Below the Waterline

A collaboration between Lewis McLain & AI

Jeff Lipton argues that ratios are the starting point of municipal credit analysis, not the end of it. Texas has spent the last decade proving him right — repeatedly, expensively, and in public.

A field guide for Texas issuers, municipal advisors, bond counsel and underwriters · August 2026

In an August 4 Bond Buyer Market Intelligence piece, Jeff Lipton makes a deceptively simple argument: an overreliance on financial ratios “can create a false sense of certainty, obscuring the qualitative factors, structural risks, governance and political issues, and emerging trends that ultimately shape long-term credit performance.” His accompanying illustration is an iceberg. Above the waterline sit the metrics everyone quotes — debt service coverage, debt per capita, days cash on hand, fund balance as a percentage of expenditures, unfunded pension liability. Below it sit governance, legal framework, cyber-threat preparedness, regulatory shifts and political will.

Those five submerged labels come from the article’s illustration; Lipton’s text names others too — climate and physical risk, demographic shifts, pension and OPEB management. This piece organizes around the five, and folds physical risk and demographics into the Texas cases where they actually bit. It is a good metaphor, but metaphors do not move ratings. Cases do. And if you want cases, Texas is the richest laboratory in the country — not because Texas credits are weak (in aggregate they are not), but because Texas runs an unusual number of natural experiments. It has 1,200-odd cities, more than 1,000 school districts, thousands of special districts, a biennial legislature that legislates aggressively into local finance, an Attorney General with a statutory chokepoint on every bond closing, a deregulated power market, a contested water supply, and an electorate that votes on tax rates and bond authorizations several times a year.

Every one of the five factors below Lipton’s waterline has, in Texas, produced a documented, dated, dollar-denominated credit outcome in the last ten years. What follows is an inventory — organized by factor — with what each episode should change about how Texas issuers and their advisors prepare disclosure, rating presentations and investor materials.

Above the waterline — what the ratios measure

• Debt service coverage
• Debt per capita
• Days cash on hand
• Fund balance as % of expenditures
• Unfunded pension liability

Below the waterline — what moved Texas credits

• Governance — Dallas Police & Fire; the Houston corridor
• Legal framework — charter revenue caps; drainage litigation; bond covenants
• Cyber-threat preparedness — 23 entities in one morning; Royal; Play
• Regulatory shifts — SB 13/SB 19; SB 2; SB 1851; the PSF capacity ceiling
• Political will — ballot language; VATRE failures; Proposition U

Factor One Governance: Dallas Police & Fire, and the three notches that never came back

The Dallas Police and Fire Pension System is the cleanest available demonstration that a plan’s governance architecture is a leading indicator and its funded ratio is a lagging one.

By the time the funded ratio told the story, the story was over. DPFP’s funded ratio fell from 72% in January 2011 to 45% in January 2016. But the qualitative tells were visible years earlier, and they were not subtle:

• An investment mandate no ratio captures. Beginning in 2005–06 the board deployed over $1 billion into direct, illiquid, exotic real estate — ultra-luxury homes in Hawaii, Aspen and California, raw land in Idaho and Colorado, and roughly $200 million into Museum Tower in downtown Dallas.
• Counterparty and control failure. The FBI executed a search warrant at the offices of external manager CDK Realty Advisors on April 4, 2016. CDK managed up to $750 million at peak. DPFP later alleged write-downs and losses exceeding $320 million. One Arizona land parcel bought for $27 million in 2006 sold for $7.5 million in 2014. The fund eventually marked its entire real estate book down 32%.
• Assumption drift. DPFP carried an 8.50% assumed return through 2014 against actual market returns of −5.35% (2014) and −8.47% (2015).
• A structural liquidity bomb. DROP balances reached 56% of total plan assets, all available for immediate withdrawal, and had been credited with above-market guaranteed interest.

That last item is the one that matters most, and it is the one least visible in conventional analysis. “Days cash on hand” is a utility metric; nobody computes it for a pension plan. Yet DPFP had, sitting on its balance sheet, a demand liability equal to more than half of assets — held by a participant population that talks to each other, in a city where the funding debate was public.

The run arrived on schedule. After DPFP publicly stated in August 2016 that the shortfall would require benefit cuts, roughly $500 million was withdrawn between August and early December, leaving about $729 million in liquid assets against a stated minimum near $600 million. Mayor Mike Rawlings sued the fund in his personal capacity as a taxpayer. On December 8, 2016, the board voted to suspend all DROP withdrawals.

Date	Agency	Action	Stated rationale
Nov. 2015	Moody’s	Aa1 → Aa2	P&F unfunded liability plus roughly $1B of deferred infrastructure
Oct. 24, 2016	Moody’s	Aa2 → Aa3; Dallas Water Utilities outlook to negative	DWU’s “direct and possibly indirect exposure to unfunded pension liabilities” — despite the charter’s “separate and sacred fund” language
Dec. 9, 2016	Moody’s	Aa3 → A1	The reform plan “has significant implementation risk because it relies heavily on actions of the state legislature and includes only modest increases in cash contributions”
Jan. 11, 2017	S&P	AA → AA−, negative	“The continued deterioration in the funded status of the Dallas Police and Fire Pension negatively affects the City’s creditworthiness”

Note the October 2016 action on Dallas Water Utilities. The DWU indenture is a closed-lien revenue pledge; the charter calls it a separate and sacred fund; the coverage ratios were fine. Moody’s revised the outlook anyway, on the theory that a distressed general government eventually reaches for whatever is nearby. No covenant test captured that. It was a judgment about sponsor behavior.

