WASHINGTON -- Standard & Poor's Corp. on Friday revised from stable to negative its rating outlook for the District of Columbia, citing "acute budget stress" that is expected to continue through the end of fiscal 1995.
The negative outlook means the district's credit rating could change within one to three years, said Kathleen Quail, a director in the Standard & Poor's municipal finance department. "But the rating of the district is under continuous review," Quail said.
The rating agency plans to issue a full credit report on June 27. Moody's Investors Service also is planning to issue a report on the district by the end of the month.
Standard & Poor's affirmed its Aminus rating on the district's outstanding general obligation debt because the city has made positive fiscal "adjustments," said Parry Young, who is also a municipal finance director for Standard & Poor's.
For example, Young said, the district "has balanced its budget aggressively" and is seeking to fix major drains on its finances, such as the way the public District of Columbia General Hospital is run.
Also, while the annual federal payment is not guaranteed, it is nevertheless based on a formula that assures the district's receipt of federal revenue, the analysts said.
"From what we know now, we think that the district is A-minus and will continue to be A-minus for the foreseeable future, for the next 20 years actually. But things could happen to change that opinion three, six, nine months down the road," Young said.
The Standard & Poor's outlook for the district had been stable since the rating agency first began using outlooks about five years ago, Young said. A stable outlook means there is no indication a rating will drift upward or downward, he said.
What effect the revised outlook will have on the district's cost of borrowing "is a tough question for us to answer," Young said. "That's outside of our expertise .... The market might think that means a downgrade is imminent, although it does not mean that."
"People haven't gotten rattled yet," said David Herships, vice president and municipal bond analyst for Kemper Securities Inc. in Chicago. Herships, who regularly follows the district credit, noted the intense media and congressional scrutiny of district finances this year. "Bondholders have got to recognize that from time to time, bad press comes out," he said.
"I don't think [market reaction] is going to be anything out of the ordinary. Every municipal government goes through this to some degree," Herships said. While there might be some market volatility if the press is negative about the revised outlook, he said, "I think this thing is going to start to settle down a little bit. Maybe it's bottomed out here."
The district's top finance official, Ellen O'Connor, could not be reached for comment.
The ratings affirmed by Standard & Poor's are for about $1 billion of uninsured GO debt, rated A-minus; about $2.2 billion of insured debt, rated AAA; $150 million of general fund recovery bonds series 1992A-1, 3, and 4, rated A-plus/A-1; $150 million of general fund recovery bonds series 1992A-2, 5, and 6, rated AA/A-1-plus based on liquidity support of various banks; and $200 million of tax and revenue anticipation notes backed by a Swiss Bank Corp. letter of credit, rated SP-1.
A key to maintaining the ratings will be the district's "ability to gain fiscal control over its pension obligations, personnel costs, and funding requirements" for the public hospital, Standard & Poor's said in a statement.
Such steps also would be needed to improve the outlook, the analysts said. "If the district is able to ... manage its budget situation, including implementing successfully its plan to change the way the D.C. General Hospital is operated, that would lend itself toward a review of the outlook at that time," Quail said.
The district's budget stress is related to "sluggish economic conditions, which have curbed local revenue growth while expenditure pressures continue to persist," Standard & Poor's said.
"The resulting decrease in cash reserves and financial flexibility make the district more vulnerable in the near term as spending requirements, particularly mandated expenditures, grow rapidly," the rating agency said.
The district's February decision to defer pension payments in fiscal 1994, which ends Sept. 30, is among the recent events that triggered the outlook change. However, the analysts cautioned that the pension payments constitute only about 5% of the district's budget.
A recent settlement between the district and the retirement board that oversees the city's pension plan actually reduces the district's financial flexibility, Young said. The settlement sets a schedule for fiscal 1994 and 1995 pension payments.
Also adding to short-term financial stress are increased receivable levels and a tax collection year change in fiscal 1993, when the district accrued and spend about $180 million in revenues that were not yet received, the agency said.
Standard & Poor's said it expects the district to "aggressively act to protect its fragile financial position while continuing to implement its capital improvement plan, which calls for about $250 million in annual debt issuances."
In mid-July, the district is planning to issue about $230 million of general obligation bonds to fund capital projects, a move subject to approval by the district council, which could vote June 22.
More use of revenue bonds in the district's capital spending mix would lessen future tax-supported debt service requirements, Standard & Poor's said. The district's current debt levels are "moderately high" but "manageable," it said.
One underlying credit factor is the district's access to federal Treasury borrowing, the agency said. "However, in the event of a cash crisis, [access] does not guarantee full and timely debt service payments, limiting its impact on the long-term bond rating," it said.
Herships agreed that access to the Treasury does not constitute a federal guarantee. However, he said, "there is no provision in the federal law for bankruptcy" of the nation's capital. The district has "too much money" to fail any bankruptcy test, he said. "It ain't going to happen."