Moody’s Gives Houston Negative Outlook

Ryan Holeywell | @RyanHoleywell | July 8, 2015

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Image: flickr/lendingmemo

Credit ratings agency Moody's just delivered a major warning about Houston's finances, announcing that it's revised the city's financial outlook to "negative."

The message is a stark one in a city that has enjoyed a booming economy in recent years, buoyed by thriving real estate, medical and energy sectors.

But the announcement from Moody's makes clear that the local government's finances aren't poised to enjoy the same success as the local economy.

The city maintained its Aa2 rating - one of the top ratings available to borrowers. But Moody's outlook revision to negative means it expects Houston's rating to fall in the medium-term.

Unsurprisingly, the ratings agency attributed the negative outlook to "the challenges the city faces from growing pensions costs and liabilities, which are compounded by significantly limited revenue raising flexibility, and projected structural imbalance."

That shouldn't come as a surprise to anyone who follows the city's finances.

The city has long faced financial hurdles tied to its pension obligations, and caps on its taxing authority have made it difficult to keep up with those demands - even as it makes cuts in other areas.

In the 2014 fiscal year, Moody's wrote, the city's fixed costs - including debt, pension obligations, and other retiree benefits - amounted to 30 percent of its budget. Meanwhile, the city had a total unfunded pension liability of $3.2 billion between its three pension systems at the end of the year. That's nearly double the unfunded liability it faced just 5 years ago. 

"A sustainable plan to manage the cost, while balancing the budgets, and meeting full required contributions, will be key credit considerations going forward," Moody's wrote.

But that's no easy task for City Hall, since those obligations are expected to increase while its ability to raise revenue is limited.

"Despite recent improvement in the financial profile, the city's financial position is significantly hindered by limited revenue raising flexibility, and challenged by rising fixed obligations," Moody's wrote.

Two laws are handcuffing the city. Proposition 1 caps the city's annual revenue increases at the lesser of its population growth rate plus inflation, or 4.5 percent. Separately, Proposition H allows the city to raise revenues by $90 million above that limit for public safety.

The Houston Chronicle summarizes the situation succinctly: 

"Changes in the early 2000s to pension benefits for police, firefighter and municipal retirees led to a huge spike in costs.

 Unlike police and municipal employees, Houston's contribution to firefighters' pensions is set by the Legislature and payouts for new hires are more generous than those for new police or municipal employees.

 On the revenue cap front, a City Council committee voted earlier this year not to ask voters to lift or repeal the cap."

Mayor Annise Parker - an advocate for pension reform and easing those caps - said in a statement that Moody's actions reflected the need to address both issues.

 "Moody's negative outlook revision ... expressly references the one-two punch of excessive pensions and artificial revenue limitations I've been fighting for the last five years.

We have tried repeatedly to obtain legislative relief from our pension stress in Austin. Each time, state lawmakers have refused to help. Until the legislature acts, pension payments will continue to crowd out many of the other needs of the city. And our cap on ad valorem revenue means we struggle to meet the demands of our rapidly growing population."