Dec 5 - Fitch Ratings has affirmed the 'AA-' rating on approximately $2.8
billion in general obligation bonds of the District of Columbia (DC, or the
Fitch has also affirmed the 'A+' rating on the following certificates of
participation (COPs) of the District:
--$7.7 million COPS series 2002;
--$48.9 million COPs series 2003;
--$170.1 million COP s series 2006.
The Rating Outlook is Stable.
The bonds are general obligations of the District, with its full faith and
credit pledged. Also pledged is revenue from a special real property tax,
unlimited as to rate or amount and levied in an amount to pay debt service on GO
and parity bonds.
The certificates evidence proportionate interests in lease payments from the
District to the trustee as lessor for various essential facilities. The
payments, equal to annual debt service, are subject to inclusion in the
District's annual budget and annual appropriation by the United States Congress.
KEY RATING DRIVERS
SOUND FINANCIAL MANAGEMENT: The District's financial management practices are
sound. Recession-driven revenue weakness led to drawdowns of the sizable general
fund balance, but the District has begun to restore those losses and reserve
levels remain solid. Prudently, the District's current-year budget assumes
revenues losses due to possible federal sequestration.
ELEVATED DEBT BURDEN: The District's debt levels are high and expected to remain
so, partially due to its unique position in serving as both sole funder and
provider of government services for its residents. Pension and OPEB obligations
are limited and well managed.
RELIANCE ON FEDERAL GOVERNMENT: Government employees comprise a very high
approximately one-third of the District's total employment and an even higher
percentage of personal income, with the vast majority from the federal
government. While historically this has been an important source of stability,
potential sequestration and other expected federal deficit reduction in the
coming years could weaken the District's economy.
The 'AA-' GO rating reflects the District's strong financial management
practices, including consistently sound reserves levels and timely actions to
maintain budgetary balance, a broad and diverse array of tax revenues, and high
resident wealth levels. The District regularly delivers below budget
expenditures, which allowed it to restore general fund reserves in recent years
after several years of drawdowns. The recent gains in operating performance are
especially impressive in light of the District's continued full funding of its
actuarially required contributions (ARC) for pensions and other post-employment
benefits (OPEB) obligations. The rating also incorporates the District's high
debt ratios, which are expected to remain high, as well as possible economic and
revenue weakness due to reliance on the federal government at a time of federal
District financial operations have begun rebounding from recession-driven
pressures. The general fund total balance declined for three consecutive years
between fiscal 2008 to fiscal 2010 (years ending Sept. 30). In fiscal 2011, tax
revenue growth of 2.8% on a GAAP basis and tight expenditure control (1% growth)
resulted in an increase in fund balance. The general fund balance at fiscal
year-end 2011 totaled $1.1
billion, or 18.9% of general fund expenditures.
Budgeted general fund expenditures and transfers out, and general fund resources
for fiscal 2012 were both 3.6% below the prior year's revised budget. Tax
revenues were budgeted to decline 5.9% (including dedicated and non-dedicated).
The District's June 2012 revenue estimate substantially improved the forecast,
projecting a 6.2% increase in general fund local revenues, and the September
2012 monthly cash report showed a robust 10% gain in general fund taxes (gross
basis) from fiscal 2011.
For the current fiscal year (2013), the District's balanced budget
conservatively forecasts a 1.2% decline in general expenditures and transfers
out versus the revised fiscal 2012 budget estimate, and a 0.4% decline in
general fund resources (including a modest $31.2 million use of fund balance).
The long-range financial plan through fiscal 2016 projects balanced operations
in fiscal years 2014 through 2016, with no use of the fund balance. Pay-go
capital contributions, mainly for school modernization are contemplated later in
the plan while additional OPEB trust contributions remain budgeted.
District economic indicators, which grew strongly earlier this decade and
significantly outperformed the U.S. in the recession, moderated more recently
with just 0.6% year-over-year employment growth in October 2012 versus 1.4%
nationally. As the nation's capital, government employment constitutes a
substantial nearly one-third of District employment, with the majority made up
of federal employees. Federal employment contracted year over year for 13
consecutive months. In October, federal employment declined 1.1% from the prior
year. Fitch expects the trend to continue, whether or not federal sequestration
is implemented as federal deficit reduction is likely in the coming year. Growth
in the services sector, namely education and health, helped offset the
government employment contraction. The District's unemployment rate in October
reached 8.5%, down substantially from 10.3% in the prior year but still above
the national rate of 7.9%.
Income levels remain very high for the district, but growth is slowing relative
to the national rate, and an income inequity gap remains. Personal income per
capita (PIPC) is by far the strongest in the nation at nearly $74,000 (178% of
the U.S. average) in 2011. But the poverty rate was a high 18.7% versus a
national 13.2% for the same year. PIPC grew 3.6% in 2011, but that was slower
than the national growth rate of 4.4%. That was the first time since 1999 that
the District's annual PIPC growth rate fell below the national rate. Federal
budget cuts would likely accelerate this trend, though continued growth in the
services sectors could provide a partial offset.
DEBT AND OTHER LONG-TERM LIABILITIES
Debt levels are high and are projected to increase moderately given the backlog
of deferred capital needs (most importantly for school modernization) and other
borrowing plans. Direct tax-supported debt represents a high 18.7% of personal
income, 6.1% of 2011 market value, and is $13,826 on a per capita basis. The
District's locally funded six-year capital improvement plan (CIP) for fiscal
years 2013-2018 totals $5.0 billion (excluding the Local Highway Trust Fund) and
is expected to be primarily debt financed, though the District plans to maintain
compliance with the Debt Ceiling Act that statutorily limits tax-supported debt
service to 12% of expenditures. District debt amortization, when considering GO
and income tax secured revenue bonds, is below average, with approximately
one-third amortized in 10 years, which Fitch attributes to adherence to the Debt
Ceiling Act cap. The 'A+' rating on the District's COPs reflects the District's
long-term credit characteristics, satisfactory legal provisions, and the
essentiality of the assets financed.
The District's pension and other post-employment benefits (OPEB) obligations are
well-managed, partially due to significant support from the federal government.
The District's Retirement Board estimates its pension plans for teachers and
police/fire employees were over 100% since fiscal 2007. Regarding OPEB, the
District makes full ARC payments and reduced its unfunded liability to $784
million at the end of fiscal 2011, or a low 1.7% of the District's personal
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);
--'U.S. Local 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
U.S. Local Government Tax-Supported Rating Criteria