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Posted at 06:00 PM ET, 07/27/2011

District CFO warns of dire debt ceiling consequences

Chief Financial Officer Natwar M. Gandhi is warning city leaders of dire consequences for the District fisc should Congress not reach a deal to raise the federal debt ceiling.

With about a quarter of the city budget consisting of federal funds — the vast majority of it Medicaid payments — the city is in danger of having to cut services if the federal government chooses to stop making payments to various programs in event of a default.

But Gandhi is more concerned that a federal default could roil markets and limit the city’s access to “tax anticipation notes” — short-term borrowing instruments used to manage the yearly cash-flow cycle (in other words, to pay the bills while the city waits for tax payments to roll in). In that case, Gandhi wrote to Mayor Vincent C. Gray and the D.C. Council, the city could default on its own obligations — which could trigger the return of the Financial Control Board in a congressional screw job of epic proportions.

The city does have some cushion — a $228 million contingency fund and a small unrestricted-fund balance. But an ongoing Capitol Hill impasse could conceivably suck those dry.

“We all hope our national leaders find a way to avert such an outcome,” Gandhi writes, “but if it comes to the point where the District needs to ration payments, we need a definitive plan that prioritizes District payments, and allows us to take all actions necessary to avoid obligating funds we do not have.”

And then there’s the bond ratings. No ratings agency has put the District on watch for a downgrade, as Maryland and Virginia have been due to their economies’ reliance on federal spending. Needless to say, the District appears to be in that same boat all the same.

Here’s Gandhi’s letter:

Gandhi Letter on Federal Debt Ceiling

By  |  06:00 PM ET, 07/27/2011

 
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