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Memorandum ‘we October 6, 2016 ww CITY OF DALLAS © Honorable Mayor and Members of the City Council scr Fitch Ratings Downgrade of Outstanding City of Dallas General Obligation Debt Today, Fitch Ratings (Fitch) downgraded the City of Dallas’ $1.7 billion outstanding {general obligation bond rating from A+ to AA. Fitch based its action on concems about the Dallas Police and Fire Pension System's (System) unfunded pension liability and the risks posed by the System's deferred retirement option plan which have contributed to liquidity challenges for the System. Fitch also changed the rating outlook from ‘stable" to “negative,” citing the need for successful pension reform efforts, ‘The downgrade only affects the City's general obligation debt. A copy of the complete: report is attached. Please let me know if you have any questions. M, Elfed Bis M. Elizabett Reich Chief Financial Officer © AC. Goi cay Maraer Lay Cate, iy Alona (rag Kyte Rasen, hy Somes Soil Se Marte ge Bye ett Cy Mager 20 Campbell iy Mage sith ben, 2, Ae tyre Hat ledanay Asan C9 auger Se) apt Assn hy arg Sea Sys, ute omer Otc ERGs, iar ihe hy aap Mayer Com “ee Cth Wink Pe io nd rp ichRat FITCH DOWNGRADES CITY OF DALLAS, TX GOS ‘TO 'AA' ON PENSIONS; OUTLOOK NEGATIVE ich Ratings-Austin-06 October 2016: Fitch Ratings - Austin - 6 Oct 2016: Fitch Ratings has downgraded the fllowing City of Dallas, Texas ratings to"AA" from "AA Issuer Default Rating (DR) to; SI. billion oF oustanding limited ax general obligation (GO) det The Rating Outlook is Negative. SECURITY ‘The GOs are payable from the city's ad valorem tax levy, limited to $2.50 per $100 of taxable assessed valuation (TAV).Certfiates of obligation (COs) ae additionally payable from surplus revenues ofthe city’s uly system. KEY RATING DRIVERS Downgrade Reflects DPFP Pension Challenges: The downgrade eects heightened concern abort the city’s unfunded pension labiliis given the reporting of updated plan valatons since the time of Fite’ last review that increased the total unfunded pension lability tothe city's general fund by about 40% and partiular concerns about the city’s DPFP (combined) plan pertaining to persistert investment losses and risks highlighted by recent developmen related to its dfered retirement option pan (DROP). Financial Resilience: The ciy's’AA rating contines to reflect trong operating performance enabled by robust economic and revenve growth prospeets, strong contol over revenucs, conservative budgeting , solid reserve funding, and longe-term ibilites that Fitch expect to remain a moderate burdon on resources iFeurent extensive pension reform efforts are sucessful, Economie Resource Base Dallas is aconter for technology, rade, Finance and major medi stor and leisure destination inthe state, 51 centers it also ranks as the top Revenue Framework: ‘ea’ factor assessment Positive growth prospect are based on expectations fr generally postive trends in taxable value and sales tax revenues and ongoing economic development. The assessment ls reflec the city’s ample independent revere raising capacity Expenditure Framework: fictor assessment The cis pace of spending i expected tobe generally in line with revenue growth given its ‘mature residential base. The assessment considers the city’s expenditure Nexbiity derived fom workforce cst controls and conservative budgeting practices. However, Fich expects that pens contributions wil likly increase as the city works (o bolster plan sustainability, resulting ia Somessat elevated earrying costs. The cys debt amortization rate rap ‘Long-Term Liailty Burden: ‘a fctor assessment Long-term liabilities comprise about 6% of unfunded pension obligations and estimated debe 40%. The long-term lability burden currently represents a moderate 20% of personal income, The rating assumes that pension reform efforts, in conjunction with continued economic growth, will ‘maintain the burden at abou this level or lower Operating Performance: ‘as fator assessment The city of Dallas’ gap-closing capabilies and healthy reserves postion ito maintain financial resilience through an economic downturn, RATING SENSITIVITIES Pension Reform Efforts: Maintenance of the current rating wil require sucessfl pension reform efforts that stabilize the level of te city's obligations and reduce the risks presented by the deferred retirement option plan. Fitch expects information on pension reforms to inform the rating during the nent ing eye CREDIT PROFILE Dallas is located in north-central Texas and ranks among the top 10 cities nationside by Population. The city serves a corporate headquarters for ATT, Southwest Ailines, Texas Instruments, 7-Eleven, Ine, HollyFronter Corp. Pizza Hut, Inc. and other large corporate concems. Top employers inthe education, government and helt services sector lend stability to the cys employment base The city’s ole as a wholesale and real trade center i enabled by a strong transportation network of airports, rail and interstate highways. The Dallas Arca Rapid Transit (DART) provides the city with easy acesss 0 highly skilled work force to suppor its growing technology, finance, business and meal service setos. Driven by professional service, construction, mining and trade setor row, the city’s employment base isin its sixth consecutive year of expansion. Top taxpayers represent utility, ar ransporaton, developers, cal sate, manufacturing and retail industries, The tax base is without concentration, Revenue Framework City of Datla general fund operations are supported by adverse mix of d valorem tax revenves (4300) sales tax revenues (24%), service charges (17%), and franchise Fes (12%). Revenue growth has exceeded inflation but has been somewhat below GDP growth over the last decade, “Medium-irm growth prospects appear likely to outstrip national ODP based on the sirength and trajectory of growth in the tadrtransporation, professional bsinesslservices and leisure! hospitality secor, New development continues as indicated by tree years of consecative growth in the cin’ residential and commercial constuction valuaton/building permit activity through 2015. The Federal Reserve reports that despite the rapid home-prce appreciation inthe metroplex resulting fom strong demand and tight inventories, Dalla home prices remain much more affordable than those in oter large metros suchas New York and Los Angeles, contributing (0 affordable living costs. However, an analysis of home price and economic tends ove time leads Fitch to bliove hme prices may be above longterm sustainable levels (Tor more information, see FitchsU.S. RMBS Sustainable Home Price Report (Fits Quarter 2016 Update) Amended, May 26,2016). ‘The city’s fiscal 2016 tax eae of $0.797 per $100 of TAY provides ample legal revenve-aising capacity below the statutory cap of $2.50. Ia proposed ta rate results in an 8% year-over-year levy increase (based on the prior yeu’ vale), the rate increase may be subject io eleston if petitioned by votes. Expenditure Framework Publi safety, 60% of spending, has grown a a pace suppored by revenue growth over the past Five years Fitch expects spending to continue in line with revenue growth based on relatively mature ‘residential tx base, The assessment is informed by the city’s elevated carrying costs, 25% of fiscal 201S governmental spending which Ftch expects to continve to limit flexibility given demands presented by the ci’ porly funded combined plan. Carrying costs reflect a apid 71% amortization schedule and declining debt service trajectory; Fitch does not expect the cot of future

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