WASHINGTON - The District of Columbia is one step closer to having the authority to issue income tax bonds after the District Council yesterday gave preliminary approval through a first reading of a bill that would grant that authority. The council is expected to give final approval of the bill on July 15, just before the legislative body's three-month summer hiatus, sources said.

The bill was introduced last month by councilman Jack Evans at chief financial officer Natwar Gandhi's request.

The measure 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, district officials have said. The income tax bonds would also create a new District of Columbia credit that district officials hope investors will want to diversify their portfolios.

The district's GOs are backed by real property taxes and are currently rated A1 by Moody's Investors Service and A-plus by both Standard & Poor's and Fitch Ratings.

District Treasurer Lasana Mack said he and other finance officials think the income tax bonds would save the district money and grab higher ratings. Yields on the district's GOs are currently about 17 basis points higher than neighboring triple-A rated states, such as Maryland, which yield about 4.83% over 30 years, compared with the district's 5.0%, according to Municipal Market Data compiled for June 26. District officials wants to narrow that difference.

Other municipalities 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 the district could achieve higher ratings depending on how the district's bonds are structured.

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

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.