WASHINGTON -- Moody's Investors Service yesterday confirmed the District of Columbia's general obligation bond rating of Baa, but said the district's strained financial position will weaken further in fiscal 1995 unless more steps are taken to balance operations.
Moody's issued the credit report in anticipation of the district's competitive sale this Thursday of $231 million of general obligation bonds.
The district plans to use $199.9 million in proceeds from the sale of GO Bond Series 1994 B to fund capital improvements, and about $25 million in proceeds from GO Refunding Bonds Series 1994 C to refund Series 1986 A and D bonds that mature June 1, 1995.
The Series 1994 C bonds will "modestly alter debt structure" by refunding part of the June 1995 principal payment, stretching payment over 10 years, Moody's said.
Municipal Bond Investors Assurance Corp. will insure the entire issue except for one $2.2 million maturity that will be insured by Connie Lee Insurance Co. With the insurance, Moody's and Standard & Poor's Corp. will rate the GO issue AAA.
Moody's said its confirmation of the district's Baa rating, in place since 1984, reflects ongoing financial strain, a tightly balanced budget for fiscal 1994 with further weakening in fiscal 1995, the district's relationship with the federal government, and a high debt burden. The fiscal year begins Oct. 1.
Standard & Poor's late last month also issued a credit report, saying the district "will be challenged to maintain its financial integrity" because it has fewer and more difficult budget balancing options available.
During recent years, the district has used such options as an accounting change in the property tax year, water and sewer fund transfers, and other balancing mechanisms that leave little flexibility for the future, the rating agencies said.
"Economic improvement will help to alleviate some of this pressure, but it remains imperative that the district further reduce and/or streamline expenditures," according to the June 27 issue of Standard & Poor's CreditWeek Municipal. The agency published the report shortly after it revised the district's credit outlook to negative from stable.
The district's ongoing structural imbalance between revenues and expenditures will lead to continued declines in cash levels, Moody's said. The most rapidly growing expenses represent fixed costs, including debt service, which grew 24% over the past two years, and pension expenses, which grew 30%, Moody's said.
The rating agencies said the district's debt burden is high in relation to declining property values and population.
Moody's said the district has $3.3 billion of outstanding GO debt, while Standard & Poor's placed the figure at about $3.47 billion. Annual debt service, now 10.2% of adjusted revenues, is expected to reach 12.3% by 2000 on the basis of the district's long-range plan for capital improvements, Standard & Poor's said. The district's annual debt ceiling is 14%.
Debt per capita in the district, whose declining population now is about 570,000, is $5,954, Standard & Poor's said. Moody's calculated the figure to be $5,538, with the median at $1,363.
The Standard & Poor's index, which is a measure of per capita debt as a percentage of per capita effective buying income, "is very high at 33%," Standard & Poor's said. Also above average is the district's principal amortization of outstanding GO debt, with 64% retired within 10 years, the agency said.
Rising debt service costs could exacerbate the strain on the district's budget, and a $250 million ceiling on yearly GO bond financing is likely over the next six years, the agencies said.
Moody's reiterated concerns that budget-balancing mechanisms approved for fiscal 1994, including a one-time gross receipts tax called a "public safety fee," have not been tried before and may result in collection problems or legal challenges.
Both Moody's and Standard & Poor's said they will closely watch the district's response to a recent court settlement requiring the district to make timely pension payments that previously had been deferred.
The district's plan to balance the 1995 budget by eliminating 589 positions in human services, education, and public safety will be difficult, and there probably will be a need for midyear revenue enhancements in fiscal 1995, Moody's said.
The district's relationship with the federal government is a mixed blessing, Moody's said. On the negative side, Congress and the president must approve the district's budget, a large portion of the property base is tax-exempt, and services must be provided to a broader base than just district residents, Moody's said. Moreover, the district lacks authority to raise revenue that other municipalities have, the agency said.
On the positive side, "the federal presence is the underpinning of the economic base and stabilizes unemployment rates," Moody's said. Nevertheless, "lingering recessionary effects" are still seen in falling assessed valuations and sales tax collections, the agency said.
Moody's, like Standard & Poor's, noted the district's authority to borrow from the federal Treasury. But the district "is unlikely to pursue this except in an extreme situation. Because the law is broadly written, it is unclear how absolute the Treasury's obligation is and how quickly the advance would be made," Moody's said.
