Lower rating is possible for D.C., but note issue is likely to get backing.

WASHINGTON -- The District of Columbia moved one step closer yesterday to having its credit rating downgraded, but sources said the district is expected to get the backing it needs from banks to insure an upcoming $250 million note sale.

Standard & Poor's Corp. yesterday placed the district on CreditWatch with negative implications, which means that if the district does not follow through on proposals to control its finances, its A-minus credit rating will be downgraded to the BBB category, the rating agency said.

At the same time, sources said banks are expected to provide a letter of credit for the note sale this month because the district has no other short-term debt outstanding, the notes will be payable by the end of the fiscal year, and the $250 million is comparable to amounts the district has borrowed and repaid on time in previous years.

Standard & Poor's had placed the district's credit on negative outlook last June, an action that portended a potential downgrade in one to three years. Yesterday's action "shortens the horizon" to six months for a possible downgrade, said Parry Young, a Standard & Poor's director. The rating agency wants to see specific actions taken to control the budget -- and specific results -- in that time frame, he said.

Standard & Poor's rates $1 billion of the district's outstanding uninsured general obligation bonds A-minus. The CreditWatch also affects $83 million of certificates of participation series 1993, which Standard & Poor's rates BBB.

The action comes after elected district officials met Monday in New York with Standard & Poor's and Moody's Investors Service analysts. Another meeting is planned today in the district with Fitch Investors Service analysts.

Mayor Sharon Pratt Kelly, Mayor-elect Marion Barry, and district council chairman David Clarke displayed a united front in presenting to the analysts a package of $595 million in spending cuts and cash management measures to eliminate a projected budget and cash shortfall of about $530 million in fiscal 1995, said Ellen O'Connor, the district's chief financial officer and deputy mayor of finance.

"The good news" is that Standard & Poor's preserved the A-minus rating on long-term debt, Clarke said. "We are on a self-imposed watch," he said, citing the council's efforts to limit the district's bonded indebtedness. For example, he said, the council cut a proposal by Kelly for $250 million in bonding authority to $200 million for fiscal 1995.

As a follow-up to Monday's meeting, Moody's Investors Service has asked the district for a detailed strategy that includes deadlines and provisions for monitoring and regular reporting to the analysts, said Diana Roswick, a vice president and assistant director with Moody's. "We want to see that they will execute the budget controls that they need to do," she said.

The district will be providing monthly cash flow statements to the rating agencies, a move welcomed by Clarke. "I would be glad to give them two" a month, he said. "Certainly that flow of information ... is going to enable those rating agencies to review us more regularly and enable the legislature to do the same," he said.

The district officials in a separate session on Monday met with representatives of 15 domestic and international banks to ask for a letter of credit to enhance $250 million of tax revenue anticipation notes that are expected to be issued Dec. 27 or Dec. 28. The planned sale will take place just days before Barry takes office on January 2. Barry has pledged repayment of the notes by Sept. 30.

A spokesman for Swiss Bank Corp., which provided a letter of credit for the district's most recent short-term borrowing of $200 million last May, could not comment on the bank's plans.

The district's access to U.S. Treasury borrowing is an underlying credit factor in the rating agencies' analyses and in banks' willingness to enhance district debt, analysts said.

The plan presented Monday by district officials includes proposals by all three elected officials, but O'-Connor said "the backbone" is a set of measures proposed last week by Barry that includes $156 million in new budget cuts and $97 million in cash measures.

Clarke said the council already has approved $184 million in budget cuts and has agreed to let a change in property tax calculations take effect tomorrow to raise a projected $40 million.

The council expects to complete work on the fiscal 1995 budget cuts on Dec. 21, but it will have another chance to act if Barry as is20expected submits a fiscal 1995 supplemental request with his fiscal 1996 budget package in February, Clarke said.

District officials on Monday also proposed a total of $140 million in cash management options, including a possible deferral of $140 million in spending to fiscal 1996, Standard & Poor's said in a statement yesterday. Similar deferrals took place in fiscal 1994, resulting in a projected $91 million cash shortfall, the agency said.

"The district's short-term borrowing needs have been accelerated and increased as a result of the deferrals and other financial factors," Standard & Poor's said. "Were deferrals to be used during fiscal 1995, S&P would look to 1996's budget to identify revenues as an offset," the agency said.

A spokeswoman for Barry said the mayor-elect felt he was received well on Wall Street and that he intends to engage in continuous follow-up with the analysts and market participants to make "what was presented a reality."

The meetings showed that "there is solid agreement about the size and causes" of the district's problems and the intent to solve them, O'Connor said.

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