DALLAS – Dallas and Houston received reassuring notices Thursday from Moody’s Investors Service on changes the state legislature approved for their most troubled pension systems.

“The reforms are credit positive for the two cities because their pension liabilities will decline and ongoing pension funding will improve,” analysts said. “Pensions are a key credit challenge for both Dallas and Houston, and both cities have amassed substantial unfunded liabilities.”

Houston Controller Chris Brown
“While there is still a lot of work to do, this is a positive development," Houston Controller Chris Brown said

Moody’s still has a negative outlook on Dallas’ A1 general obligation rating and Houston’s Aa3 rating.

The fact that legislative relief was even available to the two cities was a benefit of Texas’ legal framework, analysts said.

“This flexibility is comparatively favorable because such changes are not legally permissible in all states,” analysts said.

In the rating agency’s most recent survey of pension obligations for the 50 largest U.S. cities, Dallas’ $7.6 billion adjusted net pension liability was second highest as a percentage of revenues behind Chicago’s. Houston’s $10 billion liability ranked as fourth highest, analysts said.

The reforms that Gov. Greg Abbott signed into law for Dallas give the city more control over the governance of its public safety plan, alter a number of benefit provisions for current and future public safety employees on a prospective basis, increase employees’ own contributions to 13.5% of payroll from either 8.5% or 4%, and suspend cost-of-living adjustments until the plan reaches a specified funding target.

The new law also eases a crisis over the Deferred Retirement Option Plan (DROP) to prevent future lump sum withdrawals and to limit accruals on account balances.

Dallas will increase its annual contributions to 34.5% of “computation pay” from roughly 30.5%, plus a $13 million annual payment until 2024.

The Dallas Police and Fire Pension System suffered major losses from investments in real estate and other alternative investments, and assets fell further in 2016 as many plan participants withdrew large lump sum accounts associated with DROP.

“We expect the plan’s accrued liabilities to fall based on the types of benefit changes enacted, but the relative strength of its revised contribution rate against plan funding remains uncertain,” Moody’s said.

Houston’s net pension liability across its three pension plans will fall by $3.5 billion or 23% through benefit changes, reducing its overall balance sheet leverage from debt and pensions to 593% of operating revenues from 733% after accounting for a planned $1 billion pension obligation bond, analysts said.

Hanging over Houston is uncertainty about the outcome of a firefighters’ lawsuit challenging the constitutionality of the new law and the requirement for voter approval to issue $1 billion of pension obligation bonds. The bonds are a critical component of the agreement the city reached with employee unions. At one point, Houston Mayor Sylvester Turner described the plebiscite as a “poison pill.”

However, Houston Controller Chris Brown embraced the Moody’s comments as a sign of further progress.

The Thursday commentary “indicates that the reforms are being viewed as a positive factor in both the short-term and long-term financial trajectory of our city,” Brown said. “While there is still a lot of work to do, this is a positive development for the financial future of the City of Houston.”

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