Dallas will price bond deal ahead of election for new mayor
In an election week for a new mayor and city council, Dallas will price $378 million of general obligation bonds in a competitive sale Tuesday.
Coming in two series, the bonds include $149.3 million of bonds to settle a back-pay lawsuit that Mayor Mike Rawlings once said could have bankrupted the city in concert with a Police and Fire Pension funding crisis. Resolution of the pension problems through state legislation and restructuring came about the same time the city settled a number of lawsuits over back pay.
In May 2017, an executive committee representing nearly 8,700 current and former Dallas police officers and firefighters agreed to a $173.3 million settlement in their decades-old class-action lawsuits against City Hall over years of back-pay claims.
The agreement came nearly seven months after the Dallas City Council agreed to pay $61.7 million to settle four lawsuits in Collin County over the language of a 1979 pay referendum approved by voters.
Dallas continues to struggle with attracting and retaining police officers after the pension and back-pay resolutions. The fiscal 2019 budget includes funding for 3,050 officers, down from 3,613 budgeted positions in fiscal 2017.
City leaders hope the recent salary adjustments will stem the attrition, which likely reflects both rank and file departures during the pension crisis and police recruiting challenges nationwide.
Rawlings said legislation backed by the state’s top leaders would prevent the hiring of 100 police officers Dallas has been trying to recruit.
"It could be catastrophically harmful for cities in Texas if some commonsense math is not used in this process," Rawlings said in reference to a bill that would limit cities to property tax increases of 2.5% without voter approval. The legislation would also prevent the use of certificates of obligation, a form of debt that currently does not require voter approval.
"If the current Texas House bill regarding revenue caps passes tomorrow, I fear the City of Dallas will be forced to lay off employees or cut key services, including police and fire," Rawlings said in a statement. "The current proposal will prevent us from significantly increasing police officer and firefighter pay or hiring more, as our citizens want."
The Texas House and Senate are at odds over how low to cap the property tax increase, which is no set at 8%. Under current law, voters would have to petition for a rollback of any increase over 8%.
Term limits prohibit Rawlings from seeking a third term, and Saturday's race to replace him has drawn a crowded field with current City Council member Scott Riggs considered the favorite. Former House member Jason Villalba, a Republican defeated in 2018, is also running.
Villalba said he would be willing to consider pension obligation bonds to help reduce underfunding of the Police and Fire Pension. Rawlings opposed POBs, which were used to help strengthen the civilian employees' pension fund in 2005.
Houston, which faced a pension crisis less dire than Dallas’s but also require legislative relief, issued $1 billion of POBs under an agreement with city police and firefighters.
“I’m willing to ask and spend political capital to ask the rest of our wonderful city to tighten their belts just a little bit on the general fund so that we can afford to do what we need to do for our police and fire to make sure that they’re taken care of,” Villalba said at a candidate forum. “Ideally, this is a temporary fix.”
Griggs, a four-term north Oak Cliff council member who voted on key issues involving the pension crisis and recommended delaying a 2017 bond election until those issues were resolved, is also considering POBs and is promoting higher pay for police officers.
Griggs pushed for starting police pay to $60,000 but said that “average pay” is not enough to solve Dallas’ recruiting problem. Salaries of $70,000 should be the starting point, he said. He also is seeking a new police academy, which could be bond-funded.
Among the council races, former Mayor Laura Miller is seeking to oust incumbent Jennifer Staubach Gates in North Dallas, where citizens are divided over large-scale development plans in affluent neighborhoods.
The recent pension reforms to both the civilian and uniform plans have reduced the city’s combined total liability by roughly 40%, according to Fitch Ratings analyst Steve Murray.
“The city of Dallas' gap-closing capabilities and healthy reserves position it to maintain financial resilience through a typical economic downturn,” said Murray. Fitch rated the upcoming issue AA with a stable outlook. “Elevated debt and retiree benefit outlays will maintain a certain amount of pressure on the city's budget management practices,” Murray said.
S&P Global Ratings rates the deal AA-minus with a stable outlook.
“We anticipate the city will continue to issue bonds for general infrastructure improvements should AV growth support such issuances,” S&P analyst Andy Hobbs noted. “In November 2017, voters approved a $1.05 billion bond authorization package that included 10 different propositions for various projects and upgrades throughout the city including parks and recreation, flood control, police and fire, city hall, homeless, economic development, streets, library, and cultural arts facility.”
Moody’s Investors Service, which does not rate this deal, rated previous GO debt A1 with a stable outlook.
Bruce Rideaux, director at the municipal advisory firm Public Financial Management Inc., said the city expects strong demand for the bonds on Tuesday.
“In 2018, the city’s competitive bond sale received 12 bids,” he said. “With the long term of the bonds, it is likely that a sizable portion of the issue will go to institutional investors.”
The Texas bond calendar is showing 10 issues this week. Dallas’s two issues are the largest on Tuesday. Other sizable Texas issuers expected to be in the market this week are Northwest Independent School District and Belton ISD. The other large competitively priced issue on the day of the city’s sale is the Virginia Public School Authority.
Rideaux said the city decided to sell competitively for a lower cost of capital and a transparent award process.
“The city has successfully utilized a mix of competitive and negotiated bond sales over its various liens over the past few years,” he said.