Voters’ approval this month of a $1 billion bond issue locking in Mayor Sylvester Turner’s landmark pension reforms spurred Moody’s to issue a report upgrading the city’s credit outlook Monday.
The ratings service left Houston’s overall rating unchanged at its fourth-highest grade, Aa3, but revised the city’s credit outlook from “negative” to “stable.”
Technically, the rating was issued because the city is preparing to refinance $645 million in previously issued general improvement bonds, a routine transaction typically done to secure lower interest rates.
But the report repeatedly stresses the effect of the pension reforms voters secured at the polls Nov. 7, which, in combination with the region’s strong economy, led analysts to adjust the city’s credit outlook.
“Although the outstanding debt burden will increase, the pension liability and cost savings will more than offset the increase in the city’s debt burden from issuance of the (pension obligation bonds),” the report states. “Long-term, the financial performance should benefit from stabilized cost pressures as a result of pension reform.”
Turner cheered the report in a late Monday statement.
“The voters delivered the ultimate expression of faith in our efforts to restore Houston government to financial health,” the mayor said, “but a ratings boost from Moody’s is a powerful endorsement of our work.”
The item’s passage means the city can follow through on its plan to infuse $750 million into the police pension and $250 million into the municipal workers’ pension to improve their funding levels and lower Houston’s annual payments into its pension funds.
It also prevents Turner’s reforms from being partly unwound. The reform package will recalculate the city’s payments to erase that debt over three decades, cut benefits by $2.8 billion and include a mechanism to cap Houston’s future pension costs.
The city’s pension crisis began when leaders agreed to a series of dimly understood benefit increases between 1997 and 2001 that led the city’s costs to spike. In response, the police and municipal pension funds agreed to cuts but also let the city pay what officials thought they could afford rather than the amount needed to fully fund benefits each year. That helped create a debt of $8.2 billion.
The mayor offered to issue the bonds as an incentive to get the police and municipal pension systems to agree to another round of cuts and to bolster both plans’ funding levels. The city owed the money whether it paid it through the bonds or through higher annual payments over time, but a failing vote at the polls would have rescinded some of the benefit cuts.
To achieve an actual credit upgrade rather than just a newly “stable” outlook, the Moody’s analysts stated, voters also would need to remove a 13-year-old cap that limits what the city can collect in property taxes, its main source of general revenue.
This is a point that Turner, who opposes the revenue cap and has vowed to ask voters to rescind it, stresses frequently.
The city also could achieve an upgrade by bringing city operating costs into line with annual revenues, the report states.
Turner’s statement notes that a rosier credit outlook could save taxpayers money by giving borrowers more confidence in Houston’s books, perhaps enabling it to secure lower interest rates not only on its routine refinancing efforts but also when it issues the pension debt later this year.