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Moody's Considers Credit Downgrades For Texas Governments Dependent On Energy-Related Tax Revenue

The growing number of oil rigs pulled in from the oilfield and stored in this lot in Odessa, Texas is a testament to the steep decline in the price of crude oil in the last year. (Lorne Matalon)

The credit rating agency Moody’s Investor Services reviewing its ratings for 10 local governments in Texas — including Midland and Odessa — and may issue downgrades within 90 days. The culprit is the precipitous decline in crude oil prices and an oversupply of natural gas that is keeping prices low.

Moody’s says oil and gas “will remain weak” and that local governments in Texas may get hit hard. Moody’s has now placed 10 West Texas governments and hospital districts under review because of their tax revenue is tied to the Permian Basin’s economic health.

Julie Meyer is an analyst at Moody’s in Dallas.

“Persistently low oil prices have caused rating pressure to increase for certain Texas local governments with tax bases that are exposed to the oil and gas industry,” said Julie Meyer an analyst at Moody’s in Dallas.

Many energy-related real estate assessments have fallen in lockstep with the price of crude. That means lower property tax revenues.  And when someone is laid off, they aren’t likely to go to the mall.

“For some mainly cities, sale tax collections have weakened significantly as the local economy has slowed," Meyer explained. "A lot of these oil and gas operators in these areas are cutting their capital spending programs  and so we are seeing layoffs increase and that is having spillover effects in consumer spending.”

When a government tries to issue debt to build roads, or schools or hospitals, the first thing lenders want to know is, what is your credit rating ? Pecos County and the Midland County Hospital District are also on the list. Moody’s says the Permian’s rapid tax base expansion during the boom bet 2010 and 2014 allowed government to issue bonds & other debt instruments to build infrastructure. But that was then and this is now. Oil prices have crashed from a high of $107 in June 2014 to yesterday’s close of just over 38 dollars a barrel.