By August 25, 2015 Read More →

Are Texas municipal finances threatened by oil bust?

Fitch Ratings study examines challenges of losing tax revenue for municipalities whose economy relies on oil and gas

The recent decline in oil prices has raised the pressure on some cities, counties and single-purpose districts in oil-producing states, according to a new report by Fitch Ratings.


Photo: Shaun T. Polczer.

According to Fitch, some municipalities will be able to raise taxes and other revenue sources, cut spending and use reserves. Others have sufficient size and economic diversity to weather the economic stresses. All will be affected to varying degrees by the decline in oil prices.

West Texas Intermediate (WTI) crude oil fell below $40 per barrel in trading Monday for the first time since 2009.

Differences in revenue raising capabilities among states like Texas, California, Alaska and Louisiana, along with expenditure flexibility and available reserves, affect the degree to which local governments can respond and what tools they have at their disposal in the process.

‘The challenges posed by recent oil price fluctuations reinforce that there is no one-size-fits-all approach to financial and economic recovery for local governments,’ said Senior Director Steve Murray in a press release.

Fitch says that a recent review of historical financial and economic data from selected Fitch-rated local governments – which considered total tax revenue, GDP, unemployment and home prices – since the early 1980s shows a high correlation between energy prices and financial data.

For example, sales tax collections in Texas fell by 1.4 per cent in June 2015 from the previous June due largely to a weaker energy industry, ending a more than five-year streak of monthly gains.

Cities like Houston are facing some risk due to the decline in oil, according to Fitch. Most major regional and multinational energy companies have offices in the Houston area, exposing it to employment pressures. Houston has limited ability to raise property taxes to compensate for revenue losses, as Proposition 1 limits tax revenue increases to the lesser of 4.5% or the combined percentage increases in population and consumer inflation.

However, Houston’s job diversity may mitigate some of this risk. Roughly 30,000 workers there are employed by hundreds of refining plants in the area, which benefit from lower oil prices.

Terrebonne Parish, LA also serves as headquarters for some offshore oil and gas companies and faces economic-related risks. The recent decline in oil prices will likely affect local employment, sales tax collections and home prices.

Any related state funding decline could compound the impact, as cities and parishes in Louisiana receive a portion of state severance taxes and royalties.

For Terrebonne Parish, these two sources total $5.9 million in the fiscal 2015 budget, or roughly 25 per cent of general fund revenues. And, at nearly $41 million, sales taxes represented more than 35 per cent of budgeted parish governmental revenues in fiscal 2015. Property tax millage rates can be increased to counter tax base losses, but any hike in a local sales tax rate must be approved by voters.

The Fitch study says that two Fitch-rated local issuers are at the highest risk: Culberson County Hospital District and Zapata County, TX, which are in remote locations with limited economies.

Posted in: Energy Financial

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