Moody's Investors Service said it has downgraded the city of Houston, Texas's general obligation limited tax rating to Aa3 from Aa2, affecting approximately $3 billion in previously issued bonds.
Concurrently, Moody's assigns a Aa3 to the city's $600 million public improvement refunding bonds, Series 2016A. The outlook remains negative.
The downgrade to Aa3 reflects weakening economic and financial performance driven by prolonged decreases in oil prices, the rating agency said. It also reflects the city's high fixed costs, large unfunded pension liabilities (among the highest in the nation), as well as property tax caps.
The Aa3 also considers recent positive general fund performance, and growth in non-energy sectors that has offset some of the softening.
Additionally, the rating recognizes the positive actions taken by the new mayor and his plan to engage several stakeholders to modify the city's fixed costs and generate additional revenues, all within the next 18 to 24 months. These plans signal a change from past initiatives, and positive movement on the plans will be key to stabilizing the credit profile, Moody’s said.
The negative outlook reflects the recent weakness in economic and sales tax performance, fueled by energy companies' reduced investments in personnel and capital, as oil prices have remained low. The recent weakening in sales taxes is also contributing to the expected budget gap at fiscal yearend 2016, with the city expecting to draw on an already somewhat limited reserve position, compared to peers, Moody’s said.