The durable lesson

Moody’s has never restored Dallas’s pre-crisis rating. As of the last verified action the city’s GO stood at A1 against Aa1 in 2015 — a three-notch impairment that has now outlived the crisis by nearly a decade. Governance failures do not mean-revert on the same schedule as ratios do.

What actually fixed it was a governance change, not a contribution number

HB 3158, signed May 31, 2017, is usually described in terms of its benefit and contribution provisions — DROP capped at ten years, no interest credited in Active DROP, employee contributions at 13.50%, COLAs suspended until 70% market-value funding. Those matter. But the decisive provision was structural: the board was restructured to give the Mayor six of eleven appointments, with two active police and fire trustees and three citizen trustees selected through a nominations committee. Benefit or contribution changes now require a two-thirds vote of all trustees. Sponsor-government control replaced member control.

The unfinished business is instructive too. DPFP’s January 1, 2023 valuation showed 39.1% funding and a projected full-funding year of 2105. That triggered a Funding Soundness Restoration Plan requirement under Texas Government Code §802.2015, due September 1, 2025. The negotiated Funding Agreement was not approved until December 10–11, 2025 — after the statutory deadline — and the Pension Review Board’s February 25, 2026 board packet still annotated the plan “agreement in place, no submission.” As of that packet, Dallas P&F was the only Texas plan immediately subject to a mandatory FSRP.

And the plan’s own actuary put the residual risk in writing. Segal, in the January 1, 2026 valuation:

The Funding Agreement with the City set maximum contribution amounts, which may be less than the actuarially determined contributions, through the Fiscal Year ending September 30, 2054… This methodology contains minimal allowance for future adverse experience through September 30, 2029. If future experience does not match the assumptions used to set the contributions, the unfunded actuarial accrued liability may not be paid off within 30 years.Segal, DPFP Combined Plan Actuarial Valuation as of January 1, 2026

The arithmetic behind that warning: actual city contributions for the fiscal year ended September 30, 2025 were $204.9 million, or 79.3% of the ADC. The 2025 market return was +15.49%. And the UAAL still grew year over year, to $3.73 billion on an actuarial basis. A 15% return year in which the unfunded liability increases is a governance fact, not a market fact.

The Houston counterexample — and its limits

Houston’s SB 2190, signed the same day as HB 3158, is the design most worth studying because it embedded a self-executing governance mechanism rather than relying on future political appetite. Each of the three systems produces an annual Risk Sharing Valuation Study, prepared separately by the system actuary and the city actuary, with a reconciliation protocol when they diverge by more than two percentage points. Contribution rates float within a ±5 percentage point corridor around a fixed midpoint schedule.

The critical clause is what happens above the corridor. If the city rate exceeds the “third quarter line rate,” the city and the board must agree to increase member contributions and make plan changes — and if no agreement is reached by April 30, the pension board must act unilaterally to increase member contributions, cut COLAs, and/or raise the normal retirement age. Boards are prohibited from unilaterally amending or terminating that machinery, and final RSVSs are jointly filed with the PRB.

The outcome, on funded ratios (actuarial basis, FY2016 → FY2024): Municipal 56% → 73%; Police 78% → 92%; Fire 81% → 93%. On market value at FY2024, the fire fund is at 100%. Contribution growth decelerated from double digits pre-reform to 1–4%.

A finding worth internalizing before your next rating presentation

The 2017 Houston reform produced no upgrades — only outlook restorations. Moody’s moved the Aa3 outlook to stable in November 2017; S&P moved the AA outlook to stable in January 2018. Houston has been Moody’s Aa3 / S&P AA / Fitch AA continuously from 2016 to today. Structural reform of this magnitude bought stability, not elevation. Set expectations accordingly.

Factor Two Legal framework: the covenants, charters and court dockets that ratios never see

Lipton observes that “compliance with all legal covenants does not necessarily mean the credit is in good financial health.” The Texas corollary is broader: some of the most consequential constraints on Texas issuers are not in the indenture at all. They are in city charters, in the Election Code, and in appellate opinions.

Houston’s charter cap: $2.9 billion that appears in no ratio

Houston’s revenue cap is frequently misdated. It is not a 2015 measure; it is Proposition 1 (2004), limiting revenue to the lower of prior cap plus population and inflation, or prior revenue plus 4.5%, softened by Proposition H (2006), which permitted an additional $90 million for public safety. FY2015 is simply the first year the cap bound. Cumulative foregone revenue since then: $2.9 billion. On October 15, 2025 the council voted 11–3 to hold the rate at $0.519190; Controller Chris Hollins called it a “self-inflicted shortfall of $53 million.”

S&P named it directly when it moved Houston’s AA outlook to negative in July 2024, citing “limited capacity to raise revenue due to a city charter that restricts property tax increases” — and putting the probability of downgrade at one in three or better. Fitch followed in September 2024, citing the diminished margin of general fund reserves above 15% of spending. S&P restored its stable outlook on June 25, 2026, crediting “substantial progress in materially reducing” the FY2027 gap. Fitch’s negative outlook, however, has now run roughly two years — an unusually long tenure.

A single appellate opinion, $100 million a year

The ReBuild Houston line of cases is the best available illustration of legal-framework risk crystallizing into a hard budget number. In April 2024 the Fourteenth Court of Appeals held the city had unlawfully misallocated funds, requiring no less than 11.8 cents per $100 of valuation less debt service to the dedicated drainage and street renewal fund — an allocation not reducible by the revenue cap. On January 31, 2025, the Texas Supreme Court declined to hear Houston’s appeal. The city had said it would be forced to allocate at least $100 million annually.

