Cash-strapped D.C. uses funds slated for GO debt service to fuel operations.

WASHINGTON -- The District of Columbia had so little cash last month that it had to rely on debt service funds to stay afloat, Moody's Investors Service said Friday.

In a credit report that highlighted the district's weakening cash position and fiscal 1994 operating deficit, the rating agency said the district's depleted cash position forced it to defer a scheduled transfer to an escrow account of $63 million of tax revenue collected to pay debt service on general obligation bonds.

The district accomplished the transfer of the revenue from special real property taxes, which are levied to pay the GO debt service, early this month after it received a $660 million annual payment from the federal government.

The district has $3.4 billion of GO debt outstanding.

"It's not a good practice to ... have to use this special real property tax for operations," said Moody's analyst Patricia McGuigan. Fiscal prudence dictates setting aside debt service funds immediately, and the district's delay in transferring September funds shows "a new level of strain," she said.

According to advice of the district's bond counsel, the firm Lewis, White, Clay, Roxborough & Tillerson, the district can delay transfer to the escrow agent of up to 56% of each property tax dollar collected, Moody's said. The remainder of property taxes is used by the district for operations.

In addition to relying on debt service funds, the district borrowed $70 million to $80 million from its capital projects fund to meet cash needs, but it repaid the funds by the end of fiscal year on Sept. 30, Moody's said.

The district closed the fiscal year on Sept. 30 with a $20 million to $40 million general fund operating deficit, which district officials have said is the result of lower-than-projected revenues from a public safety fee imposed on business income in fiscal 1994 and Medicaid overspending.

Moody's, which rates the district's uninsured debt Baa, warned that the loss this year of a multiyear, formula-based authorization for the annual federal payment "adds uncertainty to the district's already tenuous financial position."

The formula was authorized three years ago on a temporary basis, and rather than make it permanent, Congress this year authorized a $660 million payment only for fiscal 1996, which begins next Oct. 1.

Meanwhile, the district council still must act on $140 million of congressionally mandated cuts to balance the district's $3.4 billion budget for fiscal 1995. If the district fails to make the cuts, it will lose part of the 1996 federal payment.

The council is expected to act after the November election, and the U.S. General Accounting Office will review and verify compliance with the congressionally mandated cuts and balanced operating-budget, Moody's said.

Moody's expects that a major drain on the fiscal 1995 budget will be the cash needs of the public District of Columbia General Hospital, which continues to have a high operating deficit.

Ellen O'Connor, the district's top finance officer, could not be reached for comment.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER