S&P downgrades Dallas credit rating

Standard & Poor’s has downgraded Dallas’ credit rating over concerns about the struggling police and fire pension.
The city’s general obligation bonds were downgraded to “AA-“ from “AA.”

“The downgrade reflects our view that despite the city’s broad and diverse economy, which continues to grow, stable financial performance, and very strong management practices, expected continued deterioration in the funded status of the city’s police and fire pension system coupled with growing carrying costs for debt, pension, and other post-employment benefit obligations is significant and negatively affects Dallas’ creditworthiness,” S&P Global Ratings credit analyst Andy Hobbs said in a statement.

The police and fire pension system could go insolvent in the next 10 years because of a funding gap. The financial troubles, along with a multi-billion-dollar lawsuit between the city and emergency works, could put Dallas on a path to bankruptcy.

“S&P’s actions today are not a surprise,” Dallas Chief Financial Officer Elizabeth Reich said in a statement. “The more the rating agencies learn about the crisis facing Dallas as a result of the police and fire pension, the more they understand what the City has been saying for some time – the pension is a significant risk to the fiscal health of the City.”

Moody’s downgraded Dallas’ credit rating twice in recent months. S&P had put the city on credit watch as more investors in the bond market – those buying the city’s debt – have grown worried about the issue. When a city’s bonds are downgraded, investors require higher interest rates in order to buy them, driving up the costs to raise funds for things like roads and emergency services.
The downgrade from S&P comes a day before the pension board is scheduled to meet and decide on whether to lift its ban on large, lump-sum payments to retirees. The withdrawals had been halted last year as a run on the pension started.

S&P has set Dallas’ outlook to “negative” and said city officials and pension board members still lack “an adopted plan to sufficiently address the pension obligation.” The city, analysts noted, has room to levy higher property taxes under state caps in order to raise money if needed. But such a move could dampen the boom in local real estate development. A plan to solve the pension crisis could also be complicated in the Texas Legislature, where lawmakers might demand changes.
“We need a legislative fix, and look forward to working with the State Legislature to provide a secure, stable retirement for our public safety workforce, and to reaffirm the City’s sovereign immunity,” Reich said. “Our plan to save the pension does not request state funds.”
A spokesman for the pension board told the Dallas Business Journal there is not yet any formal schedule to meet with state lawmakers.

“Should the debt and contingent liabilities profile improve and a credible and affordable plan to overcome Dallas’ very large and growing pension liabilities is established, we could revise the outlook to stable,” S&P said in its report.

Jon Prior
1/13/2017