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Home My WebLink AboutIR 10035 INFORMAL REPORT TO CITY COUNCIL MEMBERS No. 10035 NAT.Lpe. To the Mayor and Members of the City Council August 1, 2017 A- Y Page 1 of 5 r I-V SUBJECT: MOODY'S DOWNGRADE OF THE CITY'S GENERAL OBLIGATION 1075 CREDIT The purpose of this informal report is to provide an update on Moody's review of the City's General Obligation credit rating, which has included substantial discussion on the overall health of City's Employee Retirement Plan and the sustainability of current funding practices. Background Pension obligations in the local government sector have drawn national attention and rating agencies have increased their focus into how local governments are managing these liabilities. Several factors have led to the deterioration in pension funding levels for various municipal governments across the country resulting in negative credit implications. These factors include, but are not limited to: a prolonged low interest rate environment, aggressive rate of return assumptions, failure to meet required contributions, changes to actuarial assumptions, accounting standard changes, and an inability or limited flexibility to implement necessary restorative actions. Before 2015, full pension obligations were not required to be reported on the City's balance sheet. However in June of 2012, the Governmental Accounting Standards Board (GASB) approved Statement No. 67 and 68, Financial Reporting for Pension Plans, which substantially changed the level of disclosure and accounting / financial reporting of public employee pensions by state and local governments. As required by GASB, the City implemented these new standards in fiscal year 2015 and the new reporting information was included in our Comprehensive Annual Financial Report. This new reporting standard provides the basis for the numbers reviewed by the rating agencies during a credit review. It is important to note that the GASB calculations for determining both unfunded liabilities and the funding ratio differs from the annual valuation report submitted by the Employees Retirement Fund due to differences in the way these ratios are calculated. Fort Worth Employees Retirement Fund (ERF) Summary The City's unfunded pension liability has reached historic highs over the past three years. Our unfunded pension liability is essentially the difference between future payment obligations and the present value of funds available to pay for them. Further, based upon our current funding program, while the City has met its legally required contribution as a percentage of payroll, the City has not fully met our actuarial calculated Annual Required Contribution (ARC) in each of the last five years. The ARC is the annual employer/employee contribution which is required to adequately fund a public pension plan. The ARC is the sum of two factors: a) the cost of pension benefits being accrued in the current year (the `normal cost'), plus b) the cost to amortize, or pay off, the plan's unfunded liability. ISSUED BY THE CITY MANAGER FORT WORTH, TEXAS INFORMAL REPORT TO CITY COUNCIL MEMBERS No. 10035 NAT.Lpe. To the Mayor and Members of the City Council August 1, 2017 Y Page 2 of 5 r I-V SUBJECT: MOODY'S DOWNGRADE OF THE CITY'S GENERAL OBLIGATION 1075 CREDIT Not only has the unfunded liability risen in recent years, but the spread between Fort Worth's actual contribution and the ARC has also increased each year as pension costs continue to rise, as illustrated in the following graph. FW Contributions vs. ARC 100% 2% 3% 6% 95% 14% 16% 90% 85% 80% 75% 2013 2014 2015 2016 2017 q % Paid % Unpaid Moody's Investor Service, which maintains various ratings on Fort Worth's outstanding debt obligations, uses what they call a "tread water" indicator to measure the government's ability to prevent reported net pension liabilities from growing. The net pension liability is the amount by which the total pension liability exceeds the pension plan's net assets available for paying projected benefits. Effectively, contributions above the tread water indicator would reduce net pension liability. The City's funding practices have not met the `tread water' sufficiency test as actual contributions are below the sum of the plan's service cost and interest on the reported net pension liability. As a result, the City's growth in plan assets from contributions has been outpaced by growth in the total liability. ISSUED BY THE CITY MANAGER