WASHINGTON - The District of Columbia expects to flex its stronger credit muscle again this fall with at least $300 million of taxable, direct-pay Build America Bonds that would be issued as triple-A income tax revenue bonds, its chief financial officer said.

In an interview Friday, Natwar Gandhi said the district will issue all $433.5 million of its planned debt for fiscal 2010 as income tax bonds, which are rated as high as triple-A compared to the top A-plus rating the city typically receives on its general obligation bonds.

The district first issued income tax revenue bonds in March that were rated AAA by Standard & Poor's, Aa2 by Moody's Investors Service, and AA by Fitch Ratings.

Under the BAB deal, the federal government will make direct payments to the district equal to 35% of the interest, which will be put into the general fund to offset a portion of the income taxes used to pay debt service.

Officials said yesterday that they plan to treat the federal payments as an offset to interest under the city's 12% debt cap. The district in December approved a cap that limits its debt to 12% of expenditures. By lowering the debt service payments, the federal payments for the BABs will make more room available under the cap.

The amount of income tax bonds that the district can issue are limited by two factors - the $2.98 billion debt appropriation from the District Council, an amount that can be modified, and covenants in the March deal saying the bonds' revenue cannot drop below either three times historic revenues or two times withholding taxe revenue, officials said yesterday.

The district's debt revival has been led by Gandhi. During his 12 years in office, he has brought the city's debt from junk to gilt-edged status. The district climbed out of its credit hole faster than New York City and other municipalities that have faced credit crises, according to the CFO.

But the current economic recession "is the most severe since the Great Depression," he said. While the district has fared better than some areas, revenue estimates for fiscal 2009 and 2010 have slid. For the first time in years, Gandhi has come to the District Council with lower revenue estimates than previously forecast.

The economic reality makes the income tax bond ratings even more important, he said.

Gandhi has estimated that the higher ratings will save the district $28 million over four years.

"The market wants quality and that's why we've had the success that we've had," he said. "The market is hungry for top-quality instruments and we've provided that."

Now, facing revenue declines this year amid the recession, the CFO must balance the city council's political demand for projects with Wall Street's demand for quality debt.

One of Gandhi's first tests comes from a proposal to finance construction for a convention center hotel with $750 million of bonds. The Washington Convention Center Authority board, which includes Gandhi, voted to propose the deal last month after private financing fell through as banks tightened lending. The only option now is to finance the deal through the muni market.

But the proposed sale would push the district over its 12% debt limit. Gandhi estimated that the debt ratio will reach 11.9% in 2013 and said that adding the hotel debt would push the district over its limit.

Some members of the council have balked at the restrictions imposed by the cap and have called for the hotel deal to proceed. Gandhi, while supporting the hotel plan, has refused to allow the cap to be breached. The CFO has the legal authority to veto borrowing if it is not in the financial interest of the district. But Gandhi on Friday said Mayor Adrian Fenty's office has assured him that the debt cap will not be violated by the hotel financing.

This makes debt financing dependent upon one of two options. First, the WCCA could obtain private financing, which would allow it to proceed with a $187 million tax increment financing that has already been authorized under the cap. Marriott International Inc., which would operate the hotel, has been unable to finance its portion of the deal as planned. However, Gandhi said his office continues to work with the city's deputy mayor for economic development to find private financing.

The other option would be to move the hotel deal ahead of other projects that have been authorized under the budget. WCCA officials have said the hotel project is "shovel-ready" and that construction could begin in September. Gandhi said the district may be able to delay other projects that only have partial funding, may not get additional independent funds, and are only in the planning stages.

"The important thing to remember is that those projects in the queue that are part of the cap are unlikely to happen because of what's happening out there in the financial markets," Gandhi said. "If Marriott has a hard time getting funding, what about a community development project?"

The CFO's office has no official authority to dictate which projects could get bumped down the line for the hotel. The District Council would need to make the politically difficult choices if space is made for the hotel under the cap.

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