D.C. Looks Beyond GOs

WASHINGTON — District of Columbia officials are seeking authority to issue revenue bonds that would be backed by individual income and business-franchise taxes in an attempt to achieve higher bond ratings and a lower cost of borrowing.

Natwar Gandhi, the city's chief financial officer, announced yesterday that District Council member Jack Evans hasintroduced legislation, at his request, that would allow the district to issue income tax bonds as an alternative to general obligation bonds, which are backed by real property taxes.

The bill is pending council approval, but officials expect it to be passed. Evans, who chairs the council's finance and revenue committee, could not be reached for comment. But Marcy Edwards, senior financial policies adviser for the CFO's office, said she expects the council to pass the measure before it breaks for summer in July.

Treasurer Lasana Mack said: "We think we can achieve debt service savings because we think we can get a higher rating on these bonds."

"Practically speaking, if this gets approved and it gets higher ratings than our GOs, we'll probably be using these bonds instead" of GOs to finance projects, Mack said. The district's GOs are rated A1 by Moody's Investors Service and A-plus by both Standard & Poor's and Fitch Ratings.

The district joins New York City and New York state, among other issuers, that currently sell bonds backed by income taxes, Standard & Poor'sanalysts said. The Empire State Development Corp., for example, was able to obtain a AAA rating from Standard and Poor's for $310 million personal income tax bonds it issued in October 2007.

"This is a security that, depending on how it's structured, could allow [the district] to achieve a very high rating," analyst Karl Jacobs said.

"On the investors side, quite often they look for different types of securities because mutual funds hold so many bonds, and depending on the mutual fund, they are limited in terms of what kind of concentration they can have of one security," Jacobs said.

"If an investor is bullish on, say, D.C.'s bonds, but that fund is at its limit on that level of security, they may be looking for another type of security," he said. "Bondholders are always looking for new types of securities."

"We're hoping it becomes attractive to investors who want to diversify," Edwards said.

Pauline Schneider, a partner at Orrick Herrington and Sutcliffe LLP, the district's bond counsel, said that income tax bonds may be "a better source of security" for the district because a "substantial" portion of property is owned by the federal government or nonprofit organizations and does not general tax revenues for the local government.

But even if the council provides authority for income tax bonds, the district still plans in August to issue between $325 million and $350 million of GOs, the remaining about of debt under its fiscal 2008 capital plan.

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