Following the action of its Big 3 counterpart, Standard and Poor’s downgraded Houston’s general obligation debt from “AA+” to “AA” and reasserted the city’s outlook as “Negative.”
While both downgrade reports point to similar issues, the S&P downgrade addresses something that we’ve written about months ago – Houston’s falsely inflated rate of returns on pensions. S&P’s report further substantiated this concern:
“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…”
The report went on to reiterate the urgent need for this glaring problem to be addressed:
“The negative outlook reflects our view that there is at least a one-in-three probability that we could lower the rating again within the next two years if Houston is unable to develop and implement a credible plan that lowers its unfunded pension liability or if continued softness in oil prices leads to ongoing contractions in tax revenue.”
S&P did offer a glimmer of hope saying that if Houston is able to implement pension leading to a sustainable and structurally balanced budget they would revise the outlook to “Stable.”
Taxpayers should expect more from their officials than teetering on the brink of fiscal ruin.
Mayor Sylvester Turner is making earnest attempts at scaling back the costs of Houston’s government, but it needs to be an across the board approach to identify inefficiencies and additional areas to cut. The campaign-season rhetoric about what a bankrupt Houston would look like is becoming more of a reality with every passing downgrade.