RCC looks to increase city’s credit rating

Rusk city council members are eyeing ways to increase the city’s credit score.

District 5 Councilman Jan Pate requested the issue be placed on the agenda of the regular city council meeting held Nov. 5. Council members discussed, but took no action on, building up the city’s interest and sinking fund.

“In February 2017, the city’s credit rating dropped,” Pate explained during the Nov. 5 meeting. “The S&P downgraded us because of spending unbudgeted money and revenue mismatches. When I came onto the Council, I started out on a mission to get our credit rating up, by following the law and the charter.”

According to the Standard and Poors website, standardandpoors.com, “An S&P Global Ratings credit rating is a forward-looking opinion about the creditworthiness of an obligor with respect to a specific financial obligation, a specific class of financial obligations, or a specific financial program. It takes into consideration the creditworthiness of guarantors, insurers, or other forms of credit enhancement on the obligation and takes into account the currency in which the obligation is denominated. The opinion reflects S&P Global Ratings’ view of the obligor’s capacity and willingness to meet its financial commitments as they come due, and this opinion may assess terms, such as collateral security and subordination, which could affect ultimate payment in the event of default.”

Credit ratings are based on S&P Global Ratings’ analysis of the likelihood of payment -- the capacity and willingness of the obligor to meet its financial commitments on an obligation in accordance with the terms of the obligation; the nature and provisions of the financial obligation; and the protection afforded by, and relative position of, the financial obligation in the event of a bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors’ rights.

The city’s current credit rating is BBB, which under the S&P’s definition, exhibits adequate protection parameters, but adverse economic conditions or changing circumstances are more likely` to weaken the obligor’s capacity to meet its financial commitments on the obligation.

Part of the reason Pate said the city’s rating took a hit was because former city officials failed to set up an interest and sinking fund, as mandated by both the Texas State Constitution and the Rusk city charter.

Pate explained, “We borrowed, in 2014, $10 million. We didn’t create an I&S fund until 2017, even though by law we were supposed to. In 2013, the previous city manager recommended the city borrow money, but didn’t set up an I&S fund. That’s why our credit rating dropped, because we were not following the law. I’m glad we have an interest and sinking fund now, but we have only $3,839.69 in our I&S fund as of today. That’s all we got. It should be 2 percent of our debt load.

“It’s my recommendation that we do whatever it takes to get more money into our I&S fund, to look good for the banking regulators.”

Pate cited sections of the city charter and the Texas Constitution that mandate the formation of a separate interest and sinking (I&S) fund within the city’s budget, for payment of any debt incurred, and explained as per law the I&S fund should hold at least 2 percent of the annual debt payment on the principle of the debt.”

Pate cited Article 11, section 5 of the Texas Constitution which prohibits cities of more than 5,000 population to create debt “unless at the same time provision be made to assess and collect annually a sufficient sum to pay the interest thereon and create a sinking fund of at least 2 percent.”

Pate also referred to the Rusk city charter, Article 9, section 5, which states, “It shall be the duty of the city council to levy an annual tax sufficient to pay the interest on and provide the necessary sinking fund required by law on all outstanding general obligation bonds of the city. The interest and sinking fund shall be deposited in a separate account and shall not be diverted to or used for any other purpose than to pay the interest and principal on such bonds. The sinking fund maintained for the redemption of any debt may be invested as provided by general law.”

Pate said even after the $300,000 recently granted to the city from the Rusk Economic Development Corporation is deposited into the I&S fund, the fund would still be about $50,000 short of the 2 percent and suggested the city move funds from a payment received from the railroad into the I&S fund to make up the difference.

“We’re making improvements on moving the city forward,” Pate said. “If we take care of the I&S fund, like the law states, then come February, when the regulators look at it again, we’ll be fine.”

City Manager Jim Dunaway said he’s spoken with the city’s bond council and financial advisors on the matter who told him as long as the city meets its financial obligations by February, the city would “be fine.”

“The Attorney General has never enforced the 2 percent rule, as long as payments are met,” Dunaway said. “I have no problem (putting additional funds into the I&S fund) as long as cash flow allows us to do so. We usually just paid as those payments came down. It’s a paper maneuver.”

District 1 Councilman Ben Middlebrooks asked, “If our cash flow (from the utility fund) isn’t enough, could we take (the railroad payment funds) and put it there (the I&S fund)?”

Dunaway answered yes and added, “We’ve not failed yet in having the revenue from the utility fund to make that payment.”

Middlebrooks acknowledged Dunaway’s statement and said, “I know we’re all a little bit aggravated that we didn’t get an I&S fund set up. But I think it would make the Council feel better if we make it legally look good, even if it is just cosmetic.”

District 2 Councilman Walter Session wanted to know the benefits of a higher credit rating.

Dunaway said a higher rating would lower the city’s insurance rates and explained cities with AAA ratings include Houston, Dallas and San Antonio.

“It just makes us look bad,” Pate concluded. “I want to make it real clear Jim Dunaway is not the one who did not follow the law – that was the previous city manager. Jim rectified the problem in 2017 and I’m thankful for that.”