D.C. Mayor Won’t OK Delay in Taxing Out-of-State Debt for Now

WASHINGTON — District of Columbia Mayor Vincent Gray has refused to sign a council-approved bill that would delay taxing out-of-state bonds until Jan. 1, 2012, warning that the use of $13.4 million of reserve funds to pay for the delay could hurt the city’s credit rating.

“We must do everything possible to preserve and enhance the district’s bond ratings,” Gray told District Council chairman Kwame Brown in a letter he sent explaining his decision on Tuesday night to not sign the bill, which would provide clarifications to the budget passed in June. “If our ratings are lowered, our cost of borrowing increases. Higher debt service means fewer dollars available for important district services and programs and a reduction of capital projects under the district’s 12% debt cap.”

“Showing resolve in our commitment to set aside 50% of new revenue for cash flow is an important signal to the rating agencies that the district is serious about getting on more firm financial footing,” Gray said in his letter

District general obligation bonds are rated A-plus by Standard & Poor’s, Aa2 by Moody’s Investors Service, and AA-minus by Fitch Ratings.

Gray’s refusal to sign the bill was effectively a “pocket veto” because the council is on its summer recess until Sept. 15.

But the next council meeting is scheduled for Sept. 22 and sources say members hope to be able to work out an agreement with Gray that will assure residents’ interest earnings from out-of-state bonds are not taxed retroactively beginning Jan. 1, 2011.

That implementation date was in the budget bill the council passed in June. But Councilwoman Mary Cheh was able to the get members to approve an amendment to a budget clarification bill passed on July 12 that would delay the start date by one year to Jan. 1, 2012. Cheh would have paid for the delay by using $13.4 million of cash-flow reserve funds. However, the council had decided on May 26 to deposit and keep 50% of its new revenue into the reserve account, using it only for short-term cash-flow needs, partly to appease the rating agencies.

In refusing to sign the bill proposing the delayed implementation date and use of reserve funds, Gray pointed to a letter he received from district chief financial officer Natwar Gandhi on Tuesday warning about the use of the reserve funds.

“As a cautionary note, rating agencies and potential investors in the district’s bonds may view the reduction of the amounts previously approved for the cash-flow reserve as a lack of willingness and commitment to rebuild the general fund balance and increase liquidity,” Gandhi told Gray. “This reduction could lead to a negative outlook or even a downgrade on the district’s general obligation bond ratings, which would result in higher interest costs on future GO bond sales.”

The district will need to sell up to $900 million of tax revenue anticipation notes in fiscal 2012, Gray told Brown.

Gray seems open to a compromise on the date to begin taxing out-of-state bonds. He told Brown that he opposes a ­retroactively effective date because it will adversely affect the investment portfolios of retirees living on fixed incomes. Instead, he suggested council members agree to increase taxes for wealthy district residents.

“I continue to believe that increasing the top tax rate on higher income earners to 8.9% is a far more equitable tax policy because it taxes individuals who are actively earning income,” Gray said. “This approach has also had the benefit of a public hearing and vetting process.”

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