TEXT-Fitch rates District of Columbia's income tax revs 'AA+'

Tue Nov 6, 2012 5:13pm EST

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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