Fitch Rates District of Columbia's $481MM GOs 'A+'; Outlook Stable

2008-08-07 02:12:05 -

- Fitch Ratings has assigned an 'A+' rating to the District of Columbia's $329.4 million general obligation (GO) bonds, series 2008E and $151.5 million general obligation refunding bonds, series 2008F. The bonds are expected to be offered through negotiation on Aug. 12, 2008. In addition, Fitch has affirmed the 'A+' rating on the district's approximately $4.3 billion in outstanding GO bonds. The Rating Outlook is Stable.

The 'A+' rating reflects the district's consistently strong financial results and build up of sizeable reserves, high resident wealth levels, strong property tax base growth in the past few years, and steadily growing economy. The district's strong financial management practices contribute to its ability to control expenditures and conservative budgeting has resulted in sizable general fund operating surpluses in recent fiscal years even while allotting significant reserves for pay-as-you-go capital and funding its other post employment benefits (OPEB) obligation. The rating also incorporates Fitch's concerns about the district's high debt ratios, which are expected to increase given large capital plans, as well as uncertainty in the real estate market, which has recently experienced residential market value losses. The district continues to take measures to recover from a fraud scandal in the district's Office of Tax and Revenue (OTR) disclosed in late 2007; district losses since 1999 may total up to $48 million.

District financial operations over the past few years have been strong, and sizeable reserves have been built. An operating surplus of $281 million was recorded in fiscal 2007, and the district's total fund balance equaled nearly $1.5 billion at the close of the fiscal year, representing over 25% of general fund expenditures. The adopted fiscal 2008 general fund budget was expansive, increasing support of health and educational initiatives while enhancing income and property tax relief to a limited extent. Supplemental appropriations increased spending by approximately 18% over the prior fiscal year, though a significant portion of that increase was for one-time items or future year balance dedications. Revenue performance through June 2008 appears on track and a surplus is projected at year end. The fiscal 2009 budget has been adopted, and growth has moderated as compared to the fiscal 2008 plan. Property taxes comprise nearly one-quarter of general fund revenues, and while taxable assessed value for fiscal 2009 is already established, indicating overall growth of over 5.3%, the residential portion of the tax base declined by nearly 5%. Fitch is concerned about future declines given continued softening in the housing markets. The long range financial plan through fiscal 2012 projects balanced operations in fiscal years 2011 through 2012 without the use of fund balance and incorporates sizeable capital contributions for school modernization and additional OPEB trust contributions.

District economic indicators, which grew strongly earlier this decade, reflect recent steady growth. Employment growth for 2006 was considerably below the national level, though the 1.0% growth recoded in 2007 was just below the national level for 2007. Year-over-year growth for June 2008 of 1.6% strongly exceeded the national decline of 0.1%, driven by gains in the service and government sectors. The unemployment rate, which stood at 6.4% for June 2008, remains considerably above national levels though closer to the national average than it has been in the recent past. A correction to Census Bureau population estimates in 2005 revealed that the District's population is growing, albeit slowly, for the first time in decades. Per capita personal income has surged from 133% of the U.S level in 1999 to 158% in 2007.

Debt levels are very high and likely to increase at least moderately given the backlog of deferred capital needs and other borrowing plans. The district's proposed locally funded six-year capital improvement plan (CIP) for fiscal years 2009-2014 totals $3.4 billion, most of which will be financed with GO bonds and equipment leases. A school modernization program, to be funded with $100 million in dedicated pay-as-you-go sales tax revenues in fiscal 2007, is indexed for annual growth of 6%. The CIP does not include a number of planned projects. Additional debt for these projects could exceed $500-600 million over the next few years. District debt amortization is below average, with 24% and 42% to be amortized in five and ten years, respectively. Direct debt exceeds $9,700 on a per capita basis, and represents 4.4% of 2008 market value and nearly 18% of preliminary 2007 personal income.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

Fitch Ratings, New York
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Richard J. Raphael, 212-908-0506
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