The District of Columbia does not have any additional debt capacity and risks exceeding its self-imposed 12% debt-to-expenditures cap in fiscal 2011 unless about $350 million of its outstanding fixed-rate bonds are refunded, officials told members of the District Council Friday.
Chief financial officer Natwar M. Gandhi, asked the council to approve legislation that was introduced last Tuesday by council chairman Vincent Gray that would allow the district to issue up to $950 million of income tax-secured revenue refunding bonds.
The district’s debt profile is “front-loaded” with higher debt-service payments in the next four years. The refunding will “postpone principal repayment on certain general obligation bonds until after the financial plan period,” Gandhi said.
“We do not expect this restructuring to result in a downgrade of the district’s bond rating,” he said.
The refunding would not extend the maturities of the $350 million of fixed-rate bonds that are to be issued in mid-March as current and advance refunding bonds, said district Treasurer Lasana Mack.
The refunding will only allow the district to continue to fund capital projects that are now in the pipeline, according to Gandhi.
“We basically have nothing we can devote [for additional bonds] in 2010 or any years,” he said.
In December 2008, the district put in place a 12% debt-to-expenditures cap that is more stringent than the 17% debt cap imposed on the district by the federal government.
In his remarks to the council, Gandhi dismissed the possibility of breaching the 12% debt cap just a year after it was passed, saying it is “not an option in my book.”
A revenue estimate released last month showed that district revenue for fiscal 2011 was revised lower by $104.0 million from the September estimate.
The 12% cap helped the district achieve a AAA rating from Standard & Poor’s on its income tax-secured bonds. The bonds are rated Aa2 by Moody’s Investors Service and AA by Fitch Ratings. The district’s GOs are rated A1 by Moody’s and A-plus by Standard & Poor’s and Fitch.
A revenue estimate released by the CFO in December showed that district revenue for fiscal 2011 is lower by $104 million from the September estimate.
Gandhi told council members that he is “gravely concerned that we may be facing further declines in the overall revenue outlook.”
The district has 18 days of working capital available, well below the one month of spending recommended by the Government Finance Officers Association, Gandhi told council members.
Gray floated the idea of asking Congress to reduce or repeal the 6% of revenue the district is required to hold in a fund for emergency and contingency funding. Additionally, he proposed asking Congress to reduce or repeal the requirement that any borrowing against that fund be refunded in the two subsequent fiscal years.
“We ought to manage our affairs like others do,” Gray said, citing the district’s successful implementation of the debt limit as an example of its fiscal responsibility. But he cautioned that now “might not be the best time” to approach Congress for a change.
Gandhi was not supportive of Gray’s proposals, saying the emergency and contingency fund cannot be tapped unless there is an emergency. The district “simply cannot go and borrow money because it suits us,” he told members of the council. He said the district should “seriously cut expenditures” to rebalance its finances.
Gandhi also warned members against short-term borrowing. The district issued $500 million of tax revenue anticipation notes last year, its largest amount on record. Gandhi said rating agencies and investors “see this as a red flag.”