DALLAS — Moody's Investors Service dimmed its outlook on Houston's Aa2 general obligation rating to negative citing concerns about the city's pension obligations.
The city's challenges in meeting growing pensions costs and liabilities "are compounded by significantly limited revenue raising flexibility, and projected structural imbalance," lead analyst Adebola Kushimo wrote in her July 2 report.
In fiscal 2014, Houston's fixed costs, including pensions, retiree healthcare and debt, equaled about 30% of the budget, Kushimo said. At $3.2 billion, the total unfunded liability for the city's three pension systems was nearly double the liability reported five years ago.
"Current forecasts indicate increased pension costs, which could further weaken the city's financial position which include budget gaps in the five-year projection," Kushimo wrote. "A sustainable plan to manage the costs, while balancing the budgets, and meeting full required contributions will be key credit considerations going forward."
The stubborn pension problems contrast with positive economic indicators for the city, according to the report.
"Despite the recent downturn in oil prices, Houston's economy continues to benefitting from other key sectors including the healthcare, transportation (port), education and downstream energy," Kushimo wrote. "Although overall growth is continuing, the pace has softened, and uncertainty remains about the growth trajectory as long as oil prices remain low."
While low oil prices are bad news for exploration and production, they can be a benefit for the refining side of the industry, which is equally well represented in the Houston area.
Strong population growth has fueled demand for residential construction, Moody's said. The city's population grew 7.5% to 2.1 million in 2010 from 2000, following the almost 20% increase in the prior census.
Over the past five years, taxable values grew 4.6% annually with substantial increases of 10.2%, and 11.8% in fiscal years 2014 and 2015 respectively, to reach a total of $187.9 billion.
The city's March 2015 unemployment rate of 3.9%, was less than both the state's 4.2%, and the nation's 5.6% taken during the same time period.
Outgoing Mayor Annise Parker has advocated pension reform for three terms. More than 95% of the $130 million general fund spending increase in Parker's budget this year covers pension obligations. A major increase in costs followed changes to police, firefighter and municipal retirees in the early 2000's.
The city's revenue potential is restricted by voter approved Proposition 1 and H. Proposition 1 limits revenue increases to the lesser of population growth plus inflation, or 4.5%. Proposition H allows the city to raise revenues by $90 million above the Proposition 1 limit for public safety issues.
With about $3 billion of debt outstanding, the city's annual debt service will increase through 2018 before falling steadily through final maturity in 2043, according to Moody's.
