WASHINGTON - The District of Columbia plans to bring $400 million of tax and revenue anticipation notes to market Thursday in a one-day negotiated transaction, joining municipal issuers across the country aiming to cash in on heavy retail investor demand.

"We're feeling very good," said district Treasurer Lasana Mack. "The interest rates have come way down."

Mack said he anticipates getting interest rates below 2% on the notes, which will have a retail-priority order period first with institutional pricing to follow.

Traditionally, the district sells its notes competitively, but because of market conditions, Mack said he decided negotiated was the route to take.

"We typically issue short-term notes via competitive sale, but these notes are being issued via negotiated sale," Mack said. "We decided to utilize the negotiated sale method because of the uncertainty and volatility in the marketplace, and because of the strong retail demand recently, which is related to the attractive yields for investors in municipal securities versus U.S. Treasury securities."

Mack said he thinks retail investors will make up a major portion of buyers of the notes, which were yet to be rated as of press time. The treasurer said he expects the highest ratings for the short-term debt.

The district comes to market with Trans each fall to pay bills. It last came to market with $300 million of Trans on Dec. 4, 2007. The notes were rated MIG-1 by Moody's Investors Service, SP-1-plus by Standard & Poor's, and F1-plus by Fitch Ratings.

The notes will pay general operating expenses to accommodate the difference in timing of the city's receipts of its major revenue streams and payment outflows.

They mature on Sept. 30, 2009, the last day of the district's fiscal year.

Loop Capital Markets and Morgan Stanley are co-senior managers on the deal. Citi, Goldman, Sachs & Co., JPMorgan, Merrill Lynch & Co., M.R. Beal & Co., Raymond James & Co., Siebert Brandford Shank & Co., and Wachovia Securities round out the syndicate.

Phoenix Capital Partners and Public Resources Advisory Group are co-financial advisers on the deal.

Venable LLP is bond counsel. Edwards Angell Palmer & Dodge LLP and Lewis & Munday are co-underwriters' counsel. Hawkins Delafield & Wood LLP is disclosure counsel.

Meanwhile, officials have been grappling with a projected $131 million revenue shortfall in the district's fiscal 2009 budget. And the fiscal picture could worsen when chief financial office Natwar Gandhi releases new revenue projections next month.

Those made thus far have not taken into account the effects of market turmoil after Sept. 15 when Lehman Brothers Holdings Inc. filed for bankruptcy and the credit markets froze. Some District Council members would not accept the projections because they said they were dated. The information for the projections was collected in late summer, before the turmoil on Wall Street escalated in mid-September with the Lehman bankruptcy.

The council last week approved an additional $46 million spending freeze on top of Mayor Adrian M. Fenty's plan to reduce costs by $131 million.

Fenty had issued an executive order a week earlier to reduce funding for executive branch agencies by $52.2 million after the council stalled on his plan to balance the budget. The plan included eliminating 200 vacant jobs, cutting agency spending by $60 million, and using a $17 million fiscal 2008 surplus to close the projected gap.

The council last Monday approved a near-identical amount in cuts, $130.7 million, but also decided to freeze the $46 million of spending and put the money in a reserve account to deal with possible future revenue shortfalls. The council unanimously approved the measure and said that the money could be taken out of the account if district tax revenue projections improve in February.

The shortfall stems from an expected slowdown of income tax revenues, mostly from reductions in capital gains tax collections, which make up nearly 13% of total income tax revenues for the city.

Meanwhile, Mack said the district is still planning to come to market with about $650 million of income tax bonds in the first few months of 2009. After seeing skyrocketing interest rates and an unfriendly muni market earlier this fall, the treasurer postponed the income tax bond deal that was scheduled to come to market this or next month.

The income tax bonds, which were authorized in legislation approved by the District Council in July, are a new debt tool that Mack expects will provide debt service savings and higher bond ratings for the city. The bill allows the district to issue income tax bonds as an alternative to general obligation debt.

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