Gandhi: D.C. Officials Must Heed 12% Borrowing Cap

WASHINGTON — The District of Columbia’s chief financial officer is warning the mayor and District Council members against additional borrowing that would breach the 12% debt-to-expenditures cap.

The CFO, Natwar M. Gandhi, issued the warning in a five-page letter to officials as the city prepares to issue $126.8 million of refunding bonds, which will give it some breathing room under the cap, and $29 million of new-money notes.

The refunding bonds, coupled with a refunding last week, are expected to reduce the district’s outstanding debt and result in significant savings.

In an interview yesterday, Gandhi said he wrote the letter to stress to officials that they need to remember that the refunding deals are a one-time solution.

“They should not think this is free money,” Gandhi said of the savings. “We wanted to alert [Mayor Adrian Fenty] and the council about the long-term consequences of what we have been doing here.”

Gandhi said the refunding bonds will preserve the district’s 12% debt cap in fiscal 2010 through 2014. Combined with the estimated savings from last year’s Build America Bond sales and the low interest rates on outstanding variable-rate bonds, the refunding will save $95 million in fiscal 2010 and about $338 million through fiscal 2014, he estimated in the letter.

The $95 million in savings will be equal to about half of the city’s $200 million budget gap, according to the CFO’s most recent revenue estimates released in February.

The district expects on Thursday to price $126.8 million of Series 2010 C variable-rate refunding bonds secured by personal income taxes. The bonds will refund Series 2008B variable-rate GO bonds. The 2010C variable-rate bonds will be issued with a fixed spread to the weekly Securities Industry and Financial Markets Association rate.

The bond proceeds will also pay for letter-of-credit substitutions. The district has LOCs for 2008 variable-rate bonds with Belgian bank Dexia SA and Allied Irish Bank PLC, both of which were downgraded amid the credit crisis. The district will substitute these LOCs with two provided by Wells Fargo Securities and Bank of America Merrill Lynch — LOCs that applied to variable-rate debt issued in 2001 and 2002 that has since been refunded. The cost of the substitution is expected to be $300,000, district officials said.

The bonds are rated Aa2 by Moody’s Investors Service, AAA by Standard & Poor’s, and AA by Fitch Ratings. Standard & Poor’s said this refunding will save the district $2 million on a present-value basis.

Morgan Stanley is the underwriter. Kutak Rock LLP is the bond counsel. Phoenix Capital Partners LLP and Public Financial Management Inc. are the financial advisers.

The district sold $708 million of income-tax-secured refunding bonds last week, Gandhi noted in the letter. Without these two refundings, the district faced eliminating all borrowing in fiscal 2011 to stay under the 12% debt cap. The borrowing restriction would have delayed infrastructure projects, which is exactly what happened during the 1990s, Gandhi said.

Lawmakers must be aware of the city’s infrastructure needs and will have to balance those needs with the 12% debt cap, Gandhi said.

Separately, the district expects next week to price $29 million of payment in lieu of taxes, or PILOT, revenue bond anticipation notes for the Arthur Capper Carrollsburg project in Southeast Washington. PILOT revenue supporting the Bans are separate from GO-pledged revenues. The Bans are additionally supported by revenue from the downtown tax increment financing area. The Bans are rated SP-1 by Standard & Poor’s.

Rice Financial Products Co. is the underwriter. Squire, Sanders and Dempsey LLP is the bond counsel. Public Resources Advisory Group is the financial adviser.

Later this year, the district expects to issue $32.9 million of qualified school construction bonds. The deal had been delayed pending federal legislation that would allow QSCBs to be issued as taxable bonds with a federal subsidy for interest payments, like BABs. The legislation was signed into law yesterday.

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