DALLAS – Dallas will issue general obligation bonds to pay off $235 million in court settlements over police pay, resolving a crisis that officials once feared might bankrupt the city.
The city council voted unanimously last month to settle the remaining employees’ lawsuits over payments that date back to the 1980s.
“Kids are here that were probably not even born then – 30 years we’ve been dealing with this,” said council member Ricky Callahan. “It’s great to get something we can agree to and move arm-in-arm together.”
Dallas faced six police back-pay lawsuits, with two tried in Rockwall County and four in Collin County. The lawsuits stem from a 1979 referendum that adjusted pay differentials between grades in sworn ranks of the police department. The plaintiffs argued that the pay differentials were to be permanent, rather than a one-time adjustment, as the city argued.
After decades of litigation, Dallas Mayor Mike Rawlings warned in 2016 that the twin threats of a rapidly declining Police and Fire Pension Fund and the threat that the city could lose the police lawsuits raised the threat of bankruptcy. In the year before, the Police and Fire Pension Fund had seen a $500 million drain amid a flood of retirements from officers fearful the fund would run dry.
"It is horribly ironic that a city that has enjoyed such tremendous success, a city that has made Texas so proud and so strong, is potentially walking into the fan blades of what might look like bankruptcy," Rawlings told the Texas Pension Review Board on Nov. 3, 2016. "Shame on me, shame on you, shame on all of us if we allow that to happen."
A month after Rawlings’ statement, Dallas suffered its third downgrade in two months, falling to A1 from Aa3 on the Moody’s Investors Service scale.
In 2017, events began to turn the city’s way. The Texas Legislature rewrote the rules for governing the pension fund, giving the city more control over its investments. Until then, the city by law had no control over distribution of funds or any say in how funds were invested.
At the Dallas council’s June 27 meeting, council member Lee Kleinman said he was ready to get the lawsuit off the city’s list of worries.
“While some of these settlements may not be that pleasant, I really appreciate that this council has moved forward to clear the decks of items such as this, such as the pension, such as other items, just try to move this city forward rather than have them hang around and kick the can down the road,” Kleinman said.
Rawlings, whose tenure has been circumscribed by the pending lawsuit settlement and the struggle to restore the pension plan, expressed relief at the latest settlement.
"I'm very, very happy that we've resolved this," Rawlings said. "This is a major clearing of the air, and there are no clouds over us anymore with these lawsuits."
With the resolution of the lawsuits, Moody’s recognized the benefit to the city’s credit.
“While the precise amount of the liability to the city, if the city had lost in trial, was unknown, most recent estimates placed the liability at around $4 billion, an amount that far exceeds the available liquidity of the city and was more than double the city’s already outstanding debt,” said Moody’s senior analyst Denise Rappmund.
“The total judgment of approximately $235 million is manageable for the city, considering Dallas’ expansive and rapidly growing tax base,” Rappmund added. “General obligation bonds that the city plans to issue to satisfy the judgments represent a very small 0.2% of the 2018 value, which shrinks further when considering strong growth expected in fiscal 2019 from new construction and property appreciation.”
The city will price $58.7 million of GOs competitively on Tuesday with proceeds going toward settlement of four of the lawsuits. They are identified as refunding bonds, but the preliminary official statement specifies that the debt being refinanced is the legal settlements as opposed to outstanding bond debt.
PFM Financial Advisors and TKG & Associates are advising the city on the deal; Norton Rose is bond counsel.
Maturing through 2038, the bonds are rated AA by Fitch Ratings and AA-minus by S&P Global Ratings. Outlooks are stable.
The city said it expects to issue more GO bonds for remaining settlements this year or next.
The state district court will still need to enter a judgment to finalize the settlement in Rockwall County. However, the council’s June 27 vote is a critical step in codifying the settlement agreement, which was verbally agreed to in late spring.
As the city prepares bonds for the court settlements, it is also going forward with bonds for more common city services. At its June 27 meeting, the council voted to authorize plans for $165 million of waterworks and sewer system refunding bonds as Series 2018C.
In November, voters approved a $1.05 billion bond package that included 10 different propositions for projects and upgrades throughout the city, including more than $500 million for streets and transportation, $260 million for parks and recreation, and the remainder for Fair Park, flood control, public safety facilities, city facilities, and cultural arts.
“While these bonds come on the heels of a very large $1.05 billion bond package approved by voters in 2017 for various improvements across the city, the phased approach the city has historically taken with bond issuance will keep the debt burden stable,” Rappmund said of the settlement transactions.
Landlocked by suburbs, Dallas continues to grow modestly in a booming metro area. The city estimates market value growth of about 9% for fiscal 2019 and plans to use a modestly declining annual market value growth assumption over the next five years.
“New development and solid market value growth should help sustain financial stability in the near term, which contributes to the outlook,” S&P analyst Andy Hobbs said.
Recent new developments in the city include a $50 million investment from Vistaprint, which will build a logistics facility in southern Dallas with an estimated 600 new jobs. Smoothie King and JetSuite recently moved their headquarters to the city. RedBird Mall, a largely vacant shopping mall in southern Dallas, is being renovated into a mixed-use facility with hotel, apartment, office, entertainment, retail, and park uses.
On July 2, S&P raised its rating on the Dallas Convention Center Hotel Development Corp. series 2009A and B hotel revenue bonds to A from A-minus based on the strength of the city’s moral obligation.
The 1,016-room Omni convention center hotel, which opened in 2011, is financed through hotel occupancy tax revenues that have continued to rise along with higher rates.
The debt service requirement steadily increases to about $40.9 million in 2026. Should hotel tax revenues be insufficient to cover the annual debt service requirement, the trustee will be able to access a debt service reserve fund, funded at the maximum annual debt service payment.
A major convention city, Dallas is home to about 27% of the metro area’s hotel rooms, according to S&P.