FORT WORTH, TEXAS INFORMAL REPORT TO CITY COUNCIL MEMBERS No. 10035 NAT.Lpe. To the Mayor and Members of the City Council August 1, 2017 Y Page 3 of 5 r I-V SUBJECT: MOODY'S DOWNGRADE OF THE CITY'S GENERAL OBLIGATION 1075 CREDIT To put this into perspective, the City's actuarial calculated Net Pension Liability has grown from $1.1 billion in fiscal 2014 to $2.1 billion in fiscal 2017. Additionally, the City's pension funded ratio has deteriorated from 64.3% in fiscal 2014 to 39.4% in fiscal 2017. Weighted Pension Funded Ratio 70 = -0 n=- 2 i'_ (Y 201= 201`, 2016 2017 In summary, contributions below actuarially required levels coupled with weak investment returns limiting subsequent growth in plan assets have significantly deteriorated the overall health of the City's Employee Retirement Fund. The table below draws a historical comparison between real market returns and the fund's actuarial returns over the last ten years. ISSUED BY THE CITY MANAGER FORT WORTH, TEXAS INFORMAL REPORT TO CITY COUNCIL MEMBERS No. 10035 NAT.Lpe. To the Mayor and Members of the City Council August 1, 2017 Y Page 4 of 5 r I-V SUBJECT: MOODY'S DOWNGRADE OF THE CITY'S GENERAL OBLIGATION CREDIT E,inplo Coca ReLiEV133CILL 1-LLLtd o1 the City o 1 ort Worth 1-2 hie Actuarial Valuation December 31,2416 HisToRy OF INVESTMENT RETURN RATES Year Ending December 3 I of Market Achwidi (1) (2) Q) 2447 5.3% L L.S% 2448 -29-1% L 1.4% 2009 21.3% L R.9% 2414 10.81l0 2.7% 2011 -0.3% 0.0% 2412 11.0% 1.0% 2413 12.11/9 L0.0% 2414 4.7% 7.6"/¢ 2415 -0.3% 5.4%. 2416 8.01f0 6.2°!r Averaga P&tLflw last Fiar Yeats: 7.G0/Q 6.4°! U-i[Ten Ye3C : 3 Ar r. 4.$0'n As seen with other municipalities such as Dallas and Houston, further deterioration without effective change will likely result in additional adverse credit implications. Credit Rating Implications On June 22, the City was contacted by Moody's and informed that pressure exists within Moody's to revisit the City's credit due to the substantial changes in the funding ratio over the past few years. On July 12th, Moody's concluded their review of the City's General Obligation (GO) credit. As a result, the City's GO rating has been downgraded to Aa3 from Aa2. At the same time, the rating outlook was revised to 'negative' from `stable', indicating the rating could be lowered again in the near term if further deterioration in credit factors continues without effective change. Moody's cited in the rating report, "The downgrade to Aa3 reflects the city's large and growing unfunded pension liability and growing fixed cost burden, which includes annual pension, OPEB and debt service requirements. The Aa3 also incorporates the city's large and growing tax base, regionally ISSUED BY THE CITY MANAGER FORT WORTH, TEXAS INFORMAL REPORT TO CITY COUNCIL MEMBERS No. 10035 NAT.Lpe. To the Mayor and Members of the City Council August 1, 2017 Y Page 5 of 5 rrn SUBJECT: MOODY'S DOWNGRADE OF THE CITY'S GENERAL OBLIGATION CREDIT significant economy, average wealth indices, adequate financial reserves and a moderate direct debt burden." The rating agency added, "The negative outlook reflects our expectation that, absent pension reform and increased contributions, the city's unfunded pension liability and increasing fixed costs will pressure operations. At year-end 2016, the city's reported net pension liability increased by $516 million to $1.8 billion." A pension study is currently underway and recommendations are expected to be delivered to City Council at the end of 2017. A sustainable plan to manage the growing unfunded pension liability will be key credit considerations going forward." The rating agency's forward looking analysis included the following: Factors that Could Lead to an Upgrade • Funding and benefit reform to pension plan that reduces unfunded pension liabilities • Reduction in fixed cost burden Factors that Could Lead to a Downgrade • Inability to manage rising pension and OPEB costs, leading to increased pension liabilities • Significant increase in debt profile or fixed cost burden • Poor financial performance leading to a significant decline in reserve levels • Trend of significant declines in taxable values The City of Fort Worth currently maintains the following General Obligation (GO) ratings: AA+/Stable — S&P Aa3/Negative — Moody's AA+/Stable — Fitch If you have any questions, please call Aaron Bovos, Chief Financial Officer, at 817-392-8517. David Cooke City Manager ISSUED BY THE CITY MANAGER FORT WORTH, TEXAS