TEXT-Fitch rates District of Columbia's income tax revs 'AA+'
Nov 6 - Fitch Ratings assigns an 'AA+' rating to the following District of Columbia (the district) income tax-secured revenue bonds: --$745 million revenue bonds, series 2012C and --$30 million revenue refunding bonds, series 2012D. The series bonds are expected to sell via negotiation Nov. 7, 2012. Series 2012C finances the district's on-going capital plan while series 2012D refunds outstanding revenue bond anticipation notes. In addition, Fitch affirms the following ratings: --Approximately $3.85 billion in outstanding District of Columbia income tax-secured revenue bonds at 'AA+'. The Rating Outlook is Stable. SECURITY The income tax revenue bonds are special obligations of the district with a statutory first lien on and pledge of personal income and business franchise tax revenues and without recourse against other assets of the district. KEY RATING DRIVERS STRONG SECURITY PROVISIONS: Bondholders have a statutory first lien on available tax revenues superior to that of any other person, including GO bondholders. The district's Home Rule Act expressly stipulates that revenue debt can be issued with a valid, binding and perfected security interest in the revenues pledged. SOLID DEBT SERVICE COVERAGE: Fiscal 2012 income tax withholding revenues alone provide 2.6x coverage of projected maximum annual debt service (MADS) including currently planned issuance through fiscal 2016. ECONOMY: The district economy fared relatively well through the recession, buoyed by government employment as well as a growing business and professional sector. Federal deficit reduction efforts could slow near-term growth. NON-IMPAIRMENT COVENANT: The district has the ability to modify rates and levels of income subject to the pledged taxes; however, this risk is limited by a covenant to not reduce revenues below a specified coverage ratio as well as non-impairment of contract protections. REVENUE RETENTION PROVISIONS: A significant portion of the pledged revenue stream is delivered directly to a lockbox, although residuals can flow out to the district. Monies for debt service are accumulated several months in advance of scheduled payment dates. NO BANKRUPTCY RISK: The district cannot file for bankruptcy protection, which insulates the income tax secured bonds from general operations, permitting a rating that is higher than the district's GO rating. CREDIT PROFILE The 'AA+' rating reflects strong legal provisions and the nature of the pledged revenues, which provide ample debt service coverage. The bonds are secured by a statutory first lien and pledge on personal income and business franchise tax revenues, superior to that of any other person, including district GO bondholders. (Fitch rates the district's GOs 'AA-' with a Stable Outlook.) Pledged revenues are not reduced by amounts refunded to taxpayers. The district's Home Rule Act expressly stipulates that revenue debt can be issued with a valid, binding and perfected security interest in the revenues pledged, without a sale of the pledged revenues and without requiring annual appropriations. Like states, the district is ineligible to file for protection under the U.S. Bankruptcy Code. Personal income tax revenues grew 4.5% on an average annual basis between 2002 and 2012 despite rate reductions. Income tax withholding collections, representing 89% of personal income tax collections in fiscal 2012, grew in all but three years over the same period, offsetting volatility inherent in non-withholding revenues. Business franchise tax revenues grew on an average annual basis by 5.7% over the same period, though historical performance reflects greater volatility than the personal income tax sources. Aggregate net pledged revenues declined by a sharp 16.6% in fiscal 2009, largely the result of recession-driven declines in non-withholding and business franchise revenues of 60% and 18%, respectively, while the dominant withholding revenues declined by just less than 1%. A more modest decline in aggregate pledged revenue of 3% was recorded for fiscal 2010, as nearly 8% growth in withholding tax collections offset continued weakness in the non-withholding and business sources. Receipts rebounded significantly in fiscal 2011 amid the district's relatively strong economic performance, with nearly 20% aggregate net pledged revenue growth driven primarily by withholding revenue growth of nearly 14%. Growth continued into fiscal 2012 at a slightly slower but still strong rate of 12% (unaudited) led by 9.5% growth in withholding tax collections and strong 25% growth in business sources. The district is projecting slightly slower growth over the next few years, in part reflecting the potential for reduced federal spending due to sequestration. The Income Tax Secured Revenue Bond Authorization Act of 2008 initially authorized just over $2.9 billion in income tax secured revenue bonds; a level of bonding that was expanded by $2.3 billion in August 2011. Additional leveraging is limited by a two-pronged additional bonds test that requires pledged income tax withholding revenues for any 12 consecutive-month period of the preceding 15 months cover projected MADS by no less than 2x and total pledged revenues over the same period cover projected MADS by no less than 3x. Pledged revenues have consistently provided ample coverage of debt service requirements on both an annual and MADS basis. Assuming issuance of the remaining authorization and additional authorization to support the district's capital plan, fiscal 2012 pledged revenues provide 3.8x coverage of MADS; withholding taxes alone provide 2.6x coverage of MADS. The district covenants not to modify the income tax rates or income subject to them, if such modification would reduce MADS coverage by the withholding portion alone to less than 2x. The district's calculation of debt service under the indenture nets federal interest subsidy payments to be received in connection with Build America Bonds (BABs) or Qualified School Construction Bonds (QSCBs), essentially allowing for greater leveraging of the security. Outstanding income tax-secured revenue bonds also are considered within the district's Debt Ceiling Act, which statutorily limits debt service to 12% of expenditures. Providing additional security to bondholders, approximately 90% of pledged revenues flow directly to a lockbox account with the collection agent who sweeps funds daily to the trustee for application to the accounts created under the indenture. The trustee is required to set aside one-third of the ensuing fiscal year's debt service from the first dollars received in each of the months of April, May, and June, effectively funding debt service months in advance of the following fiscal year's payments. After debt service has been provided for as noted above, remaining available monies flow to the district's general fund. Additional information is available at 'www.fitchratings.com'.The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable Criteria and Related Research: --'Tax-Supported Rating Criteria' Aug. 14, 2012; --'U.S. State Government Tax-Supported Rating Criteria' Aug. 14, 2012. Applicable Criteria and Related Research: Tax-Supported Rating Criteria U.S. State Government Tax-Supported Rating Criteria
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