Moody's returns Dallas' ratings outlook to stable

Bloomberg News

Moody's Ratings revised its outlook on Dallas to stable from negative on Thursday after concerns over the city's pension funding eased.

The rating agency said the change reflects an expectation the city will increase pension fund contributions while maintaining structural balance amid rising cost pressures, including for public safety operations, that "will constrain budgetary flexibility absent meaningful revenue growth or expense controls." 

The city and its Police and Fire Pension System resolved a dispute last year over a 30-year funding plan that complies with a 2017 state law requiring submission of a plan that meets statutory and amortization requirements.

"We project that if followed, the funding agreement adopted in December will prevent the DPFP's non-investment cash flow from becoming severely negative relative to its assets through a combination of higher city contributions and constrained cost-of-living adjustment payouts," Moody's said in a statement.

The outlook change affects Dallas' A1 general obligation, Aa2 waterworks and sewer system, and A2 Downtown Dallas Development Authority tax increment contract revenue bond ratings, which were affirmed. There was no immediate comment from Dallas about the outlook change.

Dallas received the negative outlook shortly after voters in November 2024 approved a ballot measure requiring the city to appropriate at least 50% of annual revenue increases over the previous year to fund public safety pensions, boost police starting pay and maintain a bigger police force of at least 4,000 full-time sworn officers.

The negative outlook was based on Proposition U's expected credit impact, including reducing the city's fiscal flexibility and boosting the DPFP system's liability by increasing police starting salaries and the number of officers, according to Moody's.

In February, Republican Texas Attorney General Ken Paxton sued Dallas, claiming it failed to comply with the measure in calculating a revenue increase for fiscal 2026.

Moody's said it expected the city would make "necessary budget adjustments to maintain structural balance even in the event of an adverse outcome in the Proposition U litigation."

A projected budget shortfall led in April to a selective hiring freeze, restrictions on overtime and spending, and suspension of non-essential travel.

Moody's on Thursday also restored an Aa2 rating and stable outlook for the western Texas city of Odessa, which lost the rating in June 2024 due to extremely tardy annual financial audits.

Since November 2023, Odessa's finance department completed overdue audits for fiscal years 2022 through 2024 and filed a fiscal 2025 audit within a state-mandated timeframe, according to a city statement. 

"Regaining this rating reflects the hard work, dedication, and commitment of our finance department, city staff, leadership team, and city council," Mayor Cal Hendrick said in the statement. "Together, we have taken meaningful steps to strengthen Odessa's financial foundation and demonstrate that we are moving in the right direction."

It added the city will not pursue the reinstatement of its rating from S&P Global Ratings, which was also pulled in 2024.