WASHINGTON - The District of Columbia council was poised last night to pass a bill that would give the district the authority to issue bonds backed by income taxes - a move that finance officials expect would provide the city debt service savings and higher bond ratings.

The bill, which was set for a final vote last night after press time and was expected to pass, was introduced by council member Jack Evans at the request of chief financial officer Natwar Gandhi. It would allow the district to issue income tax bonds as an alternative to general obligation bonds in an attempt to achieve higher bond ratings and a lower cost of borrowing.

Council members were expected to grant that authority last night in the council's last legislative meeting before a three-month hiatus.

"The rationale ... is to increase our bond rating," Evans said yesterday. He also noted that the CFO expects a potential annual savings of $1 million to $3 million by using the income tax bonds.

When the bill was announced, district Treasurer Lasana Mack said that he also thinks the city can achieve debt service savings and get higher ratings on the income tax bonds compared with the ratings on the district's GOs. The city pays debt service on its GOs with real property tax revenues. Moody's Investors Service rates the GOs A1 and both Standard & Poor's and Fitch Ratings rate them A-plus.

Other governments have issued bonds backed by income taxes, including New York City and New York State. The Empire State Development Corp. was able to obtain a AAA rating from Standard & Poor's for $310 million of personal income tax bonds it issued in October 2007.

Standard & Poor's analysts in mid-June said that depending on how the district's bonds would be structured that it could achieve a higher rating under and income tax structure that such bonds would create a new District of Columbia credit for investors to consider for diversifying their portfolios.

Marcy Edwards, senior financial policy adviser for CFO's office, said in late-June that she expects that $350 million GO sale slated for late-August could be the district's last if the income tax bonds were approved.

"If the ratings on the income tax bonds are higher than the GOs, it may behoove us to issue just the income tax bonds," Edwards said last month.

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

Meanwhile, the council yesterday also approved a bill that would allow the district officials to provide a $35 million tax increment bond issue for a $260 million mixed-use redevelopment project for the O Street Market in the city's Shaw neighborhood, which is being headed by Roadside Development LLC.

Under the TIF agreement, the district would issue the bonds to cover a portion of the initial construction costs, and the bonds will be repaid using a portion of the new property tax revenue generated by the project.

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