Houston sets GO bond sale for firefighter settlement

A bond issue that is part of a settlement to end a years-long impasse between Houston and its firefighters will hit the municipal bond market this week with the higher debt load contributing to a negative outlook for the city’s rating.

Most of the proceeds from the $720.4 million general obligation bond sale are earmarked for a $650 million lump sum payment to current and retired firefighters to cover overtime pay from fiscal 2018 through 2024. Also part of a court-approved settlement is a five-year collective bargaining agreement, the first since the previous one expired in 2016, that increases total firefighter pay by up to 34%.

Ahead of the bond sale, S&P Global Ratings revised the outlook on Houston’s AA rating to negative from stable. 

“The negative outlook reflects challenges to balance the budget in the outlook period with material fund balance declines as a result of increased debt service and salary increases, with limited capacity to raise revenue due to a city charter that restricts property tax increases,” S&P analyst Katy Vazquez said in a statement. 

She added the revised outlook reflects “at least a one-in-three chance that we could lower the rating during our two-year outlook period.”

The salary increases will cost Houston $428 million over five years contingent on finding new incremental revenues, according to the rating agency, which also noted the city’s robust economy, strong financial management practices and policies, but a “very weak debt profile” that includes large pension and other post-employment benefit costs.

S&P also said the rating incorporates its view of the city’s environmental, social, and governance risks, including an elevated physical risk due to its exposure to hurricanes and inland flooding.

A weakened Hurricane Beryl, which had grown into a Category 5 storm in the Caribbean last week, battered Houston on Monday as it was downgraded to a tropical storm.

Moody’s Ratings affirmed its Aa3 rating and stable outlook for the bonds, citing Houston’s “solid financial position across all funds” in a rating report.

“It also reflects the expectation that the city will address its growing budgetary gap following the approval of its recent firefighter’s agreement through a combination of revenue enhancements and/or other budget adjustments,” Moody’s said in the report.

Mayor John Whitmire’s communications office said the city is considering a change in the charter cap via a charter amendment or additional public safety funding above the cap, either of which would require voter approval.  

“Additionally, we have already begun a citywide assessment to identify efficiencies that can be realized for cost savings,” the office said in an email. “These will be presented, and some initiatives will be implemented during FY25, and incorporated into the FY26 budget next year. On the revenue side, we have engaged a third party to assist with a comprehensive review of our solid waste department operations and are completing a fee study to present to city council for their consideration.”

The nation’s fourth largest city began fiscal 2025 on July 1 with a $7.3 billion all-funds budget, which includes about $3 billion in general fund spending. A funding gap was mostly filled by tapping reserves and spending cuts. The mayor has said the city will seek a solution to its structural deficit problem heading into the fiscal 2026 budget.

Michael Dorman

Houston Controller Chris Hollins warned the city council last week that the fiscal 2025 budget could face a hit between $110 million and $120 million should the city lose its latest appeal in a lawsuit brought by taxpayers over how much property tax revenue is allocated to the drainage fund. 

The city plans to ask the Texas Supreme Court to overturn a state appeals court’s ruling in April that set the amount of revenue at no less than 11.8 cents per $100 of taxable value less debt service on bonds. 

“That’s a big potential expense,” Hollins said, adding city officials have to be clear about how it could be covered in the current fiscal year. 

His office is projecting a fiscal 2024 general fund ending balance of $466.2 million, which is $11.4 million lower than the city finance department’s projection due to the department’s higher revenue estimate. In a June 17 memo to city officials, Hollins noted the city tapped roughly $200 million of the total fund balance for the fiscal 2025 budget.

More spending pressures are looming. The “generosity” of the firefighter settlement will likely factor in contract negotiations with city workers and police, Hollins told The Bond Buyer in April.

The $720.4 million bond sale includes $589.4 million of Series A GO bonds for the firefighter payments. 

“The city anticipates generating premium, which together with the par amount, will be sufficient to fund the ($650 million) settlement amount,” the city’s communications office said.

Houston Finance Director Melissa Dubowski told city council members last week that her department assumes an interest rate of around 4.2% for the Series A bonds.

Whitmire made ending the eight-year impasse with the firefighters’ union a priority in his campaign for mayor last year. Shortly after taking office in January, the former long-time state lawmaker halted a court battle with the union, which began under his predecessor, and commenced settlement negotiations.

The Harris County District Court on May 15 entered an agreed final judgment in the underlying litigation based on the settlement agreement. The Houston City Council in June approved the sale of judgment bonds, which do not require voter approval under Texas law, and the collective bargaining agreement.

Last month, Houston City Attorney Arturo Michel cautioned the council against delaying the bond issue, noting that the city’s failure to pay a court-ordered judgment within a short period of time would constitute an event of default under covenants for some of the city’s outstanding bonds. Dubowski said last week that the bond deal is scheduled to price on Thursday and close on July 18. 

The tight timeline aims to avoid a default. 

“The city believes there is sufficient time between the pricing and closing to deliver the settlement proceeds and satisfy the judgment,” the city’s communications office said. “The city has been in the process of making logistical arrangements to timely satisfy the judgment and avoid any default.”

Houston has $3.048 billion of outstanding debt backed by property taxes and an unfunded actuarial accrued liability of $2.758 billion for its three pension funds. The city, which funds its OPEB liability on a pay-as-you-go basis, created a trust fund last year with contributions of $10 million in fiscal 2024 and $12.5 million in fiscal 2025.

Houston “is rightly criticized for its high debt load,” said Howard Cure, municipal bond research director at Evercore Wealth Management.

“Issuing debt for a labor settlement, which is in effect an operating not capital expense, adds to the debt load and is not a good financial practice,” he said in an email that also pointed to the city’s adoption of some pension reforms and its continued pension contributions above “tread water” levels. 

The other $131 million of Series B public improvement refunding bonds in the deal will refund and defease outstanding GO bonds and commercial paper notes. 

The deal’s preliminary official statement did not include initial scales for the bonds. 

Ramirez & Co. is lead underwriter for the deal, which also includes Hilltop Securities, Wells Fargo Securities, Baird, Blaylock Van, and Estrada Hinojosa. Bracewell LLP and Edgardo E. Colon are co-bond counsel and Masterson Advisors and The RSI Group are co-financial advisors.