Moody's upgrades Houston's GO rating after budget actions

Bloomberg News

Moody's Ratings on Tuesday raised Houston's general obligation bond rating a notch to Aa2 in the wake of recent moves that greatly reduced the city's structural budget gap.  

The rating agency pointed to "recurring and meaningful revenue enhancements and expenditure realignments" in Houston's $7.5 billion fiscal 2027 budget that slashed a projected budget gap to $26 million, or 0.83% of budgeted revenue, from an initial estimate of $209 million.

The budget, which includes $3.157 billion in general fund spending, taps excess revenue from the city's combined utility system enterprise system fund through a right-of-way fee for its use of public property.

In addition, trash collection was moved from the general fund to the utility system. Residential customers for the first time will pay a $5 monthly "administration fee" supplemented by a subsidy from the system. Subject to city council approval, the solid waste fee would go up in $5 increments between fiscal 2029 and 2032, when it would reach $25 and more fully cover administrative expenses.  

"These actions materially reduced budgetary gaps and strengthened the city's forward-looking financial flexibility, with governance considerations serving as a key driver of the rating action," the Moody's report said.

"The upgrade was also supported by expectations that declining pension liabilities will sustain an improved leverage profile and enhance the city's capacity to manage its sizable capital program," it added.

Mayor John Whitmire said he will continue to work to strengthen the city's financial position.

"With this news, combined with S&P Global Ratings' upgrading Houston's outlook to stable in June, actions by two major financial institutions signal that Houston is moving in the right direction and building a solid financial foundation for our great city," he said in a statement on Wednesday.

S&P cited "substantial progress" in reducing the budget gap when it revised its outlook on Houston's AA GO bond rating to stable from negative.

There was no immediate comment on Moody's action from City Controller Chris Hollins.

Moody's also upgraded Houston's convention and entertainment hotel occupancy tax and special revenue senior lien debt rating to A1 from A2 and assigned a MIG 1 rating to the city's upcoming sale of an estimated $215 million of tax and revenue anticipation notes. All of the ratings were given a stable outlook.

The nation's fourth-largest city has had a negative outlook since September 2024 for its AA GO rating from Fitch Ratings.