WASHINGTON - A proposal to create the District of Columbia'a first special authority to issue tax-exempt revenue bonds is moving slowly toward reality, but district council members this week questioned the apparent open-endedness of a planned debt service reserve and other financing issues.

Council chairman David Clarke warned finance officials against letting the authority turn into a "mini-government" that could stash away money in debt service and other reserves and use it to fund projects not subject to council oversight.

Both the council and Congress must approve creation of the authority, which Mayor Sharon Pratt Kelly proposed last year as a way to pay for building a convention center without using the district's general fund.

The council's committee on economic development last week approved a substitute bill giving the council more say over how the authority is run.

At a council hearing on Monday, Clarke said the bill would give the mayor authority to collect on a daily basis proposed new hotel and restaurant taxes that would back the bonds, but the mayor would only have to transfer the levies monthly or quarterly to the authority.

In view of the district's cash-flow problems, there could be a temptation under this provision for the district to hold on to the money, thereby undermining assurances to bond-holders, Clarke said.

Robert Pohlman, the district's special projects director in the office of the deputy mayor for finance, said money that belongs to the authority is "not going to be credited to the general fund."

Clarke said the council needs more information on requirements for reserves for debt service, operations, and capital reserves. The district's financial analysis assumed static conditions, but the dedicated taxes backing the bonds could grow and in turn swell reserves, he said.

A December 1993 draft financing plan developed for the district and private hotel interests by Deloitte & Touche and Carmona, Motley & Co. recommends the issuance of $364.4 million of tax-exempt revenue bonds in fiscal 1994, which ends September 30, to complete phase one of the new center.

Phase two calls for issuance of $157 million of lease revenue bonds in fiscal 1997.

The debt service on phase on revenue bonds would be paid primarily from proceeds from dedicated taxes proposed in separate legislation pending before the council. The tax package effectively would raise the sales and use tax rates on hotel rooms to 13% from 11% and raise the sales and use tax rates for restaurant meals, liquor consumption and vehicle rentals to 10% from 9%.

The legislation would also add a 2.5% surtax to the existing 2.5% corporation and unincorporated business franchise taxes, effectively increasing these taxes from 10.50% from 10.25%, said Pohlman.

He said the district has not worked out specific limits for reserves but will review the issue when it puts together a complete financing package.

The financing plan "is a dynamic process," and there is uncertainty over interest rates and project costs in the absence of a design plan, he said.

Kathleen Miles, an attorney with Lewis, White, Clay, Roxborough & Tillerson, the district's co-bond counsel, said funding the reserves would be a function of language in the trust indenture. It is "premature" to focus on the formula for setting reserve requirements, she said.

The legislation would allow the new authority to issue taxable as well as tax-exempt bonds, and the debt service reserve base "can shift" depending on taxability, Miles said. Pohlman said Internal Revenue Service reserve limit requirements would be observed.

Miles said the revenue bonds probably would not be sold competitively because the authority would be a new credit with "many multiples" to consider. But a competitive sale is not impossible, she said

Pohlman raised concern that the substitute committee bill would reduce the autonomy of the authority and tie its operations more closely to the district government by requiring the council to approve the authority's operating budget and any food service contracts that exceed one year.

The measure also calls for the authority to transfer any funds remaining after obligations are met to be district's general fund and provides for a 30-days review of certain bond issues by the council, which would have veto power.

"We wish to take a closer look at each of these provisions ... to assure ourselves that they will not have an adverse impact on the market in regard to the independence of the authority from the district government," Pohlman said.

Council member Charlene Drew Jarvis, chairwoman of the economic development panel, said the executive branch will have "extraordinary" power to influence the authority because the city's chief financial officer will have a seat on the board with veto authority over any bond issue.

"I just hope you wouldn't get into this back-and-forth on what role the council should play," she said, especially since the mayor "has not identified an exact financing mechanism and its parameters."

Jarvis said the council needs "assurance that the taxpayer won't be affected in a way that is not contemplated.... That assurance will be critical" to passage of legislation.

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