COVID-19 hits Washington, D.C., revenues
The District of Columbia is missing out on as much as 50% of its hotel and restaurant tax revenue due to the impact of COVID-19, a potentially significant hit to the sales tax collections that usually account for about 10% of the city's revenue.
Washington hotel rooms are unusually empty and restaurants are running at minimal levels. Most of the city's workers, many of whom live in neighboring Virginia and Maryland, have ceased commuting. Tourism from around the world, usually high in the spring months when the district's famous cherry trees bloom, has slowed dramatically.
“Hotels are down in the 40% occupancy range right now and they’re falling,” said Jeffrey DeWitt, Washington’s chief financial officer. “The restaurants are down 40-50% and possibly falling. So we’re monitoring that.”
DeWitt said tourism, which includes hotel and restaurant revenue, is typically about 30% of its sales tax revenue.
That drop in business could mean the district is facing as much as $500 million in revenue loss for FY 2020, depending on the length and severity of the effects. That estimate was based on a return to normalcy after June.
However, DeWitt says the city is ready to take it on given its stable condition with high reserves and high liquidity.
“We’re in better shape than we’ve ever been in our history from a cash and liquidity standpoint,” said DeWitt.
So far there have been over 4,000 cases of COVID-19 in the U.S. The virus is an illness caused by a member of the coronavirus family and has spread globally, affecting economic markets as well. Many cities across the U.S. have closed bars and dine-in restaurants to stop the spread of the virus.
In February, the city released a revenue forecast and at the time DeWitt said the city was concerned about what was coming and assumed that spring festivities such as its cherry blossom festivals would be canceled.
“We’re in scenario planning and monitoring mode because what we released Feb, 28 was reasonable but things are changing, so we’re trying to be adaptable to that as a high credit quality city would do,” DeWitt said.
D.C. carries ratings of Aaa from Moody’s Investors Service, AA-plus from Fitch Ratings and AA-plus from S&P Global Ratings.
The district had about $11.6 billion of debt outstanding, according to its 2019 financial report.
D.C. is planning significant debt issuance for its future due to its rising population. In the next six years, the city has plans to issue $5.1 billion in bonds. Its six-year capital plan calls for about $8.5 billion in projects such as a new hospital and schools. DeWitt said those capital projects will continue.
There is no danger, even remotely, that the district won’t make debt service payments, DeWitt said.
“We’re in strong reserves position and we will continue to take actions to make sure we stay there,” DeWitt said.
The city has $1.43 billion in reserves.
Washington recently finished a recession study before the pandemic.
“Nobody knows how deep it is going to go or how long the recovery will be or how long this is going to last,” DeWitt said. “Nobody knows that. Are we in a recession? I don’t know yet. Certainly, we’re closer to it than we were a week ago.”
In a moderate recession, Washington could go 18 months with its reserves before needing to do cuts. Those cuts would be around 3-4%, DeWitt said.
The Washington Metropolitan Area Transit Authority is also feeling the impact of COVID-19.
As of Friday, WMATA escalated its response to the virus to its highest level. It is reducing its service beginning this week. On Monday through Friday, trains will operate every 12 minutes, and on Sundays, every 15 minutes.
Since the virus has spread, analysts say they’ve heard transit agencies say that they’re seeing ridership declines of 20-30%. As of last week, Washington's Metrorail ridership declined by 100,000 trips, but those numbers are likely to decline further. Metro typically handles more than 600,000 trips on an average weekday.
Fare revenues make up roughly 35-40% of WMATA's gross revenue. WMATA had about $1.14 billion of debt outstanding, according to its 2019 financial report.
“The way we are looking at it from a credit perspective is that we know there is going to be pressure on these fare revenues,” said Kevin Archer, an S&P analyst. “Even if they’re not a majority of gross revenues, they’re still a significant revenue stream and in some cases, part of the pledged revenues that secures the bonds.”
WMATA and other transit agencies have a fairly high dependence on fare revenue to fund operations and debt service, said Michael Rinaldi, a Fitch analyst. Transit agencies are sensitive to abrupt changes in ridership, which could be impactful to their operating revenue, Rinaldi added.
However fares are no longer WMATA’s dominant revenue source, as Moody’s analysts pointed out in a report over the summer. Over the past several years, WMATA’s government partners — D.C., Maryland and Virginia — increased their funding of the authority, reducing reliance on fares.
On Monday, President Donald Trump said the virus could disrupt the U.S. until August.
Rinaldi said it was too early to tell the effect the virus would have on WMATA until then.