NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA-' rating to District of Columbia (Washington, D.C.) general obligation (GO), series 2013A bonds.
The bonds are expected to sell via negotiation on or about Dec. 4, 2013. Series 2013A proceeds will be used to finance portions of the district's capital improvement plan (CIP), and to pay costs of issuance.
In addition, Fitch affirms the following district ratings:
--Approximately $2.245 billion in outstanding GO bonds at 'AA-';
--$45.5 million certificates of participation (COPs) series 2003 at 'A+';
--$161.5 million COPs series 2006 at 'A+'.
The Rating Outlook is Stable.
SECURITY
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 COPs 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. Reserve balances are solid, due to a strong initial rebound in revenues from recessionary declines. While the district's revenue projections incorporate estimates regarding federal sequestration, Fitch believes additional downside risk remains given the potential for more extensive federal deficit reduction. Fitch expects the district will respond promptly to any revenue weakness to maintain budgetary balance and sound reserves.
ELEVATED DEBT BURDEN: The district's debt levels are comparatively high and expected to remain so, partially due to its position in serving as both sole funder and provider of government services for its residents. Pension and other post-employment benefit (OPEB) obligations are limited and well managed.
RELIANCE ON FEDERAL GOVERNMENT: Government employees, particularly federal, are a significant portion of the district's employment and personal income base. While historically this has been an important source of stability, sequestration, the recent government shutdown, the potential for further federal uncertainty, and expected federal deficit reduction reflect the risks of this economic concentration. Fitch believes federal austerity could weaken the district's economic growth prospects over the medium term.
APPROPRIATION SECURITY: COPs payments require annual legislative appropriation, resulting in a rating one notch below the district's 'AA-' GO rating. Under the leases for the COPs, the mayor's executive budget requests must include amounts sufficient to make lease payments, equivalent to debt service, on the COPs.
RATING SENSITIVITIES
The rating is sensitive to continued prudent fiscal management in the face of an increasingly challenging economic environment as federal contraction takes hold.
CREDIT PROFILE
The 'AA-' GO rating reflects the district's strong financial management practices, including consistently sound reserve levels and timely actions to maintain budgetary balance, and a broad and diverse array of tax revenues. Fitch anticipates consistency in financial management when a new independent chief financial officer (CFO) takes office within the next few months. The district regularly delivers below budget expenditures, which allowed it to restore general fund reserves in recent years after several years of drawdowns during the recession. The rating also incorporates the district's high debt ratios, which are expected to remain elevated, as well as economic and revenue challenges due to reliance on the federal government at a time of federal deficit reduction. The 'A+' rating on the COPs is tied to the district's GO rating, satisfactory legal provisions, and the essentiality of the financed assets.
FISCAL POSITION STRONG DESPITE SLOWING GROWTH
District financial performance rebounded strongly from recessionary weakness, but revenues are showing signs of weakened growth. Collections for fiscal 2013 (on a cash basis for the year ended Sept. 30) indicate general fund tax revenues grew 4.5% year-over-year (yoy) (before earmarks to other funds) to $6.1 billion. While this was the third consecutive annual increase, the pace declined markedly from the fiscal 2012 yoy gain of 9.3%, and Fitch believes the fiscal 2013 gain came partially from one-time income acceleration associated with the 2013 federal income tax increase. Personal income tax (PIT) receipts grew 13.1% yoy to $1.7 billion, while real property tax revenues increased a less robust 4.4% to $1.9 billion. A third key revenue stream, general sales tax collections, declined very slightly by 0.1% yoy, driven by deceleration during the summer.
Fitch attributes the weakened growth to ongoing contraction at the federal government level. As discussed further below, the public sector drives a significant share of the district's economy and tax revenues. The CFO's September 2013 quarterly revenue estimate forecasts narrowing yoy general fund tax revenue growth in fiscal 2014 of 2.6% (on a GAAP basis), with less than 4% growth in the major categories of PIT, sales tax, and property tax revenues. Fitch notes that the CFO projections have historically proven conservative, though the level of federal uncertainty does add some potential volatility.
Despite this weakened pace of revenue growth, Fitch views the district's fiscal position as strong. Fiscal 2012 ended with a $416.7 million general fund GAAP-basis operating surplus and an ending general fund balance of $1.5 billion, representing a robust 22.9% of general fund revenues. This included $781 million in various statutory cash reserve funds, representing 11.9% of general fund revenues. While final budgetary results are not yet available for fiscal 2013, Fitch anticipates another general fund operating surplus, though likely of a lesser magnitude, with cash reserves remaining stable or increasing.
