Moody’s Investors Service downgraded Dallas' general obligation bond rating to A1 from Aa3 on Dec. 9, citing ongoing challenges at the $2.7 billion Dallas Police & Fire Pension System.
It is the second time this year Moody’s has downgraded Dallas’ credit rating on police and fire pension fund concerns.
“A number of credit-related events have occurred since our last review (and downgrade) in October 2016. Factors include: a material increase to the previously stated potential liability related to a back-pay referendum lawsuit, considerable withdrawals from DROP accounts through November; putting a short-term strain on the fund's liquid assets, and the unveiling of the city's proposal to bring the pension fund back to long-term solvency,” said the downgrade report. “Finally, city officials have made multiple statements suggesting it may consider bankruptcy should a significant adverse judgment regarding the back-pay lawsuit and a substantial cash infusion for the unfunded pension liabilities be required over a short period of time.”
While calling the pension fund’s decision Dec. 8 to immediately suspend DROP withdrawals, “positive,” Moody’s also said that the “length of the decision’s effectiveness” and the potential for a legal challenge by participants remain ongoing credit concerns.
The pension fund board voted Dec. 8 to halt withdrawals from the Deferred Retirement Option Plan, three days after Dallas Mayor Mike Rawlings filed a lawsuit against the pension fund, arguing the pension fund's decision to continue making lump-sum DROP payments, totaling nearly $500 million over the past few months, could bring insolvency in 10 years as opposed to the previously projected 15 years. The pension fund’s funding ratio is currently estimated at 36%.
Dallas remains on review for another possible downgrade, with a decision expected in the next 60 to 90 days, Moody’s noted. Considered in the review will be the city’s and pension fund’s reform plans, which both include changes to the DROP program, raised employee and city contributions, and reduced cost-of-living adjustments. The reforms require legislative approval.
Also on Dec. 9, Standard and Poor’s Global Ratings put Dallas’ AA general obligation bond rating on credit watch with negative implications because of the funding challenges at the police and fire pension fund. A decision from S&P to change or maintain Dallas’ rating is expected within 90 days.