Fitch Ratings lowered Dallas' general obligation bond rating to AA from AA+ on Thursday, citing concerns over the city's unfunded pension liabilities and recent developments at the $2.8 billion Dallas Police & Fire Pension System.
The police and fire retirement system reported about $6.9 billion in unfunded pension liabilties at the end of 2015, a 40% increase from the previous year, due primarily to realized private equity and real estate losses. Unfunded liabilties at the city's other defined benefit plan, the $3.3 billion Dallas Employees' Retirement Fund, more than doubled in 2015 to $2.2 billion.
In addition to those increases, high withdrawals from the police and fire system's DROP program in recent weeks are concerning, Fitch said.
“A deferred retirement option plan typically provides participants with the option of a lump-sum benefit on demand in addition to a monthly retirement benefit upon employment termination, which for most DROP programs is limited to 3-5 years,” the ratings agency said. “The DPFP DROP, by contrast, has had uncharacteristically long participation provisions, and as a result, the DROP balance made up a high 56% of total DPFP plan assets as of Jan. 1, 2016. The ability of retirees to withdraw these funds on demand exposes the plan to the risk of a materially reduced asset position, which in turn would pose near-term liquidity challenges and further increase the net pension liability. In recent weeks, the plan has been confronted with an unexpectedly high level of withdrawals that, while they appear to have abated, are expected to require investment portfolio rebalancing.”
Kelly Gottschalk, executive director of the police and fire pension plan, was not immediately available for comment.