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Details of Commerce Bond Ratings: Lowered by Fitch, Held Steady by S&P

City of Commerce, TX

COMMERCE - In our report Wednesday on the City of Commerce’s decision to sign a new audit firm amid troubles with their current provider - which City Manager Marc Clayton said played a role in the lowering of the city’s bond rating by one agency - we hadn't yet shared the new lowered figure.

Former Commerce mayor Quay Throgmorton pointed out to us this article from Business Wire that shows the downgrade by Fitch was from an ‘A-‘ to a ‘BBB.’  The city's outlook was revised from negative to stable.

Upon further review, we found Standard and Poor’s also upgraded the city's outlook to stable, while keeping their 'A' rating the same.

For Fitch, the key rating drivers noted in the report include additional deterioration of the general fund, a delay in the Fiscal 2011 audit, a decline in taxable assessed values and a high taxpayer concentration, and high overall debt.

Additionally, “Fitch anticipates further, significant financial and economic pressure” with the pending loss of medical supply manufacturer Covidien, which accounts for 17 percent of the tax roll. The exact departure date for the company remains unclear, but has been delayed from the original estimate of September 2012.

“I’m told that their date to move now has moved into early '14,” said Marc Clayton, in an interview with KETR on July 9. That would impact the city's fiscal 2015 finances, giving officials more time to attempt to attract new business and potentially weather the approaching financial storm.

The Fitch report, which was published May 23, also explains how the city’s “historically stable financial position” has eroded based on negative prior period adjustments in FY 2009 and 2010.

FY 2011 and 2012 budgets are anticipated to provide an operating surplus. In Tuesday’s presentation before council, Finance Director Warren Jamieson noted a strong second quarter with sales taxes exceeding expectations in most categories, with the exception of the hotel and motel tax.

Commerce received its financial audit from Conway Co. CPAs on July 12. The review, which is normally provided in February, has been submitted to the city council and is expected to be addressed at the city’s August 21 meeting, after which it will be considered for approval.

In a December 2011 presentation to the city council by financial advisor First Southwest, it was noted that Standard and Poor’s rating for Commerce was an ‘A.’ Both S&P and Fitch had the city in a negative outlook until recently.

A June 11 report from S&P shows they've revised the city’s general obligation debt outlook from negative to stable, while keeping the ‘A’ rating as is.

"The outlook revision reflects our opinion of the city's improvement in its financial position to a positive fund balance," said Standard & Poor's Credit Analyst Apple Lo.

The agency says its opinion is influenced by a projected return to adequate positive fund balance in fiscal year 2011 and operating surplus in 2012 and a relatively stable economic base, supported by the presence of Texas A&M University-Commerce.

S&P does note that the impending loss of Covidien and high debt levels does weaken some of the city’s financial strengths. While they do not expect to change the rating in the next two to three years, an inability to compensate the loss in tax revenues after Covidien’s exit could lead to a downgrade.

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