DALLAS – A severely underfunded pension plan continued to weigh heavily on Dallas as Moody's Investors Service dropped the city's credit rating one notch to Aa3 and maintained a negative outlook.
The action Friday came a week after Fitch Ratings lowered the city's rating to AA from AA-plus, also keeping the outlook negative. Moody's also downgraded Dallas one year ago, as did S&P Global Ratings, citing the pension problems as the key factor.
If Moody's lowers the city one more notch, Dallas will fall out of the double-A category for the first time. Dallas lost its triple-A rating in 2003.
The downgrades come as Dallas is planning to seek voter approval for an estimated $800 million of bond projects in May 2017 as the pension crisis worsens.
The Dallas Police and Fire pension board is asking that city taxpayers to contribute more than $36 million to pay for the pension fund's overhead costs.
The pension board voted Oct. 13 to request the money from the city after board members were told that taxpayers may need to contribute hundreds of millions of dollars in additional funding to keep the fund solvent.
The city already contributes $115 million to the fund annually.
The pension has seen a flood of recent lump-sum withdrawals by retired police and firefighters worried about the fund's future.
"As more people withdraw funds from the system, our long-term solvency will become much more challenging," the board told members in a written statement.
The board has processed about $220 million of lump-sum payment requests since Aug. 11, the board said.
Since Sept. 21, an additional $82 million requests were received.
In the current month, the pension board expects to process more than 80 retirements, compared to a typical month of 14.
"The Board is pleading that you not take actions that in total will ultimately cause further damage to the Fund and your long-term benefits," the board statement said. "The Plan amendments are a critical part of this solution."
Ron Pinkston, the head of the Dallas police union, told reporters that pension concerns led him to announce his retirement Oct. 4.
"I wanted to make sure that I was able to move it and get it invested somewhere safe," Pinkston told local TV interviewers. "I don't know anything anybody else doesn't know that has been doing their homework. And hopefully everybody that's in my position, that's thinking about it, is doing their homework, is checking their numbers."
The pension board disputed media reports that the fund might be out of cash by January.
"We certainly do have the funding to 'keep the lights on,'" according to pension fund director Kelly Gottschalk.
Amid declining asset values and risky investments in real estate and high-profile projects such as the public-private redevelopment of Interstate 635 in North Dallas, the Police and Fire Pension's funded ratio has fallen to 45%.
According to the Texas Pension Review Board, the fund is at risk of running out of money in 15 years.
"In order to reduce liabilities in its severely underfunded public safety pension system, the city, employees, the pension system and the state legislature must all reach an agreement on benefit changes," Moody's analyst Denise Rappmund wrote. "At the same time, the system faces a severe threat of insolvency due to significant write-downs in its investment portfolio, expected negative cash flow in the coming years even if investment returns are relatively cooperative, and an increase in employee withdrawals from Deferred Retirement Option Plan (DROP) accounts."
More than half of the pension system's $2.5 billion in assets are in deferred retirement funds, according to Gottschalk, who was chosen to head the fund in 2015 after the previous executive director, Richard Tettamant, resigned under pressure amid scrutiny of the performance of the fund's real estate and alternative investments.
The maximum allowable pension contribution to Dallas' three pension plans in fiscal 2015 was $147 million, which was nearly $78 million shy of covering a "tread water" amount on the combined unfunded pension liability, Moody's said.
The "tread water" cost is a calculation of the amount an employer must contribute that, when combined with employee contributions, is equal to current year service cost plus interest on the unfunded pension liability as of the beginning of the year, using each plan's assumed discount rate as the interest rate.
Among the proposals to save the fund is adding restrictions to the DROP. The program allows veteran officers and firefighters to technically retire but continue working for their paychecks while their pension checks are sent to a separate investment fund. DROP gave recipients an 8% to 10% annual return even while the system earned much less.
Members of the pension fund must approve the plan.
Although changes to the Police and Fire Pension require legislative approval, lawmakers have said they will not contribute state funds to reduce the city's $3.3 billion funding deficit.
Texas Attorney General Ken Paxton recently issued an opinion that the state would probably not be financially responsible if the Dallas pension fails.
"I believe the legislature must pass legislation that gives Dallas and other communities control over their pension systems so that we can devise solutions to the fiscal problems that many systems have," Mayor Mike Rawlings told The Bond Buyer. "The legislation must prevent pension boards from being controlled by the beneficiaries and from having the power to unilaterally increase benefits to levels that cannot be sustained."
Rawlings has urged the Dallas City Council to consider postponing a May 2017 vote on a proposed $800 million bond issue until the pension fund dilemma is resolved.
Dallas City Council member Scott Grigsby has proposed reducing the bond proposal to $500 million in case the city is forced to make a major contribution to the pension fund.