Pension concerns shadow Dallas debt sale

Dallas will offer $567.6 million of debt in two competitive sales Thursday as city officials continue to work on plans to fully fund pensions within 30 years and rating agencies warn of potential credit impacts from growing unfunded liabilities. 

The nation’s ninth largest city is selling $197.19 million of combination tax and revenue certificates of obligation, which carry serial maturities from 2025 through 2033, according to the preliminary official statement. Bidding will also be held on $370.4 million of general obligation refunding and improvement bonds maturing in 2025 through 2043.

S&P Global Ratings addressed the potential trajectory of the debt’s AA-minus rating with a stable outlook. 

“We could lower the rating if changes to pensions do not successfully address growing unfunded liabilities or if debt service, pension, and other postemployment benefit carrying charges were to increase to levels that negatively affect budgetary flexibility or further weaken performance,” S&P credit analyst Stephen Doyle said in a statement. 

“Assuming all other credit factors remain stable or improve, we could raise the rating if Dallas were to reduce unfunded pension liabilities meaningfully in a way that we view them as sustainable and that improve funding,” he added.

Fitch Ratings, which rates the debt AA with a stable outlook, said while the city is equipped to weather future economic downturns with its gap-closing capabilities and healthy reserves, “elevated debt and retiree benefit outlays will maintain some pressure on the city’s budget management practices.”

It added that failure to move toward actuarially determined pension contributions could lead to a rating downgrade. 

Cheiron, the city’s actuary consultant, recommended adopting actuarially determined contributions to the Police and Fire Pension System, which ended 2022 39.1% funded with an unfunded liability of $3.2 billion, up from $3 billion in 2021.

The Employees’ Retirement Fund is in better shape, with a funded ratio of 73.1% and unfunded liability of $1.41 billion.

In response to emailed questions, the city’s communications office said Dallas officials are working with the two pension funds and the City Council’s Ad Hoc Committee “to develop plans to submit to the (Texas Pension Review Board) prior to November 2024, well in advance of the September 2025 due date.”

It added options that may or may not include pension bonds are being reviewed.   

A 2017 state law, spurred by projections the city’s public safety pensions would become insolvent within 10 years, made several changes, including increasing contribution rates by both the city and its employees.

The GO bonds will refinance debt issued in 2013 and 2014, and along with certificate proceeds, fund various infrastructure improvements. The city said it’s estimating a net present value saving of about $13.5 million or about 5% of refunded par. 

Earlier this year, Dallas sold nearly $49 million of GO bonds to pay for damages and interest resulting from a 2014 lawsuit brought by natural gas drilling company Trinity East Energy LLC.  More debt could be coming from a 10-part, $1.25 billion GO bond program on the May 4 Dallas ballot.