WASHINGTON -- The District of Columbia is considering creating its first special authority to issue $364 million of tax-backed revenue bonds to finance a major new convention center, but the plan raises both political and credit issues for the city.
Moody's Investors Service officials recently warned city officials that they would be "closely watching" to see if the convention center plan would aggravate the city's cash-flow problems by diverting hotel and restaurant tax revenues from general operations, said Moody's vice president Diane Rostwick.
That prompted Mayor Sharon Pratt Kelly to say after a meeting with business leaders Friday that the city is trying to structure the issue to avoid any adverse effect on the general fund or the city's Baa rating.
"We have to make sure that it won't have an impact on our debt rating," Kelly said. "We want to treat it as a separate authority," she said, adding that she realizes "the people in the market recognize that it's all part of the same family."
Beyond the credit issues, district officials acknowledged that the plan may meet some political resistance because it would circumvent the district's debt limit by amending the city charter to create the new convention center authority.
Debt service on city general obligation bonds cannot exceed 14% of general revenues. City officials said they believe that bonds issued by the authority would not be counted toward the limit, but Ellen O'Connor, the deputy major for finance, said that is not yet certain. If the bonds are not determined to be exempt, city officials said they would cause the city to exceed the debt limit.
Any change in the city's charter would require the approval of the city council as well as Congress, and district officials said it could become controversial, though no opposition has as yet surfaced.
Since many other states and cities already use the special authority financing technique, O'Connor said she sees "no problem getting approval on Capitol Hill." One state that issues a lot of bonds through such special authorities is neighboring Virginia, which might also benefit from the additional tourism generated by the larger convention center, she said.
The plan is aimed at replacing the district's medium-sized convention center with one giant enough to compete with the big convention centers in cities like Los Angeles and Chicago.
Kelly and O'Connor both expressed confidence that the plan would attract considerable new business and jobs to the city. "This is the number one convention site in the country, probably the world," Kelly said.
As outlined in a draft financing and economic impact analysis prepared by Deloitte & Touche, the city next year would issue $364.4 million of tax-exempt bonds backed by revenues partially derived from the city's 11% hotel tax and 9% meals tax, as well as other hotel occupancy and business franchise taxes. The hotel and meals taxes would be raised by 2% and 1%, respectively, to help fund the bonds. The draft analysis projects that the authority's 30-year revenue bonds would receive a Baa or BBB rating, and that their annual yield would be around 6%.
In addition to paying the $27.5 million of annual debt service on the revenue bonds, the convention center authority would take over responsibility for paying the $11 million of debt service on an existing bond issue for the old convention center.
The convention center authority also would take over the payment of between $8 million and $12 million of district subsidies for the convention center each year, a feature that Kathy Quail of Standard & Poor's Corp. said was notable.
Given that the district would be diverting the subsidies as well as some of its tax revenues to the convention center authority, the proposal could end up being "a wash" in its impact on the city's general fund, she said.
Quail said that her agency, like Moody's, is examining the convention center plans to see if the financing creates any new obligations for the district's already hard-pressed general fund. But she said she was optimistic that the district would structure the issue to avoid doing so.
"That was stated as one of their objectives -- not to affect their debt rating" in a recent meeting she had with city officials, she said.
The district is also contemplating a second bond issue in 1977 in connection with a second stage of development for the convention center. The second issue would be the district's first-ever lease revenue bonds.
The Deloitte & Touche analysis indicates that the 30-year lease bonds would be backed solely by lease revenues derived from renting the existing convention center to the federal government. A "federal lease guarantee" would ensure that the bonds are taxable and receive a triple-A rating and a 7% rate, the analysis says.
Quail said that since the lease financing would be secured by the lease revenues, it would not have any impact on the district's general fund.
The rating officials were generally positive about the district's idea of creating its first special authority to issue the bonds.
"The district's goal is to diversify and take advantage of the financing mechanisms available in order to accommodate its infrastructure needs without necessarily burdening the general fund. That makes sense, given the district's current budget situation," Quail said.
Quail and Roswick said that under Kelly's administration the district has been experimenting with new kinds of financings, having recently issued its first certificates of participation and conducted its first interest rate swaps.
"They're doing what a lot of communities are doing -- attempting to look creatively at how to fund different needs," said Roswick.
Quail added that the mayor has worked well with Congress and the Clinton Administration, and she is not aware of any resistance from the federal government to the special authority plan.