An April 2025 phase-in settlement stepped the allocation from 57% to 67% (FY2026), 77% (FY2027) and 100% (FY2028), saving roughly $180 million in the following year and unblocking the FY2026 budget. No coverage ratio computed on January 30, 2025 anticipated any of this.

Preemption, charter amendments and a $650 million judgment

Houston’s firefighter pay dispute is a case study in legal hierarchy determining a dollar figure. Proposition B, a citizen-initiated charter amendment approved by roughly 59% of voters in November 2018, required firefighter compensation “at least equal and comparable by rank and seniority” with police. A district court voided it in 2019; the Fourteenth Court of Appeals upheld it in 2021.

On March 31, 2023, the Texas Supreme Court held that Chapter 174 of the Local Government Code preempts Proposition B — because Chapter 174 measures firefighter pay against comparable private-sector employment while Proposition B measures it against police pay, and “the two rules of decision cannot be reconciled.” The court simultaneously affirmed and remanded the parallel Chapter 174 judicial-enforcement suit. The charter amendment lost; the collective bargaining statute won; the underlying claim survived.

Item	Figure
Back pay (July 1, 2017 – March 1, 2024)	$650,000,000 — $633.24M to the 2024 Refunded Judgment Fund, $16.76M to the Local 341 Medical Trust
All-in cost including 30 years of debt service	~$1.5 billion
Recurring annual cost	~$72 million
Collective bargaining agreement	5 years, FY2025–FY2029; base increases totaling 24%, up to 34% with escalators contingent on new public-safety revenue
Financing	$612.125M GO Refunding Series 2024A, closed July 18, 2024 (issued alongside $122.125M Series 2024B)
Voter approval required?	No. Texas law does not require a vote for judgment bonds

That last row deserves emphasis. Council Member Mary Nan Huffman pushed to place the $650 million on the November 2024 ballot. Mayor John Whitmire defeated the effort, warning it “would likely kill the proposed settlement, rekindle litigation, and result in a much more expensive resolution.” The City Attorney added that failure to pay a court-ordered judgment within a short window would constitute an event of default under covenants on some outstanding city bonds. The legal framework did not merely size the obligation — it dictated the financing structure and removed the political-will variable entirely.

The live covenant question: Houston’s FY2027 utility transfer

Houston closed its FY2027 gap — $209.3 million initial, $25.3 million final — substantially by imposing a new 5%-of-gross-revenue right-of-way fee on the Combined Utility System, worth roughly $104 million. The Finance Director stated the transfer “is subordinate to all debt service paid and, as such, is allowable under the master ordinance.” She also conceded that amendments to the 20-plus-year-old CUS master bond ordinance — to explicitly permit the fee in the flow of funds and to cap the transfer — would form part of a fall 2026 refunding. The Controller has characterized the second phase as requiring bondholder approval.

For municipal advisors and bond counsel

This is exactly the fact pattern Lipton describes: full covenant compliance today, an unresolved documentary question tomorrow, and nothing in the coverage ratio to signal it. If your issuer is solving a general fund problem with an enterprise fund transfer, the master ordinance analysis belongs in the rating presentation — not in the footnotes of a refunding six months later.

Factor Three Political will: Texas votes, and Texas voters have opinions

Lipton’s sharpest line is about the limits of automation: “I would not expect AI to assess the likelihood of political leaders approving future utility rate increases or an electorate voting to approve a school budget.” Texas holds those elections constantly, which means we have a large sample.

Ballot language is a credit variable

HB 3 (2019) added Texas Education Code §45.003(b-1), which requires every school bond proposition to include the statement “THIS IS A PROPERTY TAX INCREASE” — with no exception, even where the tax rate does not change. The Attorney General confirmed on July 30, 2025 that the language is “strictly construed; therefore, school districts may not modify, supplement, or qualify this mandatory ballot language.” Separately, SB 30 (2019) forced stadium seating over 1,000, natatoriums, other recreational facilities, performing arts facilities, teacher housing and technology equipment into standalone propositions.

The inflection arrived on November 2, 2021: 65 of 174 school propositions defeated (38%), and $3.8 billion of $12.1 billion rejected (32%). Fort Worth ISD’s $1.2 billion Proposition A passed by 57 votes, while three FWISD arts and athletics propositions worth roughly $300 million failed — against a 2017 FWISD bond that had passed with over 70%. Temple ISD’s $178 million failed by two votes.

BRB FY	On ballot ($M)	Approved ($M)	Approved %
2016	11,105.2	10,560.9	95.1%
2017	8,605.3	7,042.1	81.8%
2018	13,508.2	11,897.1	88.1%
2021	16,111.0	14,043.3	87.2%
2022	25,345.7	15,692.0	61.9%
2023	40,164.5	33,603.3	83.7%
2024	28,287.5	22,659.1	80.1%
2025	23,558.6	14,853.7	63.0%

A methodological caveat worth stating in any disclosure that cites this series: SB 30 changed the denominator. Forcing severable items into standalone propositions mechanically raises proposition counts and concentrates failures in the newly-severed items. Proposition-count pass rates therefore overstate the deterioration. Dollar-weighted rates are the cleaner series — and they still show two of the last four years below 64%.

The operating-side picture is harder. On November 5, 2024 Texas voters rejected 30 of 52 VATRE propositions, and Houston ISD’s $4.4 billion bond failed. Moody’s, writing on that cycle in February 2025, put the consequence plainly: “Without a main revenue-generating tool, districts will struggle to address key priorities… without relying on financial reserves or cutting expenses.” In November 2025, more than half of VATREs failed again; Magnolia ISD lost all three propositions ($516.9 million), Friendswood ISD all four ($165 million).

