DALLAS – Dallas took another credit downgrade Wednesday as S&P Global Ratings dropped the city's rating one notch to AA-minus while keeping its outlook negative.
The downgrade came less than a month after Moody's Investors Service lowered the rating to A1 from Aa3, also retaining a negative outlook.
Both agencies cited the growing risk to the city's finances from a Police and Fire Pension Fund that has suffered a recent run on the bank from retirees amid efforts to keep the fund from failing.
"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 postemployment benefit obligations is significant and negatively affects Dallas' creditworthiness," wrote S&P credit analyst Andy Hobbs.
At AA-minus, the S&P rating is the equivalent of one notch higher than Moody's. Fitch Ratings reported on Jan. 9 that a downgrade is likely if the Texas Legislature fails to provide a structural solution to the pension fund problem. Fitch has a negative outlook on its AA rating.
In its Wednesday action, S&P also lowered its rating on Dallas' moral obligation bonds to A-minus from A, retaining a negative outlook.
"Deterioration over the next two years in the city's budget flexibility, performance, or liquidity could result in a downgrade," Hobbs wrote. "Similarly, uncertainty regarding future fixed cost expenditures could make budgeting and forecasting more difficult.
"If the city's debt service, pension, and OPEB carrying charge elevate to a level we view as very high and the city is not successful in implementing an affordable plan to address the large pension liabilities, we could lower the rating multiple notches," Hobbs wrote.
Dallas Mayor Mike Rawlings told the Texas Pension Review Board in November that the combined impact of the pension fund and a court case involving back pay for Dallas Police officers could come to $8 billion. That, he said, could lead to a potential bankruptcy. Rawlings and the city maintain that Dallas is not legally responsible for the $4 billion pension liability but have said that the city wants to help.
After a $500 million run on the pension fund in the past year, pension board members halted withdrawals from a deferred pension fund known as DROP (Deferred Retirement Option Plan).
Fund managers said the remaining $2.1 billion in total pension fund assets include just $729 million in cash. The $154.5 million in pending withdrawal requests in the first week of December would take the cash balance too low for a pension fund, they said. The fund has an estimated $6 billion in future liabilities under its current structure.
In testimony to the State Pension Review Board, Rawlings said the pension crisis has made recruitment of police officers more difficult just as the city faces a flood of retirements. The city is also struggling to find the money to provide raises to police officers, which Rawlings said they are due.
