WASHINGTON - District of Columbia finance officials plan to issue up to $500 million of tax and revenue anticipation notes next month and hope investors will be receptive to them because they need the money to pay bills. But after being spooked by higher interest rates and an unfriendly muni market over the past weeks, Treasurer Lasana Mack said the district will postpone a $650 million income-tax bond deal scheduled for next month until the first quarter of next year.
"We're hopeful ... the market will be there for us" for the Trans, Mack said. "We do need the cash. This is our seasonal cash-flow borrowing that accommodates the difference in the timing of our receipts of some of our major revenue streams and our payment outflows."
He could not specify the exact date for the transaction.
"We're seeing gradually some positive signs here in the marketplace, things are improving," Mack said, pointing to successful short-term borrowings in California, Massachusetts, and Pennsylvania as "positive developments."
"The rates for California were higher than we'd like to see on a short-term deal, but of course they had $4 billion to sell," Mack said.
The decision to postpone the $650 million income tax bonds should not hurt any agency spending, Mack said. The income tax bonds, which were authorized in legislation approved by the District Council in July, are a new debt tool that Mack and others expect will provide debt service savings and higher bond ratings. The bill allows the district to issue income tax bonds as an alternative to general obligation bonds.
"Agencies have the authority to spend if the funds are in the approved budget for the fiscal year, if any spending occurs prior to the issuance, then we just reimburse ourselves when we do the issuance," Mack said.
And while the district has joined more than 20 other states with projected revenue shortfalls for fiscal 2009 - it faces a $131 million shortfall - its fiscal picture could worsen in the coming months because projections made thus far have not taken into account the effects of recent market turmoil.
Mack said if the district has to pay higher than anticipated interest rates on its income tax bonds, it will not affect its fiscal 2009 budget.
"That would not pose a problem for us budget wise, in part because we're pushing the issuance back," he said. "Even if the rates were higher than planned, it still wouldn't cause us a budget problem. It would cause an adjustment in our assumptions [for debt service] for the following years."
"That's why we made a decision, just given everything that was going on, and the uncertainty in the marketplace, we thought it would be most prudent to push it back," Mack added.
Meanwhile, the district also has outstanding more than $525 million of variable-rate demand obligations backed by Dexia Credit Local letters of credit, as well as about $330 million of VRDOs and auction-rate securities that are insured by Financial Security Assurance, whose rates have jumped. The rate increases occurred after rating agencies either downgraded or put on negative watch Dexia's parent company, which owns FSA.
Mack said he is evaluating his options for obtaining rate relief, and may end up converting some of the VRDOs to fixed-rate securities early next year.
"It's been a problem," he said. "Of course with the credit issues associated with those banks, certain investors have not wanted to hold that paper or purchase that paper."
Because of a lack of investor interest, some of the VRDOs were put back to the banks that provided liquidity. As a result, the district rates on those have increased to the 5% to 6% range.
"And so that obviously that's higher than we'd like to see on our variable-rate bonds," Mack added.
The treasurer said that the rates on some of the district's other variable-rate debt have fallen, and that the average rate on all the district's VRDOs is at 4.40%.
"It's less than our fixed-rate bonds," he said. "It's obviously a little higher than we would like to see, but not too bad."
