Dallas rating outlook revised to negative by Moody’s

Voter approval of a Dallas public safety spending measure sparked an outlook revision to negative from stable for the city’s ratings by Moody’s Ratings.

Proposition U requires the city to appropriate at least 50% of annual revenue increases over the previous year to fund public safety pensions, boost police starting pay, and maintain a police force of at least 4,000 full-time sworn police officers compared to about 3,100 currently. 

The measure, which was placed on the Nov. 5 ballot via a signature campaign, passed with 50.47% of the vote, according to unofficial results. 

Moody’s said the negative outlook reflects the expected credit impact of the measure, including reducing the city’s fiscal flexibility and boosting the Police and Fire Pension System’s liability by increasing police starting salaries and the number of officers.

“Although the additional revenue going to (the pension fund) is positive, the reduced financial flexibility and the expected negative impact to the pension liability is likely to weigh on the credit profile,” Moody’s said in a report released Thursday. “The city’s plan to incorporate the mandates from Proposition U will be a key focus in future reviews.”

There was no immediate comment from the city about the action taken by Moody’s. A Dallas spokesperson provided information sent to the city council that said the fiscal 2025 budget allocated more than 100% of year-over-year general fund revenue growth to police and fire initiatives and that the administration believes the city is already in compliance with Proposition U, which amends the city charter. 

The city council adopted a plan in September that ramps up contributions to the Dallas Police and Fire Pension System, which is just 39% funded, with a $3.2 billion unfunded liability, to actuarially determined levels over five years to comply with a Texas law aimed at keeping the retirement system solvent.

Moody’s called additional contributions to the Dallas public safety and employee retirement systems “a positive step.” 

“However, the increased contributions are not expected to meet the tread water level and the plans’ cash flow remains very weak,” the report said. “If investment returns lag plan targets or if other plan assumptions are not met, the city will need to contribute even more (absent benefit changes), which will further restrict financial flexibility. Given the economic strength, revenue growth will help the city balance budgets but large expenditure cuts may be necessary.”

Along with the outlook change, Moody’s affirmed the city’s A1 general obligation, Aa2 waterworks and sewer system, A2 tax increment contract, and Baa1 hotel revenue bond ratings.

Kroll Bond Rating Agency on Oct. 30 revised the outlook on Dallas’ AA-plus GO rating to stable from positive, citing “the limited improvement in the city’s pension funding metrics to date, which may limit future financial flexibility.”

Ahead of an April Dallas GO bond sale, analysts at S&P Global Ratings and Fitch Ratings warned the city could face downgrades if its pension funding troubles are not addressed. The debt was rated AA-minus by S&P and AA by Fitch, both with stable outlooks.