Moody's Investor Service announced it has downgraded the city of Dallas' general obligation bond rating to AA3 from AA2 because of the city's exposure to unfunded pension liabilities.
Moody's also announced Oct. 14 on its website that it had changed its outlook on the city to negative. The negative outlook “reflects the challenging and complex landscape that the city must navigate to rein in its growing pension predicament,” Moody's said in the announcement.
The $2.8 billion Dallas Police & Fire Pension System reported about $6.9 billion in unfunded pension liabilities at the end of 2015, a 40% increase from the previous year, due primarily to realized private equity and real estate losses. Unfunded liabilities 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.
“At the same time, the system faces a severe threat of insolvency due to significant write-downs in its investment portfolio, expected negative cash flow in the coming years even if investment returns are relatively cooperative, and an increase in employee withdrawals from deferred retirement option plan … accounts,” Moody's said.
Fitch Ratings expressed similar concerns earlier this month regarding pension liabilities and the high number of DROP account withdrawals when it lowered Dallas' general obligation bond rating to AA from AA+.
Kelly Gottschalk, executive director of the police and fire pension plan, said the plan has been working with the city since last December on managing the pension liability issue.
“I think we're getting very close to doing an election (on possible changes) on the member side, and we are hopeful the city will come forward with part of the solution,” Ms. Gottschalk said.