WASHINGTON - The District of Columbia Council's committee of the whole today will consider a bill that would hold the city's debt-to-expenditures ratio at 12%.
The meeting comes as finance officials are monitoring interest rates on the district's variable-rate debt, which in recent days spiked higher, reflecting the turmoil in the credit markets.
The debt cap bill is expected to be well received by council members, and could garner more support given the chaos that hit the market last week.
"It's always good to manage your debt responsibly, but in bad times it's even more important," District chief financial officer Natwar Gandhi said in an interview last week. "[We] do not want to add to our debt obligations irresponsibly. We want Wall Street to know that we are fiscally prudent."
The bill, which District Council chairman Vincent Gray introduced in mid-July and has since been co-sponsored by 10 of the 12 other council members, would hold the city's debt-to-expenditures ratio at 12%, which would result in minimal additional bonding capacity for the next five years.
"At a time when the national economy is taking a dive and Wall Street is in crisis, the District of Columbia government needs to be proactive to ensure our financial stability and to send a strong message to the bond rating agencies that we are prudently managing our borrowing and debt," Gray said in a press release.
Gandhi has pushed for the cap for months, saying that to keep the city's current bond ratings, or to perhaps grab higher ratings, officials need to stick to his recommendations. If the District Council approves the bill, it will also need congressional approval.
The city's current bond ratings are its highest ever - A-plus from both Fitch Ratings and Standard & Poor's and A1 from Moody's Investors Services - and are far removed from the junk bond ratings it carried during the city's financial crisis in the mid-1990s.
Currently the district's debt ratio is at 9.7%, but it is expected to increase to 11% in fiscal 2009, and to peak at 11.8% in both 2010 and 2011, Gandhi said. The median debt ratio for major municipalities is 8.6%, according to Moody's.
And the district has the highest debt per capita - which is expected to be $10,902 at the end of this fiscal year - of all major municipalities nationwide. That figure is expected to increase to $13,999 by fiscal 2013 as a result of additional planned debt-driven projects, Gandhi said.
The district has a maximum legal cap of 17% on its debt, but Gandhi said it would not be financially prudent to ever approach that limit, and council officials have reiterated that they would not intend to reach that percentage.
Council member Jack Evans, who chairs the finance committee and is a co-sponsor of the bill, has called Gandhi's recommendations too conservative in the past. Evans has said he would not want the cap to limit the city's flexibility.
Council sources said that Evans and Mayor Adrian Fenty's administration fear that enacting the law would restrict the city's ability to respond to unexpected needs, such as issuing bonds to respond to a disaster like the fires that destroyed the city's Eastern Market and the Georgetown University library.
The committee of the whole will mark up the bill today and then it would be sent to the full council for a first and second reading.
Later this week, the council will also hear from the CFO's office when it will present revised fiscal 2009 revenues on Wednesday or Thursday.
Gandhi said he does not think the district faces as significant a drop in revenues that some cities and states have been hit with over the past few months.
"We are in no way near the dire shape of our neighbors," Gandhi said, referring to Maryland and Virginia, both of which have reported revenue shortfalls of nearly $1 billion for fiscal 2009.
"That doesn't mean we do not have risks," Gandhi said. "After all, how long can you swim in a sea of red ink and say, 'I'm green'? "
"We are basically very cautious," Gandhi said. "We are carefully monitoring this, and conservative as we are in our revenue estimation, we had anticipated a great deal of all of this, so we can manage it better."
Gandhi has already twice revised the district's fiscal 2009 revenue estimates downward since the beginning of this year. He is pushing the debt caps harder now as the city braces for the effects of the national economic downturn.
"I must say, no matter what I have in terms of numbers, it is going to be stable or slightly less [than anticipated]. I would say given we are broad based in our tax collections, that we have job sectors that are either growing or remaining stable, we are not going to experience the kind of problems that the region or national economy has experienced."
But the district did feel some of the negative effects of last week's chaotic financial markets when investors in a flight to quality flocked to U.S. Treasury securities, and interest rates in the variable-rate debt market soared. The interest rates on the district's $600 million of variable-rate demand obligations, which make up about 13% of the district's total debt outstanding, spiked to 5.15%, up from about 2.75% a week earlier.
"We're going to see how the market performs over the course of the next few days, and see what the resets are next week, and we'll see where we go from there," Treasurer Lasana Mack said last week.
About $125 million of the city's VRDOs are being remarketed by Lehman Brothers, and Mack said he will continue to monitor the situation, and could replace Lehman with a different remarketing agent.
As the Treasury and Federal Reserve made plans to provide federal insurance for investors of money market mutual funds and to create a new institution that would take beleaguered assets off the balance sheets of financial companies, Mack said he hopes the action would help rates on the district's VRDOs to return to lower levels.
"We're hoping that the Fed action will bring some calmness," Mack said. "I would think that would bring some stability to the short end."
Mack said the district could consider converting their VRDOs to fixed rate, but that for now, officials still feel the city has benefited from the VRDOs and the savings overall that they have achieved from the structure, compared to using a fixed rate.
"It's possible," Mack said. "In this market, anything is possible."
