As the City of Dallas continues to work with the Dallas Police and Fire Pension (DPFP) board on solutions to help close the pension's massive $4 billion funding hole, Standard & Poor's has finally decided that the "continued deterioration in the funded status" of the fund merits a downgrade. As such, S&P has downgraded the city's general obligation bonds to "AA-" from "AA" and placed them on "negative watch." Per the Dallas Business Journal:
"The downgrade reflects our view that despite the city's broad and diverse economy, which continues to grow, stable financial performance, and very strong management practices, expected continued deterioration in the funded status of the city's police and fire pension system coupled with growing carrying costs for debt, pension, and other post-employment benefit obligations is significant and negatively affects Dallas' creditworthiness," S&P Global Ratings credit analyst Andy Hobbs said in a statement.
The police and fire pension system could go insolvent in the next 10 years because of a funding gap. The financial troubles, along with a multi-billion-dollar lawsuit between the city and emergency works, could put Dallas on a path to bankruptcy.
The move by S&P comes over a month after Moody’s downgraded Dallas’ credit rating, for the second time in recent months, to A1, which is a notch below S&P's new rating. Oddly, as we pointed out yesterday, S&P also seems to be somewhat delayed in their rating downgrade of the City of Chicago (see "Chicago Mayor Emanuel Pushes Moody's To Rescind Junk Rating Ahead Of $1.2 Billion New Issue"). That said, we're sure it has nothing to do with keeping the city's G.O. rating above investment grade just long enough to get that $1.2 billion bond deal done next week so that Rahm Emanuel can continue his ponzi scheme with taxpayer money.
Of course, the downgrades have come as little surprise to Dallas Mayor Mike Rawlings who, for months, has been arguing that the "run on the pension" has brought the DPFP to the "verge of collapse." Responding to the downgrade, even Dallas CFO Elizabeth Reich implied that S&P was a little late to the ball game saying their "actions today are not a surprise" and that the "pension is a significant risk to the fiscal health of the City."
“S&P’s actions today are not a surprise," Dallas Chief Financial Officer Elizabeth Reich said in a statement. "The more the rating agencies learn about the crisis facing Dallas as a result of the police and fire pension, the more they understand what the City has been saying for some time – the pension is a significant risk to the fiscal health of the City."
As we noted last week, this most recent downgrade for Dallas comes after the City Council floated a proposal to inject $1 billion of incremental taxpayer funding into the DPFP, over the course of 30 years, if retirees would agree to a $1 billion "clawback" of what city officials referred to a ill-gotten interest guarantees (see "City Of Dallas Looks To "Clawback" Ill-Gotten Pension Gains From Police").
Unfortunately, the downgrade from S&P came a day before the pension board is (1) scheduled to meet with Bank of America about restructuring or extending roughly $130 million in outstanding debt and (2) due to decide whether to lift its ban on large, lump-sum payments to retirees.
The pension is in danger of falling into insolvency in the next 10 years because of an estimated $3.3 billion funding gap. The problem, along with a multi-billion-dollar lawsuit over emergency worker back pay, could send the city spiraling into bankruptcy and threaten its blossoming economy. The state is launching a criminal investigation into the previous administration's handling of the pension's finances.
"We have been working with Bank of America on the terms of the loan and possibly restructuring and extending the term,” a spokesman for the pension board said in an email to the Dallas Business Journal. “Nothing is finalized at this point."
But we're just everything is fine, Bank Of America, so please go ahead and grant that loan extension for an extra 10 bps of yield.
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For those that haven't followed this story as closely, here is a recap we posted last week.
Almost exactly one month after taking the unprecedented step of suspending withdrawals from the Dallas Police and Fire Pension (DPFP), the Dallas city council is looking to "clawback" what it views as ill-gotten interest payments made to pensioners to the tune of roughly $1 billion.
Of course, we have followed the epic meltdown of the DPFP closely over the past several months after a series of shady real estate deals brought the fund to, in the words of Dallas Mayor Mike Rawlings, "the verge of collapse" and resulted in an FBI raid of one of the funds largest real estate investors (see "Dallas Cops' Pension Fund Nears Insolvency In Wake Of Shady Real Estate Deals, FBI Raid"). The discovery of the failed real estate deals led to a "run on the bank" as scared pensioners looked to withdraw as much as possible before the whole ponzi scheme collapsed (see "After A "Run On The Pension Fund" Dallas Mayor Demands Halt Of Withdrawals"). All of which culminated with the unprecedented decision last month to suspend withdrawals (see "In Unprecedented Move, Dallas Pension System Suspends Withdrawals") after nearly $500mm was removed from police accounts.
Now, according to a local ABC affiliate, the Dallas city council is frantically working with the DPFP board to close a $4 billion funding gap. While the city has agreed to throw an incremental $1 billion of taxpayer money at the problem over the next 30 years, that additional funding comes with some strings attached, which includes a $1 billion "clawback" of what the city views as ill-gotten gains from Police DROP accounts. The proposed "clawbacks" would come in the form of reduced future distributions for pensioners.
For those who haven't followed this story as closely, DROP, which was created in the early 90's, allowed police and firefighters in Dallas to retire while still on the job. Their monthly pension checks were then diverted into DROP accounts, which were guaranteed an 8-10% return regardless of how the overall fund performed. Unfortunately for DPFP pensioners, the Dallas City Council now views those guaranteed returns as an effort to defraud Dallas taxpayers of billions...we would tend to agree.
The city has agreed to put in an additional billion dollars over 30 years, but they're proposing a series of bitter pills to make up the rest of the nearly $4 billion shortfall.
The bitterest pill: A proposal to take back all of the interest police and firefighters earned on Deferred Option Retirement accounts, or DROP. That would amount to an additional billion dollars saved.
The city is calling it an "equity adjustment." Retirees call it an illegal "claw back."
Whatever you want to call it, it's outlined in a draft legislation being hammered out by the city and pension fund leaders. Pension fund representatives and the city have been meeting almost daily to try to come to an agreement on proposed legislation that they can take to the state capital to fix the failing fund.
Of course, anyone with half a brain probably should have realized that this ponzi on steroids was doomed to fail from the start. But, better late than never we suppose.
To add insult to injury, for Dallas taxpayers at least, the City Council also notes that the DPFP's artificially high annual cost of living adjustments have resulted in pension checks that are 20% higher than they would have been had they been tied to actual inflation levels instead.
News 8 obtained a copy of the legislation which says accounts would be "adjusted to zero percent of interest."
"It's very tough but the city wants to protect the monthly benefit," Kleinman said. "It's a restatement of their accounts."
The city is also seeking to "equity adjustment" on cost of living increases. The city says that pension checks are about 20 percent higher than they would have been if increases had been tied to inflation.
The city's proposing to freeze cost of living increases until it catches up to the inflation index.
DROP and the cost of living increases account for about half of the fund's liability, the city says.
For those retirees who have already taken the money out of DROP accounts, they'd garnish their future pension checks to recoup excess interest. Worried retirees have withdrawn in excess of $500 million from DROP accounts in recent months.
Meanwhile, all of these discussions have Dallas' police predictably upset.
"We used the rules they gave us now all of the sudden they're going to go back on the rules and say hey you don't get any of that," said Charles Hale, a retired police officer. "That's not fair."
Retirees promised they'd be suing if anybody tried to take back money they feel they've earned.
"It's acting like it was an underhanded Ponzi scheme that we pulled," said Joe Dunn, a retired police officer. "It's not fair."
Frankly, we too are shocked at the audacity of the Dallas City Council to suggest that public employees be forced to be compensated in a way somewhat more akin to private employees. It's just outrageous.
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