Dallas Lands on S&P Downgrade Watch Amid Pension Debacle

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DALLAS – With Dallas trying to stop the run on a rapidly declining pension fund, S&P Global Ratings placed the city's AA general obligation rating on its watch list for a possible downgrade Friday.

"The action reflects the challenges the city faces with regard to its rising pension liabilities and the lack of a plan with a clear path to resolution which will require approval from several levels of government to address them in the immediate term," said S&P Global Ratings credit analyst Andy Hobbs.

The negative watch also affects S&P's A rating on moral obligation debt related to the Dallas Convention Center Hotel Development Corp. and the Downtown Dallas Development Corp.

Moody's Investors Service downgraded the city's debt one notch to Aa3 in October, a week after Fitch Ratings lowered its rating to AA.

The downgrades came as Dallas officials draw plans for an $800 million bond proposal for voters in May. Mayor Mike Rawlings has urged the City Council to postpone the election until the crisis over the Dallas Police and Fire Pension Fund can be resolved.

On Dec. 5, Rawlings filed a lawsuit as a private citizen to stop the Dallas Police and Fire Pension system from allowing retirees to pull their deferred retirement (DROP) funds from the system.

Rawlings' lawsuit contends the pension board is "willingly failing" to perform its duty. It asks a judge to issue an injunction to stop the withdrawals, which the mayor asked the board to do in a letter last week.

"Because (deferred retirement) Participants do not have any right to a lump-sum withdrawal of (deferred retirement) funds, this method of payment may only be used when the Pension System is solvent, liquid, and actuarially sound," the lawsuit claims.

It also states that the pension system's staff is close to liquidating assets to pay for the withdrawals.

More than $500 million in DROP funds have been withdrawn since August, speeding the funds pace toward insolvency in 10 to 15 years.

Four days after Rawlings filed suit, The Dallas Police and Fire Pension Board voted to halt withdrawals from the DROP fund.

Under the DROP program, first responders eligible for retirement, but who wanted to keep working, were allowed to maintain a separate savings account with an interest rate of at least 8%. With the fund's future in doubt, firefighters, police and emergency workers began rushing to claim lump-sum payments. Among those who retired to claim benefits was the Dallas chief of police.

"Adding complexity to the challenge facing the city, the pension system is governed by state law and not city ordinance, which makes plan changes more difficult as it includes stipulations such as a state-defined maximum cap on contributions," Hobbs wrote.

The Texas Legislature is expected to address the problem when it convenes in Austin in January.

Dallas recently presented a briefing on challenges and potential remedies associated with the pension fund through pay and staffing adjustments, S&P noted.

"To date, a clear strategy to address the pension plan's growing liability has not yet been determined nor agreed upon. In our view, the liability will create near-term budgetary challenges," Hobbs said. "A lack of a clear plan to address the growing pension liability or near-term budgetary challenges as a result of negative impacts from the city's pension liability could have negative implications on the general obligation and moral obligation ratings."

S&P said it expects to resolve the CreditWatch status within 90 days.

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