And yet — in May 2026, Dallas ISD’s $6.2 billion package, the largest school bond in Texas history, passed all four propositions with over 70% support (Proposition A at 74.6%), amid a statewide cycle that authorized $76.4 billion of new principal. Political will is not a constant. It is a variable that moves with local campaign quality, project mix, and whether the district severed the stadium.

When voters create fixed costs

Political will cuts both ways, and Dallas provides the clearest example. On November 5, 2024, Dallas voters narrowly approved Proposition U — 50.47% — requiring that at least 50% of annual revenue growth go to public safety pensions and police pay, and mandating a force of 4,000 sworn officers against roughly 3,100 at the time. Within about ten days, Moody’s revised the city’s outlook to negative, affirming A1, and noted that the increased contributions “are not expected to meet the tread water level and the plans’ cash flow remains very weak.” Kroll had already revised its AA+ outlook to stable from positive two weeks earlier.

An electorate can impose a permanent claim on revenue growth in a single afternoon. No ratio computed on November 4 contained it.

Statewide propositions reallocate the base

The November 4, 2025 constitutional amendment election passed all 17 measures on turnout just under 16% of registered voters. Three matter for local credit:

• Proposition 13 (79.4%) — ISD homestead exemption to $140,000 from $100,000, with state hold-harmless for districts.
• Proposition 11 (77.7%) — additional 65-plus and disabled exemption to $60,000 from $10,000.
• Proposition 9 (65.0%) — business personal property exemption to $125,000. This one carries an unreimbursed hit to city, county and special district tax bases. The House’s own amendment guide records the objection that “Counties, municipalities, and special districts could have to raise tax rates to cover the loss.”

Also on that ballot: Proposition 4, which dedicates to the Texas Water Fund the first $1 billion of state sales and use tax revenue collected in a fiscal year above a $46.5 billion floor, from FY2027 through FY2047 — up to $20 billion over 20 years, contingent each year on collections clearing that floor. In July 2026 the Texas Water Development Board approved a 2027 State Water Plan estimating $174 billion of investment over the next 50 years. Twenty billion dollars of dedicated funding against that number is a start, not a solution — and the gap is a political-will question that will be re-litigated for two decades.

Factor Four Regulatory shifts: market access is not a ratio

Lipton notes that “at times, demand and market access matter more” than the numbers. Texas has run the most direct experiment in the country on that proposition.

SB 13, SB 19, and the standing letter

SB 13 (fossil fuel “boycott”) and SB 19 (firearm entity discrimination) took effect September 1, 2021. The enforcement mechanism is not the statutes themselves — it is Government Code Chapter 1202, under which the Attorney General’s Public Finance Division must approve every public security issued by any Texas political subdivision before closing. Compliance runs through “standing letters” filed by each bank. The AG can place a standing letter under review and then rescind it, after which the office simply declines to approve any transcript in which that bank is a party. There is no adjudication and no appeal.

The market effect was immediate. Five of the largest muni underwriters exited Texas on the effective date. JPMorgan fell from a top-five Texas underwriter in 2021 to 22nd in 2022; Bank of America fell out of the top 25 entirely. Citigroup underwrote four Texas deals totaling $216 million in the first seven months under the law.

$300–500MEstimated additional interest borne by Texas issuers on $31.8 billion borrowed in the first eight months (Garrett & Ivanov)

~40 bp Borrowing cost increase for jurisdictions that had previously relied on the exiting underwriters for a majority of issues

3Banks ever formally excluded by state action — Citigroup, UBS and Barclays. The rest withdrew or paused voluntarily

That third figure is worth stating precisely, because the record is routinely overstated. Only Citigroup (SB 19, AG rejection, January 2023), UBS (SB 13, Comptroller list, August 2022) and Barclays (SB 13, AG rescission, January 2024) were ever formally excluded. Goldman Sachs, JPMorgan, Bank of America and Wells Fargo were never banned — they withdrew or paused during review, and JPMorgan, Bank of America, Morgan Stanley and Wells Fargo have all since been affirmatively cleared. The chilling effect was real; the ban was narrow. Both facts belong in the analysis.

The regime is also unstable, which is itself the point. In American Sustainable Business Council v. Hegar, Judge Alan Albright granted partial summary judgment on February 3, 2026, declaring SB 13 facially overbroad under the First Amendment and impermissibly vague under the Fourteenth. Three days later the AG advised bond counsel: “Unless and until the order is stayed, we will not be enforcing or implementing SB 13” — while cautioning that the order did not touch SB 19 and that issuers should not remove SB 13 language from bond documents. On May 29, 2026, the Fifth Circuit stayed the injunction pending appeal. On June 3, the AG resumed enforcement. As of August 2026, SB 13 is back in force with the merits appeal pending.

For issuers timing a transaction

Between February 3 and June 3, 2026, the enforceability of a statute governing your underwriter’s eligibility changed twice. That is not a credit metric. It is a market-access variable with a four-month half-life, and it belongs in your transaction timeline discussion.

The revenue cap, and the sleeper that binds harder

SB 2 (2019) lowered the M&O revenue-growth trigger from 8% to 3.5% for cities and counties and replaced petition-triggered rollback elections with automatic November elections. Fitch’s contemporaneous assessment was that it “could negatively impact Fitch’s assessment of certain local governments’ independent revenue raising ability — a component of one of Fitch’s four key rating drivers in its U.S. public finance tax supported rating criteria.” Moody’s called it credit negative. S&P warned that the constraint “could reduce financial flexibility and stress Texas municipalities’ creditworthiness.”

