Pension bond approval boosts Houston rating outlook

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DALLAS – Moody’s Investors Service elevated Houston's rating outlook to stable from negative ahead of a $645 million refunding deal expected at the end of the month.

The shift on Houston's Aa3 rating comes after voters approved $1 billion of pension obligation bonds to allow the city to restructure its public pensions.

“The stable outlook reflects the long-term trajectory of the credit profile which resulted from the recently passed pension reform as well as the strength of the city's economy, and increasing liquidity which contributes to a stable credit profile over the medium to longer term,” analysts wrote in the report Monday.

In addition to the $1 billion of pension bonds, voters approved nearly $500 million of public improvement bonds.

Houston Controller Chris Brown called the outlook revision "a direct result of voters supporting the issuance of $1.01 billion in pension obligation bonds and, thus, finalizing the ‘Houston Pension Solution.’ This revision demonstrates why achieving meaningful pension reform was so critical, and represents a significant step toward a brighter financial future for the city.”

Analysts also considered the impact of Hurricane Harvey, which inundated Houston after it came ashore Aug. 25. Despite the storm, Houston saw its sales tax revenue climb 2.43% year-over-year for September, according to Texas Comptroller Glenn Hegar’s latest report.

“Houston's large and robust economy is expected to remain largely unimpaired by damages related to Hurricane Harvey because current damage estimates suggest modest potential impact to assessed values, and rebuilding has already begun in several parts of the city,” the report said. “In the near term, the economy could face some sluggishness until damage assessments are complete and rebuilding is well underway.” Houston’s primary revenue source is property tax, which is capped by law.

The city issues a tax and revenue anticipation note annually for cash because property taxes generally arrive by Feb. 1, and cash begins to run narrow by the summer. In fiscal year 2017, the city issued $200 million of TRANs, which will be repaid before the end of the fiscal year. Officials expect annual issuance of TRANS sized between $150 and $250 million, will continue in the near to medium term.

About half of the proceeds of this month’s deal will be used to take out existing commercial paper, and the rest will be used to refund certain maturities of existing debt for an expected net present value savings of over 7%, and no extension of final maturity, according to Moody’s.

The city also plans to issue its pension bonds before the end of the year, officials said.

With the approval and expected delivery of the bonds, the city can begin the pension reform plan, which provides cash infusion to two of the three plans, trims benefits and includes future cost containment measures for the city.

“Although the outstanding debt burden will increase, the pension liability and cost savings will more than offset the increase in the city's debt burden from issuance of the POBs,” analysts said.

Moody’s calls Houston’s direct debt profile “manageable,” at 1.4% of 2018 assessed valuation.

“Including the anticipated POBs, the debt burden will increase to 1.8%,” the report said. “Given the quantity and size of the overlapping taxing entities, the overall debt is somewhat elevated at 4.7%.”

The city's adopted capital improvement plan calls for $550.3 million in general obligation bonds over the next five years, Moody’s said.

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Ratings City of Houston, TX Texas