Bond ratings for a Texas city that defaulted on debt as it struggled with water scarcity were downgraded by S&P Global Ratings for a second time since August amid amplified signs of financial distress.
Clyde, a city of less than 4,000 in central Texas, also disclosed in
“Use of those funds disguised the deficit cash flow issue relative to the debt service requirements,” according to the report, which did not directly identify the origin of the proceeds or which debt payment was made with them.
S&P Global Ratings
The city’s failure to make payments due Aug. 1 on $18.16 million of insured certificates of obligation sold in 2013 and 2022 led S&P to
S&P Tuesday downgraded Clyde’s 2023 general obligation bonds and series 2010 and 2023 tax and surplus revenue certificates of obligation
Those ratings had been downgraded from A-minus and placed on a watchlist in August, when S&P cut the certificates’ underlying ratings.
“The lowered rating reflects our view of the city’s optimistic revenue projections and unplanned asset failures, which we believe could lead to further financial distress despite recent property tax and utility user rate increases,” S&P analyst Misty Newland said in a statement.
The rating agency said the negative outlook reflects its view the city’s liquidity will be constrained over the near-term given its plan to issue a revenue anticipation note to repay $662,725 to bond insurers for the Aug. 1 default, ongoing emergency infrastructure repairs, and water purchases from the city of Abilene.
Clyde Mayor Rodger Brown did not immediately respond to a request for comment.
The city council last week increased the property tax rate and enterprise user fees to generate a projected $1.2 million to $1.4 million, while cutting the fiscal 2025 budget by about $1 million, according to S&P, which noted the “vulnerable” fiscal 2025 budget is balanced with the inclusion of a $1.5 million transfer from an enterprise fund budgeted surplus.
In Clyde’s annual financial report for the fiscal year that ended Sept. 30, 2023, auditor Cameron L. Gulley, CPA, said November 2023 and August 2024 debt service defaults indicate “the city will be unable to meet future obligations as they come due raising substantial doubt about its ability to continue as a going concern.”
The report, which was posted on the Municipal Securities Rulemaking Board’s EMMA website Aug. 30, indicated Clyde’s general fund expenditures more than doubled to nearly $18 million in fiscal 2023 compared to fiscal 2022, while revenue totaled just $4.048 million. A beginning fund balance of $11.6 million was reduced to an ending balance of $1.35 million.
According to the report, the city’s parks and recreation department exceeded its $349,000 budget by $12.9 million, attributed to “Parks and recs community center capital expenditures not budgeted.”
In fiscal 2024, the city struggled to maintain its financial health amid drought conditions and a reduction in water revenue that contributed to the defaults, according to the report.
The financial audit said the November 2023 default involving a $1.017 million payment to First Security Finance was cured in February when the balance was paid. Missed payments due Aug. 1 on the certificates of obligation resulted in claims made to bond insurers Build America Mutual Assurance Company and Assured Guaranty Municipal, it added.