WASHINGTON -- Key members of the District of Columbia council are fighting Mayor Sharon Pratt Kelly's plan to issue $250 million of tax-exempt general obligation bonds because they fear the issue will overextend the city's ability to service debt.
Mayor Kelly sought emergency legislation to allow her to issue the bonds in June, with maturities of up to 20 years, to fund budgeted capital projects ranging from infrastructure improvements to new school roofs.
The district's last capital bond issue was for $231 million last June. The average maturity of existing debt is 10 to 12 years, said Maria DayMarshall, the district's treasurer, at a hearing Wednesday before the council.
She acknowledged the district "will pay some premium" for the longer maturity period because there would be a higher true interest cost, which she estimated would be 20 to 30 basis points higher. Total projected debt service in the first year after issuance would be $20 million, she said.
About $50 million of the new borrowing would be composed of zero coupon bonds to be issued to "restructure" existing debt, said Ellen O'Connor, the district's deputy mayor for finance and chief financial officer.
Zero coupon bonds, a type of bond the district has not issued since 1986, would allow the district to offset the "front loading" of current debt because they would result in a "more even debt service appropriation from year to year," O'Connor said at the hearing.
District council chairman David Clarke refused to act on an emergency basis on the bond resolution. In a May 10 letter to Kelly, he said the requested borrowing "will have a negative fiscal impact on the fiscal year 1995 budget ... because interest rates today are significantly higher than you projected when you proposed your budget."
Kelly last February budgeted $11.8 million for interest on the proposed bonds, but this amount cannot pay the higher rates, Clarke said. He called for reducing the planned borrowing by 20% to reflect the longer maturity and adjusted interest rates.
Kelly initially projected that restructuring of existing debt would save $31 million. However, rising interest rates have effectively added $2.2 million to the figure to keep the budget in balance, O'Connor said.
The proposed budget in February assumed an interest rate of 5.4% "at the high end" on new bonds, but the district now expects to have to pay between 6% and 6.5%, she said.
Council member Marion Barry, who is expected this weekend to formally announce his candidacy for mayor, said at the hearing that "we cannot afford the debt service that goes with this borrowing."
Barry and council member William Lightfoot said Kelly, who was not at the hearing, must trim the requested borrowing or they will do it for her.
Sparks flew during Barry's questioning of O'Connor, when he repeatedly chastised her for "filibustering," for not having specific numbers in response to detailed questions, and for deferring at one point to others at the witness table. "I'm just leaning back" in the chair, she said at that point.
Barry and Clarke expressed concern because the district's total fiscal 1995 debt service of $347.4 million exceeds its capital spending budget of $243.7 million. They also were concerned that about $31 million of proceeds from the proposed borrowing is earmarked for correctional facilities while only $25 million would go to schools.
Lightfoot and Barry are seeking to amend the bond resolution with a requirement that proceeds from the bond sale cannot be used to compensate any employee unless the employee works on projects financed by the proceeds.
But Kelly is concerned that the amendment is too rigid and could lead to "devastating" personnel cutbacks, O'Connor said. She said a less drastic approach to trimming personnel is being considered on the basis of a draft report by the district's auditors, Coopers & Lybrand, which identifies positions to be removed from the capital program over time.
Barry, who served as mayor in the 1980s, criticized the Kelly Administration generally for its lack of financial discipline and what he said was excessive borrowing. He said he achieved annual growth in the general fund of 6% to 11% compared to current growth of about 1.5%. Barry also said his annual borrowing averaged $180 million to $190 million from 1985 through 1990.
"You have been poor money managers," Barry told O'Connor. If district citizens could vote like Virginia citizens do on every bond resolution in Fairfax County, they would not vote for the proposed borrowing, he said.
"You are off the mark," O'Connor said because the money is needed for essential street and other projects. "We are not paying Fairfax County," she said. She defended Kelly's record of achieving balanced budgets and making tough decisions to cut spending in fire, police, public works, and other departments, despite inherited fiscal problems.
Barry also criticized Wall Street, saying it did not have a true picture of the city because, for example, analysts do not come down and count the number of employees working on capital projects.
Generating less controversy at the hearing was a decision by the mayor not to pursue a plan to have a proposed special authority for a new convention center take over responsibility for $11 million of debt service payments on an existing bond issue for the existing convention center.
The mayor is concerned that transferring responsibility from the city would change covenants with existing bondholders, O'Connor said. The proposal for the new authority, which would be established to issue revenue bonds to finance a convention center, is pending before the council's committee on economic development.
