Houston's credit downgraded by second ratings agency

Storm clouds form around the downtown skyline in Houston. ( Steve Gonzales / Houston Chronicle ) Storm clouds form around the downtown skyline in Houston. ( Steve Gonzales / Houston Chronicle ) Photo: Steve Gonzales, Staff Photo: Steve Gonzales, Staff Image 1 of / 1 Caption Close Houston's credit downgraded by second ratings agency 1 / 1 Back to Gallery

Ratings agency Standard & Poor's on Friday joined rival Moody's in downgrading the city of Houston's credit rating, stressing the cost burden of city retiree benefits.

S&P lowered its rating on the city's debt one notch to 'AA' from 'AA+' and rated the city's credit outlook as negative, the same actions Moody's took last Wednesday ahead of a $600 million debt refinancing city officials plan to complete tomorrow in Chicago.

"The downgrade reflects our opinion of the city's large unfunded pension liability that has been exacerbated by what we consider optimistic rate of return assumptions and a history of lower-than-actuarially determined contributions, which the current administration is seeking to correct," S&P analyst Omar Tabani said.

The weight of Houston's pension burden, the analysts wrote, is magnified by the voter-approved revenue cap and low oil prices. The revenue cap, approved in 2004, limits the growth in property taxes, the city's main source of revenue. The law has led Houston to forgo $120 million in property taxes in the last two years. (You can find the report here.)

A strong economy and robust internal financial policies help offset these weaknesses, the S&P analysts said, but not enough to prevent the downgrade.

There is "at least a one-in-three probability" that the rating will drop again within two years, they wrote, if the city does not reform its pensions, or if oil stays in a slump.

"If the city is unable to address its pension liabilities within the next two years while maintaining structurally balanced operations, we will likely lower the rating," the analysts wrote.

For more background on the impact of being downgraded, check out this story about the Moody's downgrade. And for more details on how the pension mess was created, try this recent story, this story that was written during the mayoral race last fall, or this story that gives some different numbers quantifying the pension underfunding.

In response to the Moody's downgrade last week, Mayor Sylvester Turner issued a statement that touched on the same issues.

"I am continuing discussions with various stakeholders on a plan to solve the City's outstanding pension obligations," he said. "I remain confident that the steps we are taking today will create fiscal stability for the city tomorrow."