Moody’s Investors Service has sent Houston a dire warning about the need for the Texas Legislature to approve the Houston Pension Solution. In its latest update on Houston’s $3 billion taxpayer supported General Obligation debt, the agency cites the “lack of a sustainable pension plan to address growing pension liability” as a factor that could lead to a downgrade in the city’s credit rating.
“This is a clear indication of what will happen if pension reform is not approved in Austin,” said Mayor Sylvester Turner. “The city and Houston taxpayers cannot afford the increased borrowing costs that will accompany a rating downgrade. We have presented state lawmakers with a Houston solution to a Houston issue. Now, it is imperative that they approve it without upsetting the delicate balances we have struck. The stability of our finances is at stake.”
Houston’s current credit rating from Moody’s is Aa3 with a negative outlook. In summarizing its rationale for the rating, Moody’s writes, “The City of Houston’s Aa3 rating reflects a large and regional economy whose recent performance has been tempered by decreases in oil prices, and underperforming revenues, contributing to a weakened but still adequate financial performance. Additional considerations reflect high fixed costs, large unfunded pension liabilities (among the highest in the nation), as well as property tax caps. Also considered is the city’s current reform plan, which if approved, could positively impact the city’s long term fiscal position and stabilize the credit profile.” Moody’s is reserving any reconsideration of the existing rating until the conclusion of the legislative session in May.
If the legislature fails to pass reform, the General fund will incur over $130M in additional charges next fiscal year.
“Our current credit outlook remains intact, but that outlook relies heavily on the outcome of the Houston Pension Solution in the Texas Legislature,” said City Controller Chris Brown. “Moody's most recent credit analysis reaffirms that the time for Houston’s pension reform is now.”
After receiving earlier endorsements from the Texas House Committee on Pensions and the Texas Senate Committee on State Affairs, the Houston Pension Solution is now awaiting floor votes in both chambers. The reform plan eliminates $8.1 billion in unfunded liability, caps future costs, does not require a tax increase and is budget neutral. The measure has strong support from City Council and two of the three employee pension systems as well as numerous other stakeholders.