The city’s unfunded pension liability is weighing on Fort Worth’s financial picture as Moody’s Investors Services downgraded city general obligation bonds for a second straight year.
Moody’s, one of the nation’s three credit rating agencies, lowered a rating tied to $657 million in outstanding debt to Aa3 from Aa2 and revised its outlook to “negative” from “stable.” Moody’s warned investors that the city’s pension hole will continue to put pressure on the city’s operations, its ability to provide services and make capital investments. The debt service is paid from the city’s operating budget, which is funded by property and sales tax revenues.
In the report issued Thursday, Moody’s said the downgrade “reflects the city’s large and growing unfunded pension liability and growing fixed cost burden, which includes annual pension, other post-employment employment benefits (such as retiree health insurance) and debt service requirements.”
In May 2016, Moody’s downgraded its rating on $165.2 million in general obligation bonds.
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The city is not issuing any new general obligation bonds this year. A lower rating typically means that it will cost the city more to borrow money in the future.
Next year, the city anticipates asking voters in May to approve $399.5 million in bonds to build eight new parks, a fire station and do extensive street repairs, among other things. That would be a 37 percent increase over the last bond package in 2014.
We agree it’s not perfect. We’ve acknowledged we’ve got additional work to do and we’ve been doing that. We’re very well aware of where we are. They seem to want change faster than what we’re currently doing.
Aaron Bovos, Fort Worth chief financial officer
Aaron Bovos, Fort Worth’s chief financial officer, said Monday that he doesn’t anticipate the downgrade to have much impact on the 2018 bond program, though it could affect a planned 2022 issue.
“We spent the majority of our time talking about pension liability,” Bovos said of the city’s meeting with Moody’s. “We agree it’s not perfect. We’ve acknowledged we’ve got additional work to do and we’ve been doing that. We’re very well aware of where we are. They seem to want change faster than what we’re currently doing.”
The city established a task force more than a year ago to study the pension issue and develop ways to make it sustainable over the long haul. It is expected to provide the Texas Pension Review Board with a restoration plan by December. The state board is requiring the plan because the city has had three consecutive years in which the pension amortization rate is greater than 40 years, which is considered a less desirable time goal for when the pension should be fully funded.
And in May, the council approved hiring Philadelphia-based PFM Group Consulting, PFM Financial Advisors and PFM Asset Management for actuarial and consulting services on the pension issue. The contract is for $285,106.
Fort Worth is not alone in dealing with pension issues. State and local public pensions nationwide are underfunded by $5.6 trillion dollars, according to a 2016 report by the American Legislative Exchange Council.
Closer to home, Texas Gov. Greg Abbott signed a law in May to save the troubled Dallas police and fire pension system. Dallas taxpayers will begin pumping tens of millions more dollars into the system, which will also make benefit cuts.
In December, Fort Worth reported its pension liability at $3.4 billion, of which $1.4 billion is unfunded. The unfunded liability is the difference between promised benefits and what’s on hand to pay for them. After some time at being at “infinite,” or never being able to pay it off, the unfunded liability dropped to 55.7 years in 2014, but rose to 72.5 years in 2015.
That restoration plan could include additional employee contributions to close the gap, as well as seeking greater investment returns. The City Council has said it doesn’t want to push the added burden onto taxpayers. The city already contributes about 20 percent to fund employee pensions while employees pay in about 10 percent. City employees, police and fire are under one blended system, although the firefighters have talked about separating from the fund.
Moody’s said Fort Worth needs to find at least $40 million to meet the “tread water” benchmark for its pension liability, or the amount needed to prevent the unfunded pension liability from growing.
The city has about 6,300 active employees and more than 4,100 others receiving pensions.