The constraint compounds, and there is no symmetric recovery mechanism after a downturn. The Legislative Budget Board’s own framing of a proposed further tightening — SB 10 in the 2025 second called session, which would have cut the multiplier to 2.5% — captures it: “Tax reductions relative to current law baseline escalate markedly, as tax levy growth compounds more slowly when limited by the reduced voter-approval tax rate multiplier.” SB 10 did not pass; the Senate Research Center analysis states the motivation plainly (“From 2019 to 2025, municipal and county property tax levies increased at faster rates than ISD property tax levies”). Expect it back in 2027.

But the more instructive 2025 enactment is SB 1851, which bars a city from adopting a rate above the no-new-revenue rate if it is not current on its Local Government Code Chapter 103 annual audit. On May 14, 2026, the Attorney General sent letters to more than 130 cities prohibiting them from exceeding the NNR rate; his office had earlier demanded documents from nearly 1,000 of the state’s roughly 1,200 cities. Manvel, at about 20,000 residents, estimated a revenue loss near $485,000, or 3.5%.

This is a revenue constraint triggered by an administrative failure. For a small city, a late audit is now more binding than the 3.5% cap. Nothing in fund balance, days cash or debt per capita signals it.

Odessa learned the same lesson from the other direction. S&P withdrew its rating on June 6, 2024 and Moody’s on June 18, 2024, citing “insufficient or otherwise inadequate information” because the city had not completed its FY2022 and FY2023 audits. Odessa was assigned a new Moody’s Aa2 issuer rating on June 4, 2026 after completing four years of audits; it has said it will not seek reinstatement from S&P. Two years without a rating — and it was never an oil-price event. Disclosure discipline is credit quality.

School districts: flat funding, falling enrollment, and a guarantee that masks it

Texas ISDs are experiencing the most significant qualitative deterioration in the state, and it is nearly invisible in secondary market pricing because virtually all Texas ISD GO paper trades on the Permanent School Fund’s triple-A guarantee rather than the underlying rating.

The underlying picture, from the agencies:

• Fitch, July 2026: approximately 26% of the Texas public schools Fitch rates have had outlooks revised or underlying ratings downgraded — some by multiple notches — since January 2025. The stated driver is “limited and infrequent increases in the state’s basic allotment… that has often failed to keep pace with rising labor, benefits, and other operating costs.” Fitch adds: “Even districts with a longstanding strong fiscal track record are reporting weaker-than-expected results.”
• S&P, February 2025: negative actions on Texas ISD underlying ratings outpaced positive over the trailing year; median reserves fell to 36.8% of general fund revenue in 2024 from 40.7% in 2023.
• Fitch, March 2026 (national): K-12 districts accounted for 70% of all Fitch downgrades and negative outlook revisions over the trailing twelve months.

The structural cause is a funding formula that has not moved. The basic allotment has been $6,160 since HB 3 in 2019. HB 2 (2025) delivered $8.5 billion — but did not raise the basic allotment; it added a guaranteed yield adjustment fixed at $55 per student through 2027, a sub-1% increase, delivered alongside roughly ten new restricted allotments. Core discretionary per-student operating revenue is effectively flat in nominal terms since 2019 and sharply negative in real terms.

Layered on top: enrollment. TEA reported 5,467,642 students in 2025-26, down 76,613 or 1.4% — only the second year-over-year decline since PEIMS collection began. Eighteen of twenty ESC regions lost enrollment. Texas 2036’s analysis finds 60% of the loss in grades K–5 and projects that under every Texas Demographic Center migration scenario, enrollment shrinks again next year, with roughly 100,000 fewer K-12 students by 2030 under the mid-migration case. Major urban districts have lost 17.3% of students over ten years. And the ESA program — SB 2 (2025), with ~106,660 students awarded from more than 274,000 applicants as of June 2026 — is an additional ADA drain whose magnitude Fitch describes as hard to predict.

The PSF ceiling: a guarantee is only as good as its capacity

The Permanent School Fund Bond Guarantee Program is the largest triple-A rated bond guarantor in the United States, backing more than $143 billion for 900-plus districts at a cost to the district of a $1,500 application fee and no premium. It is also capacity-constrained in a way that is easy to overlook until it binds.

In late 2022 it did. Projected available capacity fell from roughly $3.9 billion at June 30, 2022 to about $26.65 million projected at end-December. TEA rationed rather than closing, prioritizing districts with the lowest property wealth per ADA. Between November 2022 and January 2023 TEA denied $8.4 billion of applications from 56 districts — 92% of the dollar value of all applications in those three months.

The cost was measurable. Austin ISD’s $542 million January 2023 deal, sold unenhanced with underlying Aaa/AAA ratings, priced at a 3.67% TIC — 10 basis points wider than Dallas ISD’s $551 million PSF-guaranteed deal priced the same day, despite Dallas’s lower underlying rating.

Relief came in two steps: an SBOE reserve cut from 5% to 0.25% effective March 1, 2023, and IRS Notice 2023-39 on May 10, 2023, which converted the federal cap from a static $117.3 billion to a dynamic 500% of PSF book value as of each bond’s sale date — raising federal capacity roughly 86% to about $218 billion and flipping the binding constraint from federal back to state.

