DALLAS - Moody's Investors Service yesterday cut the longstanding Aaa ratings for Dallas and the Dallas Independent School District, citing continued weakness in the tax base triggered by the mid-1980s oil and real estate busts.
In separate one-page statements, the rating agency said it downgraded the city to Aa1 because of a soft economy and weakened tax base. Analysts cited identical reasons in dropping the school district two notches to Aa, but also blamed the state's new school funding law for prompting the decline.
Both had been rated Aaa by Moody's since June 1973. The city retains an AAA rating from Standard & Poor's Corp., while the school district is rated Aa-plus.
The downgrades did not surprise city and school officials yesterday, but prompted speculation about the future of the Aaa rating assigned to Dallas County, which has also suffered an eroding tax base.
Jeffrey F. Rizzo, vice president and managing director for regional ratings at Moody's, yesterday said analysts met with county officials on Oct. 12. He declined to respond to speculation the county may be downgraded, saying only that "we are continuing a dialogue."
Dallas County Treasurer Bill Melton said Moody's and Standard & Poor's, which also rates the county triple-A, have focused extensively on the declining tax base weakness in recent weeks.
"There's no way we can know what they will do," the treasurer said yesterday. "We know we are still under review. We hope that what we are doing [financially] will withstand their test, but the call is ultimately theirs. "
While the countywide decline in property values has been 11.5% since the 1989 peak in assessments, it is about half the 20.3%, or $9.2 billion, in tax base lost over the last five years by the Dallas Independent School District. The city has suffered a similar drop in values.
"There had been discussions with Moody's about the tax situation," said Matthew Harden, executive manager of budget, finance, and planning for the district, which was the last triple-A rated metropolitan school district in the nation. "We were not totally surprised."
Neither were bond market watchers.
"Such a downgrade was inevitable," said Don Karlberg, a vice president and senior analyst at Kemper Securities Inc. in Houston, who privately predicted the ratings cut earlier this fall. "With a triple-A, there's only one way to go."
The announcement comes ahead of Wednesday's planned competitive $90 million new-money sale by Dallas and a Dec. 5 bond election by the Dallas school district, which will ask voters to approve a $275 million capital program.
Dallas City Manager Jan Hart said the downgrade should not affect the overall pricing of city bonds. "It will be an unsubstantial difference," she said.
Hart also said the downgrade did not reflect on the city's historically strong fiscal management and its ability to adjust to the weak economy.
"We knew they have had some concerns with the economy and the general weakness in the tax base," she said yesterday, predicting the city would regain its prized Aaa status. "This is a factor that is outside our control."
Moody's said the downgrade affects $716.2 million in outstanding GO bonds. The city's revenue bond rating remains Aa and Love Field Airport bonds remain A1.
In its statement, Moody's called the city's management "exemplary," noting that Dallas has responded to its declining tax base by cutting its non-uniformed work force by 20% and by raising its property tax rate in three of the last five years.
At the same time, Dallas officials have slowed capital spending by deferring new bond authorizations and holding new-money issuance to a level equal to the amount of debt the city retires. Hart said that will not change.
Still, Moody's said, "While management is expected to continue to craft creative measures to promote fiscal balance, its options may now be somewhat limited by virtue of the notable actions taken to date."
Analysts also cited strong management by the Dallas Independent School District, which overlaps with much of the city's tax base. But Moody's also noted that changes in the state's controversial school funding formula cost the district millions in funding, forcing the district to rely more heavily on property taxes for operations.
For instance, the district lost $41.4 million last year in state aid after a controversial Robin Hood school funding law forced districts such as Dallas to rely more on their own tax revenues.
"It cut their state aid in half," said Chris Evangel, vice president at Moody's.
Harden said the rating agency's point was that unlike the city, the school district does not have other revenues to tap.
"We are more dependent on our tax base," he said, adding that the drop in property values may be bottoming out. "We have talked with the county appraisal district and they indicate this should be bottoming out in another year."
Despite the decline in state aid and the pressure on the falling property values, Harden estimates the district should end the year with a fund balance of $54 million, or about 10% of the annual operating budget.
As for the upcoming bond election or future sales of debt, school district officials say the downgrade, which affects $169.1 million in outstanding GO debt, will not have an impact on future capital planning.
Moody's first expressed concern about the weakness in the Dallas-area tax base in a mid-September report when it noted that county-wide property values had fallen $12.9 billion, or 11.5% of their peak 1989 levels. But while overall tax assessments have dropped, suburban pockets in Dallas County have prospered, showing moderate to strong gains while the city and Dallas schools have shown a decline.
Most have attributed the decline in property values to the lingering effects of the 1986 collapse of the oil and real estate markets, which caused the collapse of hundreds of the state's financial institutions.
But Karlberg said that trend is not unique to Dallas credits. "They are only getting hit with some of the same problems facing other central cities," he said. "For Dallas, it just took longer."