WASHINGTON - The District of Columbia Council last week approved nearly $200 million of bonds backed by payments in lieu of taxes and tax increment financing for the planned $1.1 billion Southwest waterfront project. But it is likely to be years before any debt is issued or a shovel hits the ground.
The massive redevelopment could possibly be slowed if district lawmakers were to approve debt cap legislation introduced last week by District Council chairman Vincent Gray, at the request of chief financial officer Natwar Gandhi. The proposed cap would hold the city's debt-to-expenditures ratio at 12%, which would result in no bonding capacity for at least several years for some proposed development projects.
"The District of Columbia has made a remarkable financial turnaround from junk-bond status to a balanced budget, with A-level bond ratings and a fund balance of $1.5 billion," Gray said in a release introducing the bill. "Both the debt cap and the reestablishment of the operating cash reserve send a strong message to Wall Street that we plan to continue on a sound financial basis, even though it will mean making hard choices."
The $10 billion Anacostia Waterfront Initiative is aimed at transforming land along the Anacostia River in a fashion similar to Baltimore's Inner Harbor. It includes Poplar Point, a $2.5 billion 110-acre project, and a $1.4 billion mixed-use project called the Hill East Waterfront, both of which will also require TIFs and PILOTs, said Sean Madigan, spokesman for the deputy mayor for planning and economic development. The Southwest project will include new public piers, assorted repairs, and the creation of five new public parks within the 16-acre site.
The council approved $198 million of PILOTs and TIFs for Southwest, but those bonds likely will not be issued until fiscal 2014. The Gandhi's recommendations extend to fiscal 2013.
Council member Jack Evans, who chairs the finance committee, said he supports Gray's bill to cap the city's debt, but that he would not want it to "limit our flexibility."
The debt limit would leave little room for the district to take on any new projects that would need bonds. Under his proposal, Gandhi said that about $121 million of debt capacity is left for the next five years for projects. The CFO said district officials would need to set priorities when considering projects that need bonds.
Madigan said the planning and economic development office has been monitoring Gandhi's proposal, but noted that it is considered an "advisory" and not a law. And Evans and others have suggested that any bill the council would pass would need to allow for wiggle room to consider new or emergency projects.
The council wrapped up its legislative session on Wednesday and will return from a two-month break for its next legislative session in mid-September, when the debt-cap bill could be considered. The calendar for that meeting has yet to be finalized.
The debt cap effectively would wipe out any chance of a bond-financed Major League Soccer stadium for the D.C. United team. An idea to use about $150 million of bonds has been floated for months, but no action has been taken on the controversial project.
Gandhi reiterated earlier this month when he sent a letter to district officials saying that to keep the city's current bond ratings - and perhaps achieve higher ratings - they need to stick to his recommendations and stay below the 12% debt ratio. A new law, which would require the District Council's and congressional approval, would be a clear signal of the city's fiscal prudence, he said.
"Obviously, we would like to push for a [ratings] upgrade," Gandhi said earlier this month. "We would like to send the message to Wall Street that the district will not borrow above its debt capacity."
Gandhi has twice revised the district's fiscal 2009 revenue estimates downward since the beginning of this year. He is pushing the debt caps harder now as the city braces for the effects of the national economic downturn.
The district has a maximum legal cap of 17% on its debt, but the CFO said it would not be financially prudent to ever approach that limit. Gandhi calls his proposal a "management" cap that is meant to provide a more relevant guide for current debt considerations.
The city's current bond ratings are its highest ever - A-plus from both Fitch Ratings and Standard & Poor's and A1 from Moody's Investors Service - and are far removed from the junk-bond ratings it carried during its financial crisis in the mid-1990s.
Currently the district's debt ratio is at 9.7%, but that is expected to increase to 11% in fiscal 2009, and to peak at 11.8% in both 2010 and 2011, Gandhi said in the letter. The median debt ratio for major municipalities is 8.6%, according to Moody's.
The district has the highest debt per capita - which is expected to be $10,902 at the end of this fiscal year - of all major municipalities nationwide. That figure is expected to increase to $13,999 by fiscal 2013 as a result of additional debt-driven projects, according to Gandhi.
Meanwhile, Madigan said that an environmental impact study is ongoing at the Poplar Point project, and will not be finished for more than a year.
"A lot of these projects have pretty lengthy timelines," Madigan said, adding that it could be at least three years before a shovel hits dirt for that project.
Madigan said the request for expressions of interest for the Hill East development has been extended until the end of October. Hill East includes the former D.C. General Hospital site and 50 acres of land in the southeast part of the district, which officials want to turn into a mixed-use waterfront neighborhood with retail and affordable housing.
"We put out the solicitation ... and had about 150 potential bidders, investors, developers," Madigan said. "We want people to put a lot of thought into how they would respond."
"Every project has its own set of challenges," he added. "We want to maintain as much flexibility as possible."
The District Council on Tuesday also passed a bill that gives the city the authority to issue bonds backed by income taxes - a move that finance officials expect will provide debt service savings and higher bond ratings.
The bill will allow the district to issue income tax bonds as an alternative to general obligation bonds.
Marcy Edwards, senior financial policy adviser for the CFO's office, said that the district could begin to issue the income tax bonds as early as fall, but that the bill first needs congressional approval. Congress, which is mandated to approve the district's budget and all legislation, has yet to set any dates to consider district legislation.
Edwards said that if the income tax bonds get final approval she expects the $350 million GO sale slated for mid-August to be the district's last as officials instead will use income tax bonds.