Metric	Value
PSF cost value	$51.91 billion (unaudited)
IRS limit (5.0x)	$259.57 billion
State capacity limit (3.5x, SBOE rule)	$181.70 billion — binding constraint
Guaranteed bonds outstanding	$143.82 billion
Utilization	79.16% of capacity limit
Projected available capacity	$32.17 billion

Utilization is back to roughly 79%. The good news is that the SBOE retains about 1.5 turns of unused statutory headroom — the multiplier can go to 5.0x by rule, with no federal action required. The qualitative point is that closing that gap is a discretionary act by an elected board, not an automatic one. Against $76.4 billion of new principal authorized in May 2026 alone, that is a governance question worth watching.

Factor Five Cyber-threat preparedness: real risk, no rating action, and why that matters

Texas has been hit harder and more publicly than almost any state, and the honest analytical conclusion is uncomfortable: we could find no Texas issuer that has suffered a rating action attributable to a cyber incident. That is precisely why ratios will never surface this risk — and why it needs separate treatment.

Date	Entity	What happened
Aug. 16, 2019	22–23 Texas local governments	Coordinated REvil/Sodinokibi attack pushed simultaneously through a single managed service provider’s remote-management software. Collective demand $2.5 million; none paid. The state activated its State Operations Center and DIR reported a transition to recovery within a week.
May 3, 2023	City of Dallas	Royal ransomware via a stolen domain service account; intrusion ran April 7 – May 4. Municipal courts closed for weeks; police/fire dispatch support systems, permitting and libraries disrupted. Council approved roughly $8.6 million in recovery spending on Aug. 9. Breach notifications to 30,253 individuals including SSNs and health insurance data. City published a formal after-action review.
Oct. 19, 2023	Dallas County	Play ransomware; county refused to pay and the group leaked stolen documents in November. Notices to 201,404 individuals; two years of credit monitoring offered.
June 2021	Judson ISD	Paid $547,045.61 — among the largest publicly confirmed ransom payments by a U.S. school district. Sheldon ISD paid roughly $207,000 in 2019; Port Neches–Groves ISD paid $35,000.

Three separate Dallas-area entities were compromised by two ransomware crews inside twelve months — the Dallas Central Appraisal District (November 2022, which reportedly paid roughly $170,000), the City (May 2023) and the County (October 2023). A CBS 11 investigation reported that at least 67 Texas school districts suffered a cybersecurity breach over a two-year period.

Moody’s operative framing is liquidity-conditional: “cash-strapped debt issuers with low liquidity and high leverage are more susceptible to the negative credit effects of cyber incidents.” Dallas absorbed $8.6 million against a multi-billion general fund without difficulty. A district or small city with 45 days cash would not. Moody’s also treats the establishment of state cybersecurity commissions — Texas among roughly two dozen states — as a positive credit consideration; Texas transitioned its cybersecurity functions to the new Texas Cyber Command on April 9, 2026.

The disclosure asymmetry

Lipton observes that many audited financial statements show only a footnote line attesting to covenant compliance, and that “Not all financial disclosures, however, include this language.” Cyber is worse: for most Texas issuers there is no line item at all. An issuer with tested backups, segmented networks, cyber insurance and an incident response retainer looks identical, on every published ratio, to one without them. Until that changes, the only way an analyst learns the difference is by asking — which means the only way an issuer gets credit for the investment is by volunteering it.

The Marquee Case Corpus Christi: when a physical constraint becomes a multi-notch downgrade

If you read one Texas case study to internalize Lipton’s argument, make it this one. Corpus Christi is the cleanest example in the U.S. municipal market of a resource constraint producing multi-agency, multi-notch downgrades — with the transmission mechanism running explicitly through customer concentration.

Date	Action
Sept. 2025	Council halts the Inner Harbor desalination campus — Texas’s first seawater desal plant for municipal use — as estimated cost climbs past $1.2 billion; design-build contractor terminated. Moody’s opens review for downgrade.
Oct. 2025	Fitch and S&P revise utility system revenue bond outlooks to negative.
Dec. 11–12, 2025	Moody’s downgrades: GO and sales tax revenue bonds to A1 from Aa2; combined utility enterprise to A1 from Aa3. Negative outlooks. Approximately $2 billion of debt affected.
April 2026	Moody’s opens a second review for further downgrade. Fitch revises the AA issuer rating outlook to negative.
May 2026	S&P downgrades utility system revenue debt two notches to A, CreditWatch negative; revises the AA GO outlook to negative.
June 1–2, 2026	Fitch cuts combined utility system senior lien revenue bonds three notches to A− from AA−, outlook negative.

Moody’s language is worth quoting because it is entirely forward-looking and entirely non-ratio:

The unexpected acceleration of water depletion risk and the narrow window to implement solutions before November 2026, which could trigger a Level 1 Emergency, indicating 180 days until its water supply will be insufficient to meet demand… The magnitude of water stress makes curtailment of industrial operations — a key driver of the regional economy and dependent on the city’s water supply — more likely.Moody’s Ratings, December 2025

Fitch’s framing adds the concentration channel explicitly: uncertainty over potential water curtailments and their revenue impact, “along with industrial customer concentration, could limit the system’s ability to meaningfully improve leverage and coverage metrics.”

Read that carefully. The agencies did not downgrade because coverage had deteriorated. They downgraded because a physical constraint made future coverage deterioration probable, through a customer base that is simultaneously the city’s tax base and its largest water user. This is the definition of a forward-looking qualitative assessment, and no ratio computed in mid-2025 would have flagged it.

