It was only a matter of time before someone pointed out that the emperor had no clothes. For the City of Dallas, that moment came yesterday, when Moody’s Investor Service downgraded the City’s debt rating due, in part, to Dallas’ “very large and growing unfunded pension liabilities.” After years of providing defined benefit pensions — something a majority of the private sector moved away from long ago — the system has finally been exposed for what it is: unsustainable.

Despite rising healthcare costs, longer lifespans, and an underperforming stock market, the City continues to guarantee lifetime benefits to its employees, and to pay out pensions as if it has the money to do so.

As a result, Dallas has amassed more than $200 million in pension-related bond debt, with another $2.9 billion in unfunded pension promises that it has no money to deliver. And this is only for the pension system; Dallas owes more than $6 billion in additional debt for other city services and projects.

In light of this, it is little wonder that Moody’s – a credit-rating company known for seeing through facades – took notice of Dallas’ snowballing fiscal position, and downgraded the City’s credit rating.

Moody’s provided suggestions of ways Dallas can reform its spending practices and improve its credit: by making “material improvement to annual pension funding [and a] reduction in the Moody's adjusted net pension liability.” Yet, even as Moody’s was making its announcement, the Dallas City Council agreed to issue another $227 million in bonds. Not a good sign.

Only time will tell whether Dallas will follow Moody’s advice. But the mere existence of such advice reflects that Dallas’ situation is still redeemable; the City is not doomed to debt forever. Local policymakers have plenty of tools and ideas at their disposal to restore their credit rating, including transitioning the local retirement systems to a defined contribution model, using zero-based budgeting to weed-out and redirect inefficient government spending, implementing debt transparency and accountability measures to keep themselves in line, or getting a handle on nonvoter approved debt. Hopefully Dallas officials will view Moody’s downgrade as the wake-up call that it is, and – rather than insisting that they are already wearing invisible garments – decide to put on some clothes.