Large reserve balances provide important flexibility for the district, particularly given its unique operational and economic reliance on the federal government. When the federal government recently shut down, the lack of a federal budget prevented D.C. from accessing revenues authorized under its fiscal 2014 budget. To cover payroll and other basic expenses, the district used a portion of its contingency reserve fund, which it has since fully repaid. Importantly, the enacted federal continuing resolution reopening the government authorized the district's budget for the entire fiscal year even in the event of another federal shutdown.
FEDERAL EXPOSURE CHALLENGES ECONOMY
The district's economy outperformed the U.S. during the recession and rebounded more strongly than the national economy, but is beginning to show signs of strain related to federal government reductions. Between 2008 and 2011, the district's yoy growth in employment, personal income, per capita personal income (PCPI), and real GDP all exceeded national rates. But in 2012, those trends reversed with district yoy growth trailing the nation in all four metrics due mainly to the onset of federal deficit reduction measures and related economic contraction. Government sector employment in the district (the majority of which is federal) has been declining yoy since October 2011, and at a much more aggressive pace than nationally. In August 2013, government employment declined 2.3% yoy in the district versus just 0.1% nationally. Overall, nonfarm employment in the district grew just 0.2% vs. 1.7% national growth. D.C.'s unemployment rate ticked upwards in recent months, diverging from the national trend, reaching 8.7% versus the U.S. rate of 7.3%.
Given the interconnectedness of the public and private sectors in the district's economy, Fitch anticipates continued declines in the government sector could bring down private sector employment growth and lead to flattening of total jobs growth or yoy losses, dependent on the extent of federal deficit reduction measures. Additional volatility due to another pending federal shutdown in January 2014 when the current federal funding resolution expires could further challenge the local economy. Positively, real estate indicators indicate a still growing market with strong and accelerating yoy growth in average single family home prices through September 2013, and a modest decline in the most recent quarterly commercial office vacancy rate.
D.C.'s income levels remain very high, but growth is slowing relative to the national rate, and an income equity gap remains. 2012 PCPI is by far the strongest in the nation (relative to U.S. states) at nearly $74,773 (171% of the U.S. rate), but the poverty rate was a high 18.2% versus a national 15.9% for the same year. PCPI grew just 0.4% in 2012, well below the national growth rate of 3.4%. Similarly, the district's total personal income growth slowed to 2.6% in 2012 versus 4.2% for the nation. Other demographic factors indicate the district's potential for further economic growth with above-average population growth and educational attainment. These benefits help mitigate, but do not fully offset, Fitch's concerns regarding the district economy's reliance on a shrinking government sector.
COMPARITIVELY HIGH, BUT MANAGEABLE LONG-TERM LIABILITIES
Debt levels are high compared to U.S. states and are projected to increase given the district's sizable CIP. On pro forma basis (including the current issue, a simultaneous $100 million GO direct placement (not rated by Fitch), and a $500 million income tax-secured bond issuance planned for next spring) direct tax-supported debt represents a high 21.3% of 2012 personal income and $15,920 on a per capita basis (2012 population estimate). Debt represents a more moderate 6.9% of D.C.'s taxable market value. The district's six-year CIP for fiscal years 2014-2019 totals $6.2 billion with GO and income tax-secured debt providing roughly two-thirds ($4.1 billion) of financing sources.
Despite these significant plans, the rating incorporates Fitch's expectation that the district will remain in compliance with its Debt Ceiling Act that statutorily limits annual tax-supported debt service to 12% of expenditures and transfers out. For fiscal 2013, the district reports debt service represented 9.55% towards the 12% limit. Fitch expects the percentage will approach, but not exceed, the cap over the medium-term as D.C. finances its extensive capital needs. The district amortizes its GO and income tax-secured revenue bonds (78% of total pro-forma tax-supported debt) at a below average rate with approximately one-third retired in 10 years. Extended debt maturities reflect the district's need to adhere to the 12% limit.
The district's pension and OPEB obligations are well-managed, partially due to significant support from the federal government. D.C.'s pension plans for teachers and police/fire employees are fully funded and received $482.4 million in federal contributions in fiscal 2012, consistent with prior years. Other district employees are either covered by the federal civil service retirement system (CSRS, to which the district consistently contributes the full actuarially-calculated required contribution, or ARC) or Social Security. Regarding OPEB, the district makes full ARC payments and reduced its unfunded liability to $355.1 million at the end of fiscal 2012, or a low 0.8% of the district's personal income.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'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:
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
U.S. State Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=808452
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