The city has since moved — a February 2026 contract negotiation at roughly $978 million, well below prior estimates; 50 MGD secured from the Nueces River Authority’s proposed plant; $1 billion of projects targeting 76 MGD; an $11 million reclaimed water design expansion; and rate increases effective January 1, 2026. Rainfall has pushed the projected Level 1 emergency out to September 2027. But the ratings are where they are.

The Midland–Odessa control group

For a companion lesson in economic concentration, compare Midland and Odessa. Roughly one in five jobs in Midland–Odessa is directly tied to oil and gas — the highest concentration in the country. In the 2016 bust, Moody’s placed eleven Permian-area local governments on review for downgrade — among them Midland, Odessa, Pecos County and seven hospital districts — affecting $477 million of debt.

Same commodity, opposite outcomes. Midland has held AAA/stable through the cycles; Fitch specifically noted that Midland sets aside surplus sales tax receipts into fund balance to avoid dependence on volatile oil revenue. Odessa lost both of its ratings — for late audits. Concentration risk is manageable with countercyclical reserve policy and fatal without administrative discipline. Neither of those is a ratio; both are governance.

Winter Storm Uri: the tail that arrived in four days

One more, because it is the purest demonstration that a February 1, 2021 ratio package contained none of what happened between February 14 and 19.

• Denton Municipal Electric spent roughly $207 million on ERCOT power in about four days. Over the previous three years combined, the utility had spent $237 million on electricity. On one day alone it paid out more to buy power than in the entire prior year. The council moved to expand its debt cap on February 23, 2021, and financed the cost over decades.
• Brazos Electric Power Cooperative — the largest and oldest Texas generation and transmission cooperative, 16 member co-ops, roughly 660,000 end users — received an ERCOT bill of about $2.1 billion for seven days and filed Chapter 11 on March 1, 2021. The plan went effective December 15, 2022 with ERCOT’s claim settled near $1.89 billion. Brazos wound down its power supply business, sold its generation assets, emerged as a transmission-and-distribution-only cooperative, and senior management was required to depart.
• Rayburn Country Electric took the other path, becoming the first utility in Texas to securitize an Uri ERCOT bill — roughly $908 million of senior secured cost recovery bonds priced in early 2022. The securitization allowed Rayburn to avoid bankruptcy.
• CPS Energy sued ERCOT in March 2021 over the $9,000/MWh cap. On June 23, 2023 the Texas Supreme Court held 5–4 that ERCOT is “an organ of government” performing a “uniquely governmental function” and entitled to sovereign immunity, dismissing the suit. San Antonio customers are reported to be recovering at least $418 million through a small monthly rider running roughly 25 years.

The statewide cleanup ran through securitization: roughly $3.5 billion of Customer Rate Relief Bonds issued in March 2023 by the Texas Natural Gas Securitization Finance Corporation under HB 1520 (a proposed state appropriation to retire them was dropped in committee, and the great majority remained outstanding in FY2025), plus $800 million (Subchapter M, November 2021) and $2.116 billion (Subchapter N, June 2022) through ERCOT-sponsored special purpose entities under HB 4492. Press tallies have put total consumer-borne Uri debt near $10 billion.

The stress-testing point

Lipton writes that “even if initial assumptions were valid, perhaps there was a failure to perform appropriate stress testing.” Denton consumed nearly a full year’s power budget in a single day, and close to three years’ worth in four. No days-cash-on-hand calculation anticipates that. The question a Texas public power issuer should be able to answer in a rating presentation is not “what is our coverage?” but “what is our maximum four-day exposure, and what facility covers it?”

The Call to Action: What each stakeholder should do differently

Lipton addresses issuers, municipal advisors, legal counsel, underwriters and investors. Here is the Texas-specific translation.

Issuers

• Get current on your audit. SB 1851 and the Odessa episode make this a rating and rate-setting issue, not a compliance chore. More than 130 Texas cities were barred from exceeding the no-new-revenue rate in May 2026 for this reason alone.
• Disclose your cyber posture affirmatively. Tested backups, network segmentation, insurance limits, incident response retainer, tabletop cadence. No ratio will ever show it, and no analyst can infer it. If you have made the investment, say so.
• Bring your governance changes, not just your numbers. Dallas’s rating cascade stopped when board composition changed. Houston’s reform was rewarded for the automatic backstop, not the contribution schedule.
• Stress test to the tail, and bring the answer. Maximum multi-day commodity exposure. Maximum drought curtailment revenue impact. Largest single-customer concentration. Present the number before you are asked for it.
• Sever the stadium. If you are a school district, SB 30 has already told you what your voters will vote on separately. Design the package around that reality rather than discovering it on election night.

Municipal advisors

• Build the rating presentation around the five submerged factors explicitly, with a slide for each. Agencies are already asking; anticipate rather than react.
• Model the compounding effect of the 3.5% cap over the full projection period, not year one — and model the 2.5% scenario, because SB 10 will be back in 2027.
• Treat underwriter eligibility as a live timeline risk. The enforceability of SB 13 changed twice in four months in 2026.

Bond counsel and disclosure counsel

• Ballot language is now strictly construed. The AG’s July 30, 2025 letter forecloses modifying, supplementing or qualifying the mandatory school bond warning — and SB 1025 (2025) added a parallel “THIS IS A TAX INCREASE” requirement for all tax bond elections.
• Where a general fund problem is being solved with an enterprise transfer, run the master ordinance flow-of-funds analysis before the budget vote, not before the refunding.
• Track appellate dockets that touch revenue dedication. A single opinion produced Houston’s $100 million annual obligation; Midland ISD’s July 2026 challenge to TEA’s authority to set Tier One M&O rates could be the most significant school finance case since 2016.

