WASHINGTON — The District of Columbia’s chief financial officer warned the city’s new leaders against writing a fiscal 2012 budget that draws on the general fund balance to pay for operations, saying that balancing the budget in this manner for the fifth straight year could threaten the district’s credit rating and reputation with bond investors.
In a three-page letter to the new mayor, Vincent Gray, and city council chairman Kwame Brown — both sworn in last week — district CFO Natwar M. Gandhi said the district’s credit rating “is now at risk,” and that a fiscal 2012 budget should be approved without tapping reserves.
“It is essential that the FY 2012 budget and fiscal plan be constructed in a manner such that additional funds are not drawn from the fund balance to help balance the budget,” Gandhi said in the letter.
Additionally, the city’s beleaguered United Medical Center hospital and declining property tax revenues could undermine its credit, he said.
The district’s fund balance has declined since fiscal 2009. In fiscal 2011, the district used $186 million in reserves to offset revenue shortfalls, according to a December Standard & Poor’s rating report on the district’s general obligation bonds that Gandhi cited in his letter.
The credit strains Gandhi described pertain to the district’s GO bonds, which were issued in December, but are no longer its preferred debt financing tool. The district has a higher rating on its income tax-secured bonds, which has been its debt of choice for the last two years.
The income tax-secured bonds are rated Aa2 by Moody’s Investors Service, AAA by Standard & Poor’s, and A by Fitch Ratings. The district’s GO bonds are rated A1 by Moody’s and A-plus by Standard & Poor’s and Fitch. Gandhi said he and the district’s elected officials plan to visit Standard & Poor’s soon after the city’s annual audit is released on Feb. 1.
The district issued $181.3 million of GO Build America Bonds in December because it reached its annual limit for income tax-secured bond issuance. The district sold the GOs to capture the savings from BABs before the program expired on Dec. 31. District officials calculated that the savings from BABs offset the higher interest rate cost of selling the lower-rated GO bonds.
In his letter, Gandhi highlighted Standard & Poor’s concern about the United Medical Center, a troubled hospital that the district foreclosed on in July. The district has allocated $26 million from its contingency fund to support the hospital. Only $6 million of that has been spent, and UMC expects to repay $3 million to the district “very soon,” said David Umansky, a spokesperson for Gandhi. The district has not been able to find a buyer for the hospital, he said.
Standard & Poor’s also raised concerns over the district’s declining payroll tax revenues, which fell to 83% of total collections in 2009. Gandhi said he expects fiscal 2010 property tax returns “will show marked improvement.”
Standard & Poor’s said the Internal Revenue Service withheld $707,757 of a $4.7 million subsidy payment due on Dec. 1 from BABs issued earlier by the district as an offset for unpaid payroll taxes. The payment remains outstanding, according to district officials.
