Bloomberg News

D.C. Gets Lowest Rate Even as Federal Job Cuts Loom: Muni Credit

September 27, 2011

Sept. 27 (Bloomberg) -- The District of Columbia may borrow the most in its history at a record-low cost today even as federal budget cuts threaten to erode the employment base of the nation’s capital.

The city of about 600,000 joins states from coast to coast rushing to take advantage of the lowest short-term rates since at least 1989. California slashed borrowing costs by 88 percent on a $5.4 billion note sale this month. Washington Treasurer Lasana Mack said the city expects to sell $820 million in top- rated one-year notes at 0.30 percent or less, at least 21 percent cheaper than a similar sale 11 months ago.

“They’re going to benefit from having a high rating given the economic environment,” said Daniel Solender, who manages $14 billion as head of municipal bonds at Lord Abbett & Co. in Jersey City, New Jersey.

Washington, Maryland and Virginia stand to lose the most jobs and funding as legislators chart how to cut U.S. government spending. Last week Moody’s Investors Service slapped a negative outlook on the city’s long-term debt. Efforts to trim the deficit of the federal government, which employs 29 percent of the city’s workforce, may have an “outsize impact” on Washington’s finances, according to Moody’s.

Washington plans to sell the tax-and-revenue anticipation notes, which are top-rated by Moody’s at MIG 1, at a yield of about 0.30 percent, or “maybe even lower,” said Mack, 48, who also serves as deputy chief financial officer. A rate of 0.30 percent was nine basis points more than a top-rated, one-year benchmark bond on Sept. 23, according to data compiled by Bloomberg.

Lowest Since 1989

The city sold $700 million in tax-and-revenue anticipation notes in October 2010 at a yield of 0.38, or 11 basis points more than a top-rated, one-year benchmark bond, Bloomberg data show. A basis point is 0.01 percentage point.

Two weeks ago, yields on top-rated municipal securities maturing in one year touched the lowest since the Bond Buyer’s weekly index of the debt began in 1989. They have fallen more than 5 percentage points in that span.

In August, after the partisan showdown in Congress over raising the debt ceiling, Moody’s downgraded to negative the long-term outlooks for Maryland and Virginia because they’re “indirectly linked” to the U.S. government.

‘Eagerly Awaiting’

“We are sitting in the lap of the federal government here and we are eagerly waiting to see how the deficit issue is going to be resolved,” the city’s chief financial officer, Natwar Gandhi, 71, said in a telephone interview.

Gandhi’s concern, like that of Moody’s, is with what the congressional supercommittee will do when it releases its budget-cutting plan in mid-November. The panel is charged with slicing $1.2 trillion from the deficit in addition to almost $1 trillion in cuts made in an August deal that prevented a U.S. default.

If the supercommittee slashes Medicaid, state budgets could be imperiled, Fitch Ratings said in a report issued last week. However, states won’t likely feel an immediate impact from the August reductions, Fitch said.

Any cuts to the government’s insurance program for the poor could also slam the district’s budget, Gandhi said. Unlike other cities, Washington provides many of the same services as a state, including Medicaid. About $1.8 billion, or about 20 percent of its annual operating budget, is spent on the insurance program, he said.

Medicaid Risk

The city’s ownership of a hospital that “relies heavily” on Medicaid payments adds to its vulnerability to any reduction of the program, Moody’s said.

Potential cuts to Medicaid “magnifies the enterprise risk that the hospital acquisition already poses to the district’s finances,” Moody’s said. The city purchased United Medical Center in 2010 and is looking for a private buyer.

Moody’s lowered outlook applies to long-term debt, such as general-obligation bonds. Washington sold $138.5 million in income-tax-secured revenue bonds yesterday. Those securities have a top AAA rating from Standard & Poor’s and are rated one level lower by Moody’s with a stable outlook.

The city’s reserve fund has fallen to $700 million from $1.5 billion in 2005, and dollars that remain are dedicated and can’t be touched, Gandhi said. The city’s revenue peaked in fiscal year 2008 at $6.2 billion, and fell to $5.8 billion in fiscal year 2010.

Depleted Funds

“We don’t have the kind of working capital we used to have,” Gandhi said. “The recession demanded that we use the fund balance to take care of city needs.”

From 2008 through fiscal 2010 the total budget, which includes capital expenditures, grew by about $600 million to $10.8 billion, documents show.

Washington is expected to end the current fiscal year on Sept. 30 with an $89 million surplus, which both the mayor and the City Council agree should be put toward rebuilding the fund balance, Gandhi said. The city’s revenue is also expected to rebound back to its peak 2008 level in the next fiscal year, city budget documents said.

U.S. state tax revenue grew at its fastest pace in six years in the second quarter, led by personal and corporate levies, the Nelson A. Rockefeller Institute of Government reported Sept. 1. Revenue rose 11.4 percent from the same three months a year earlier, according to the report, which included data from 46 states.

--With additional assistance from Michelle Kaske in New York. Editors: Mark Schoifet, Walid el-Gabry

To contact the reporters on this story: Freeman Klopott in New York at fklopott@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net


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