Underwriters and investors

• For Texas ISD paper, remember what the PSF guarantee is masking. Roughly 26% of Fitch-rated Texas schools have seen negative underlying action since January 2025, with a flat basic allotment and a second consecutive enrollment decline ahead. The guarantee is excellent; the underlying trend is not the same thing.
• Monitor PSF capacity utilization directly. At 79% of the state limit, the buffer depends on a discretionary SBOE rule change.
• Underwrite water supply as a credit factor, not an ESG factor. Corpus Christi lost two to three notches across three agencies in nine months on a resource constraint, and the mechanism was customer concentration.

Closing

Lipton’s conclusion is that “multiple results for the same metric often reflect how stakeholders measure a multi-dimensional canvas of credit risk,” and that “the availability of data is not the issue, but a lack of standardization in how the data is interpreted can impact the credit dynamics.”

Texas suggests something slightly stronger. In every case above, the data existed. DPFP’s DROP concentration was published. Denton’s power purchase budget was public. The Corpus Christi reservoir levels were on a website. Odessa’s missing audits were conspicuous by absence. The Fifth Circuit’s docket is open to anyone. None of it was hidden — it simply was not in the ratio, and so for a while it was not in the analysis.

The practical implication for a Texas issuer is straightforward and slightly demanding. The information that will determine your credit trajectory over the next five years is information you already possess and are not currently required to disclose. Ratios are the starting point. In Texas, the interesting part starts below the waterline.

Sources

Source article

• Jeff Lipton, “How qualitative credit signals can reveal muni risks before ratios do,” The Bond Buyer, August 4, 2026

Pensions and governance

• City of Dallas, DPFP Overview · DPFP Actuarial Valuation as of January 1, 2026 (Segal) · DPFP Funding Agreement, December 11, 2025
• Center for Retirement Research, Boston College · Institutional Investor, “Dallas Confidential”
• City of Dallas, Moody’s October 2016 action · NBC 5 DFW, S&P January 2017 downgrade · Bond Buyer, Moody’s outlook revision following Proposition U
• Texas Pension Review Board, DPFP plan page · PRB Board Meeting Packet, February 25, 2026 · Tex. Gov’t Code ch. 802 (FSRP)
• City of Houston Annual Pension Update 2024 · SB 2190 enrolled bill analysis · City of Houston, rating agency reaction to SB 2190

Legal framework and litigation

• Texas Supreme Court, Proposition B preemption opinion (March 31, 2023) · City of Houston, firefighter contract financial terms · Official Statement, Series 2024A/2024B (EMMA)
• Bond Buyer, drainage fund decision · Bond Buyer, drainage settlement · City of Houston revenue cap presentation, October 2025
• Bond Buyer, S&P negative outlook · Bond Buyer, Fitch negative outlook · Bond Buyer, FY2027 budget and CUS covenant question
• Texas Supreme Court, CPS Energy v. ERCOT (June 23, 2023)

Regulatory shifts

• Texas Attorney General, All Bond Counsel letters (index of every SB 13/SB 19 determination) · AG letter resuming SB 13 enforcement, June 3, 2026
• Garrett & Ivanov, “Gas, Guns, and Governments: Financial Costs of Anti-ESG Policies” · Bond Buyer, market share effects
• SB 2 (86R, 2019) bill summary · SB 10 (89th, 2nd C.S.) Senate Research Center analysis · Texas Tribune, SB 1851 enforcement
• Odessa American, Odessa regains Moody’s rating

Schools, PSF and political will

• Tex. Educ. Code §45.003 · AG bond counsel letter on ballot language, July 30, 2025
• Texas Bond Review Board, Local Government Annual Report FY2025 · Bond Buyer, November 2021 bond election results
• Bond Buyer, Fitch July 2026 on Texas school ratings · Bond Buyer, Moody’s February 2025
• TEA, Enrollment in Texas Public Schools 2025-26 · Texas 2036, Enrollment Report May 2026
• TEA, PSF Bond Guarantee Program official disclosure, February 26, 2026 · IRS Notice 2023-39 · Bond Buyer, PSF capacity crunch
• Ballotpedia, November 2025 constitutional amendments · Bond Buyer, 2027 State Water Plan

Cyber

• Texas DIR, August 2019 coordinated ransomware attack · Texas DIR, transition to Texas Cyber Command
• Cybersecurity Dive, City of Dallas recovery costs · BleepingComputer, Dallas County breach · EdScoop, Judson ISD ransom payment
• Cybersecurity Dive, Moody’s on cyber and creditworthiness · Bond Buyer, cybersecurity and credit ratings

Water, energy and economic concentration

• Bond Buyer, Moody’s Corpus Christi downgrades · Bond Buyer, S&P downgrades · Bond Buyer, Fitch three-notch downgrade
• Bond Buyer, Texas utilities and Winter Storm Uri · ERCOT, HB 4492 Subchapter M · ERCOT, Subchapter N · TNGSFC Customer Rate Relief Bonds, Series 2023
• Brazos Electric Chapter 11 outcome · KERA, Denton’s Uri power costs
• Dallas Fed, Midland oil and gas employment concentration

This commentary is provided for informational and educational purposes only. It is not investment, legal, tax or accounting advice, and it is not a recommendation to buy, sell or hold any security. Figures, ratings and legal outcomes are current as of August 2026 and are drawn from the public sources linked above; ratings and litigation postures change. Readers should independently verify any figure before relying on it and should consult their own advisors.