DALLAS – Dallas suffered its third downgrade within a year Friday as Fitch Ratings lowered the city to AA from AA-plus because of a worsening pension crisis.
Fitch maintained a negative outlook as city officials develop plans for an $800 million bond proposal that is expected to go to voters next May.
Dallas Mayor Mike Rawlings in September urged the city council to postpone the May bond election until a solution is found for the severe underfunding of the city's Police and Fire Pension Fund.
The Fitch downgrade comes nearly a year after Moody's Investors Service and Standard & Poor's lowered their general obligation ratings one notch to Aa2 and AA respectively. Unlike Fitch, S&P and Moody's restored stable outlooks.
Rated triple-A in 2003, Dallas has seen its ratings erode due to infrastructure needs and the rising pension problem.
Updated pension plan valuations since Fitch's last review in 2015 have increased the total unfunded pension liability to the city's general fund by about 40%, analysts said.
"Fitch expects that pension contributions will likely increase as the city works to bolster plan sustainability, resulting in somewhat elevated carrying costs," analyst Rebecca Meyer said.
Dallas participates in three single-employer defined benefit plans. The Dallas Employees Retirement Fund covers non-uniform employees. The Dallas Police and Fire Pension Plan and Supplemental Police and Fire Pension Plan of the city of Dallas cover police and firefighters.
Under Government Accounting Standards Board Statement 68, the DPFP plan reports a net pension liability for the combined and supplemental plans of $6.9 billion and $24 million, respectively, as of Dec. 31, 2015.
"A 40% increase in the net pension liability over the prior year resulted primarily from realized losses in private equity and real estate investment values," Meyer said. "The DPFP's DROP provisions have also contributed to increased liabilities, liquidity challenges and investment losses associated with required triggering of investment portfolio rebalancing given the level of withdrawals."
Dallas has recorded five straight years of tax base growth amid new development and a strong real estate market. Declining oil prices have not shown any obvious impact in the Dallas market.
As the ninth most-populous city in the U.S. and third in Texas behind Houston and San Antonio, Dallas has seen modest growth in its estimated population of 1.3 million, analysts said. By contrast, the surrounding metropolitan area has grown by more than 30% since 2000.
In the Dallas Independent School District, which overlaps most of the city, voters approved a record $1.6 billion bond issue in 2015.
"Positive growth prospects are based on expectations for generally positive trends in taxable value and sales tax revenues and ongoing economic development," Meyer noted.
Property taxes account for 43% of Dallas revenues, with 24% coming from sales taxes, 17% from service charges and 12% from franchise fees.
"Revenue growth has exceeded inflation but has been somewhat below GDP growth over the last decade," Meyer said.
