Much doom was predicted if voters approved a trio of charter amendments ostensibly aimed at allocating more money for the city’s police department and delivering accountability and transparency at City Hall. A new memo sent to the Council Friday seems to be early validation of those concerns, as Moody’s Investor Service revised its outlook on the city’s debt service from “stable” to “negative” last week. The credit opinion cites one charter amendment in particular for the change.
A group called Dallas HERO backed the three charter amendments, two of which passed. Proposition S would require the city to waive immunity from lawsuits, allowing residents to sue the city for not abiding by its charter, ordinances, or state law. Proposition T tied the city manager’s salary and continued employment to the outcome of a yearly residential satisfaction survey. Proposition U allocated 50 percent of all new revenue to shore up the police and fire pension, which is experiencing a roughly $3 billion shortfall. It would also require the city to raise the starting wage for police officers and maintain a police force of 4,000. (The city’s current force is around 3,100 and at its peak was around 3,600 in 2016.) S and U won at the polls.
City leaders warned prior to Election Day that Proposition U in particular would hamstring the city’s ability to respond to the city’s other needs. City staff estimates it would cost at least $175 million just to hire the additional 900 officers, including training and outfitting them. The list of new revenue sources includes nearly every aspect of city operations: asset forfeiture revenue, property taxes, hotel occupancy taxes, court fees, open records fees, and public improvement district taxes.
Moody’s report does not downgrade the city’s credit rating; it remains (at least for now) at A1, which means the general obligation bonds issued by the city have good qualities but may be slightly more risky long term. Rather, as interim City Manager Kimberly Bizor Tolbert wrote in last week’s memo, it is an “indication of an expected direction of the credit rating’s movement to be reviewed over the next 18-24 months.”
Moody’s cited concerns about the city’s liquidity, whether it had cash on hand to nimbly address any fiscal issues that come up in light of Proposition U’s passage. The city’s plan to infuse the Dallas Police and Fire Pension System with $11.2 billion over the next 30 years is a positive, the report said, but the requirements of Proposition U “reduced financial flexibility and the expected negative impact to the pension liability is likely to weigh on the credit profile.”
“The city’s plan to incorporate the mandates from Proposition U will be a key focus in future reviews.”
General obligation bonds work like this: the city promises to use its tax revenue to pay back bonds, including interest and principal. General obligation bonds are frequently used by cities, counties, and school districts to fund expensive capital projects. For instance, proceeds from the 2024 bond will help pay for a variety of projects, including road construction, a new police academy, new libraries, and improvements to fire and police stations. The bonds are sold through competitive bids, with the city publishing a notice of sale. Financial institutions then bid to buy the bonds. The bidder with the lowest interest rate typically wins.
Should Moody’s downgrade the city’s general obligation credit rating, it would cost more for the city to borrow money. Bond buyers look at those credit ratings as an indication of how risky the investment is. A high credit rating indicates that the city will likely not default on its debt and repay it with interest. The lower the credit rating, the higher the risk, and the higher the interest rate.
A city spokesperson told the trade publication Bond Buyer that Dallas’ 2025 budget allocated more than 100 percent of year-over-year general fund revenue growth to public safety initiatives. The spokesperson said that the city feels it is already in compliance with the proposition.
Moody’s new credit opinion is not the first time analysts have pointed to impending trouble. In April, Fitch Ratings and S&P Global Ratings warned that the pension funding issue could leave the city vulnerable to downgrades in its credit ratings. On November 1, Kroll Bond Rating Agency affirmed the city’s AA+ rating on its general obligation debt, but revised its outlook from “positive” to “stable,” citing the low funding of the pension. That report, however, had a sunnier outlook: “the City’s sizable tax-base and strong financial position help to largely mitigate the burden posed by elevated pension liabilities, in KBRA’s view.”
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