Hit with rating downgrade, small Texas city focuses on fiscal woes

Officials in La Marque, Texas, are addressing the city’s strained finances in the wake of delayed debt service payments, a bond rating downgrade and an ominous warning from its recently hired finance director, who proposed a fiscal stabilization plan earlier this month.

“If you approve the plan, you can be the council that saves La Marque,” Finance Director Worth Ferguson said at a Sept. 8 council meeting. “If you don’t and don’t do anything, it’s very likely you will be the council that ends La Marque because there aren’t other options.”  

By a 3-2 vote, the city council Thursday approved an increase in the maintenance and operations property tax rate —  a move included in the plan, which also calls for a hiring freeze, a cash flow borrowing to bridge a gap before the majority of property tax revenue arrives between January and March, and other measures.

“We need to show that we are a good investment,” said Council Member and Mayor Pro Tem Joe Compian, who voted in favor of the higher rate. “We need to maintain our credit rating.” 

Administrative turmoil in the city of about 20,000 — south of Houston in Galveston County — led to a delay until Sept. 10of Sept. 1 debt service payments on general obligation bonds sold in 2014 and 2017 and certificates of obligation issued in 2018.

S&P Global Ratings cited the late payments when it lowered the city’s AA-minus general obligation rating to A-plus on Sept. 18 and placed it on a 90-day CreditWatch review for a potential further downgrade. 

The action reflects turnover in key executive positions that resulted in the late principal and interest payments, as well as “additional disclosure indicating cash flow issues in fiscal 2025, which we believe could further pressure the rating, potentially by multiple notches,” the rating agency said, referring to a payment delinquency notice the city posted on the Municipal Securities Rulemaking Board’s EMMA website on Sept. 16.

“We believe the city has elevated governance structure risk compared to that of other rated entities in the sector given the content of the filing that states significant turnover in key executive positions,” S&P’s rating report said. “We believe these governance shortfalls are a contributor to its recently missed debt service payment and liquidity pressures that signal budgetary imbalance.”

La Marque is committed to maintaining a strong credit rating and will make upcoming debt service payments due Feb. 1 and March 1 on time, Ferguson said in an emailed response to questions from The Bond Buyer. 

“The city believes the missed payments were an isolated incident as new staff was brought on board as further described in the EMMA notice,” he said. “Council has approved a balanced budget that includes all debt payments and includes the levy and interest and sinking fund tax sufficient to pay debt service on the city’s ad valorem tax debt.” 

La Marque’s disclosure notice said in the wake of three permanent or interim city managers resigning and financial staff turnover since January, it hired an interim city manager in July and Ferguson at the end of August. 

The notice also cited financial strain largely due to a failure to meet budgeted revenue projections and historical overspending and pointed to a projected cash flow shortfall of approximately $3 million during the first quarter of fiscal 2026, which begins Oct. 1, “assuming that the city does not experience a hurricane or other natural disaster requiring additional expenditures for protective measures or remediation costs.” 

The last hurricane to impact the city was Beryl in 2024.

Ferguson said the property tax rate hike will raise about $340,000, while a fiscal 2026 budget adopted Thursday by the council cut expenses by approximately $900,000.

“Between the added revenue and the lower expenditures, the city plans to begin rebuilding reserves and provide for payment of any fees and interest costs associated with a possible tax and revenue anticipation note,” he said.

The city is considering issuing about $4.3 million of notes through a private placement or a direct purchase, he added. 

La Marque’s fiscal 2024 financial audit was posted Sept. 24 on EMMA, nearly a year after the fiscal year ended. It showed general fund expenditures of $20.97 million exceeded revenue by $3.517 million with the fiscal year ending with an unassigned balance of negative $273,098. The city had $2.15 million GO bonds and $9.3 million certificates of obligation outstanding as of Sept. 30, 2024.

At Thursday’s council meeting, the city’s ability to raise the property tax rate despite the tardy audit was called into question under a Texas law that took effect Sept. 1. The law authorizes anyone to submit a complaint to the Texas Attorney General alleging that a city failed to comply with a state Local Government Code requirement to file its annual audit within 180 days of the end of its fiscal year. A resident who spoke at the meeting said he filed a complaint regarding La Marque.

If verified by the attorney general, the city would be prohibited from adopting a property tax rate that exceeds its no-new-revenue tax rate for the tax year that begins on or after the date of the attorney general’s determination. 

The no-new-revenue rate 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. 

City officials said no attorney general determination has been received, thereby allowing for the tax rate hike.

The audit-related legislation breezed through the Republican-controlled legislature during a regular session that included a barrage of unsuccessful bills aimed at restricting local government debt issuance. In subsequent special sessions this summer, the House and Senate failed to reach a consensus on a bill to limit the annual growth in city and county property tax revenue.

Gov. Greg Abbott has reportedly hinted at a third special session. The legislature’s next regular session is in 2027.