DALLAS – Dallas could see a downgrade of its AA credit rating if the Texas Legislature fails to provide a new governing structure for the troubled Police and Fire Pension Fund, according to Fitch Ratings.
"Fitch believes that such legislation has reasonable prospects for success and keeps Fitch's assessment of carrying costs and operating performance from deteriorating further at present," Fitch analyst Rebecca Meyer wrote in a report published Monday.
"Fitch would view additional credit deterioration as a likely outcome if current efforts result in ineffectual or no pension reform in the 2017 legislative session," she added.
Dallas already lost one double-A rating amid its pension problems in December, when Moody's Investors Service downgraded the city to A1 from Aa3, maintaining a negative outlook.
In the Texas legislative session that begins Tuesday, Dallas has hired state Sen. John Whitmire, D-Houston, as an advisor on legislation. As a member of the state Senate, Whitmire is allowed to work for a city that has business before the Legislature. But Whitmire is expected to recuse himself from votes on matters affecting the pension.
Fitch has a negative outlook on the Dallas rating.
"The city's AA rating continues to reflect strong operating performance enabled by robust economic and revenue growth prospects, strong control over revenues, conservative budgeting , and solid reserve funding," Meyer said.
Dallas' fiscal 2015 carrying costs for debt service and retiree benefit outlays were "elevated" at 25% of governmental spending, Meyer said. That contributed to a single-A category assessment for expenditure flexibility, she said.
The city and DPFP are seeking consensus on a package of pension reforms to lower benefits and stabilize the system, although implementation requires legislative approval.
"Fitch believes a reform proposal endorsed by both groups will receive a better reception at the legislature and improve odds for approval," Meyer said. "Lack of meaningful DPFP pension reform would put additional upward pressure on pension contributions, which have been driven higher by the magnitude of the DPFP net pension liability, now at nearly $7 billion."
Moody's in its December downgrade cited two threats to the city's finances that Dallas Mayor Mike Rawlings outlined at the November meeting of the Texas Pension Review Board.
In addition to the potential failure of the public safety pension system, an unfavorable ruling on a lawsuit involving back pay for police could cost the city $4 billion, according to Rawlings.
The Moody's action came the same day S&P Global Ratings placed Dallas' AA rating on watch for possible downgrade.
Rawlings told the pension review board in November that the combined impact of the pension fund and court case could come to $8 billion, which could lead to a potential bankruptcy. Rawlings and the city maintain that Dallas is not legally responsible for the $4 billion pension liability.
With the pension crisis worsening, the Dallas City Council decided by an informal vote to delay plans for an $800 million bond election in May until November at the earliest.
