Mayor's Office Press Release
Houston Pension Solution Draws Positive Reviews from Credit Ratings Agencies
June 13, 2017 -- In their first reviews since the Houston Pension Solution was signed into state law on May 31, 2017, the three ratings agencies that gauge Houston’s credit delivered positive assessments of the pension reform’s impact on the City’s path to improved financial health. They also point to the outcome of a planned November vote on issuing $1 billion in pension obligation bonds as critical to the City’s future.
“Not so long ago, our city was seeing credit downgrades,” Mayor Sylvester Turner said. “Now we have stopped that decline and are drawing national attention for getting on the right path. We have more work to do before we achieve our goal of sustainable, structural budget balance, where revenues are equal to or greater than spending each year. We will get there by managing our taxpayers’ money carefully and conservatively, and by staying focused on wise investment and use of public funds to create a better Houston.”
In the past week, Moody’s, Fitch and Standard & Poor’s (S&P) issued reports praising the pension reforms:
- Moody’s issued a report last week calling Houston’s pension reform packages “credit positive … because (Houston’s) pension liabilities will decline and ongoing pension funding will improve.”
- Fitch held the City’s credit rating constant on Houston’s Tax and Revenue Anticipation Notes and longer-term debt and assigned a stable rating outlook to the City. In that report, Fitch noted that with the City’s pension reform legislation including a requirement to make required contributions each year, there is reason to believe “a chronic pension contribution gap will close.”
- Standard & Poor’s characterized Houston’s pension reform as “a step in the right direction” for pension funding and sustainability.
Both S&P and Fitch pointed to the need to secure voter approval of $1 billion in pension obligation bonds in November. The bonds pay back pension systems for debt owed to them due to underfunding. Fitch said “the outcome of the November election … will be key to resolving the outlook, and the long-term stability of the city’s credit profile.” Also worthy of monitoring, the ratings agencies suggested, is the outcome of a lawsuit by firefighters that seeks to undermine the pension reform package.
The Houston Pension Solution, which experts have called a "national model," will immediately reduce the City’s $8.2 billion unfunded liability through future benefit reductions. Under the plan, which utilizes a more realistic 7 percent rate of return on investments, the City will be required to meet its annual contribution until the unfunded liability is fully paid off in 30 years.
An innovative cost corridor concept controls costs for the City. The corridor serves a risk sharing mechanism - if investments perform too far below established levels, the pension boards will cut benefits or increase employee contributions to bring costs in line.
The reforms were passed by the Texas Legislature in May and signed by Gov. Greg Abbott May 31. The law takes effect July 1.