. 30.
While Port Freeport called its decision to become tax free a "historic milestone" in
Given the S&P downgrade, more immediate disclosure would have been desirable to inform investors that the payment source for revenue bonds will also pay for GO bonds, as well as operational expenses, according to Richard Ciccarone, president emeritus of Merritt Research Services, an Investortools company that provides municipal finance industry data.
"The downgrade in hindsight makes it clear that they should have disclosed at the time that it was occurring," he said.
A joint statement from the port's financial advisor Masterson Advisors and bond counsel Bracewell said the reduction of the GO debt service tax rate to zero was in accordance with the bond resolutions and "was not an action that required an event notice under port's continuing disclosure agreements.
"The bond resolutions allow the port to reduce its tax rate to the extent the port has set aside other lawfully available funds for the payment of debt service prior to setting its annual tax rate," the statement said. "Port Freeport remains obligated to annually assess taxes in an amount sufficient to pay debt service under the bond resolutions."
Lisa Washburn, a managing director at Municipal Market Analytics, said that "in the spirit of good disclosure," an action that modifies a bond repayment stream is worthy of an event notice.
"It would be something that an investor would want to know about and at the time that it's happening," she said.
The Government Finance Officers Association
Rob Lowe, the port's chief financial officer, said "the GO tax levy will remain in place for the life of the bonds, however we intend to set aside operating funds annually to cover that levy."
The port generated $54.1 million in operating revenue in fiscal 2024, mainly from harbor operations and lease income, $8 million higher than fiscal 2023.
It collected $6.58 million from property tax levies in fiscal 2023, and $3.5 million in fiscal 2024, after the maintenance and operations levy was eliminated, according to its ACFR.
Restoring the port's maintenance and operations levy would need voter approval, according to S&P. Lowe said the levy elimination was noted
"(Restoring that levy) is not necessarily going to be easy at a bad economic time," Ciccarone said. "So that's a significant fact."
In April, Moody's revised its 2025 outlook for the U.S. ports sector to negative from stable due to tariffs, policy uncertainty, and rising inflation risk that are expected to weigh on ports' trade volumes. Fitch Ratings in June changed its outlook for North American ports to deteriorating, citing trade war and tariff uncertainties.
