One of three Wall Street bond raters weighed in today on the District’s debt. There’s good news and bad news.
The bad news: Moody’s Investors Service has moved the District general obligation bonds from a “stable” to “negative” outlook — a shift considered a precursor to a downgrade.
The good news, such as it is: The outlook revision, according to a Moody’s statement, isn’t the fault of city officials. Rather, it “reflects the District’s unique exposure, as the nation’s capital, to federal government downsizing and the risk that such a downsizing could have on the finances of the District.”
In other words, “The major issue is beyond our control,” said Natalie Wilson, a spokeswoman for Chief Financial Officer Natwar M. Gandhi. The District is in the same boat as its neighboring Maryland and Virginia, who have top-rated debt that has also been placed on negative outlook simply because of their economic dependence on federal spending.
The Moody’s decision simply can’t be read as rebuking city fiscal decisions. Among the city’s “challenges,” the agency lists “[f]uture federal downsizing,” its “[h]igh government service burden,” its high rates of unemployment and poverty, and its inability to tax commuters or federal property. There is no mention of United Medical Center; no mention of income tax hikes; and only a passing mention of the vaunted “fund balance” — aka the city savings account — as a factor that could lead to a future rating modification. From the release:
WHAT COULD MAKE THE RATING GO UP
Rebuilding and maintenance of healthy fund balances
Substantial improvement in the local economy, including more robust population growth, increased resident employment and lower poverty levels
The ability to access currently off-limits portions of the tax base, such as taxing commuter incomes
WHAT COULD MAKE THE RATING GO DOWN
Federal downsizing that has a negative impact on the District’s economy and finances, including reductions in the federal workforce or entitlement cuts
Erosion of the district’s strong financial management practices, particularly leading to budget imbalance or draw downs of fund balance below adequate levels
What about the timing? Surely Moody’s was trying to send a message by releasing their new evaluations on the same day District lawmakers passed an income-tax hike?
Nope. For one, the statement makes no mention of fiscal decisions; in fact, based on the concerns outlined, Moody’s would be encouraged by the shared determination of city leaders to sock away an $89 million surplus to shore up the fund balance. More importantly, the rating’s timing is directly tied to the fact that the District will be selling $820 million worth of tax anticipation notes next week. (Those are short-term instruments meant to maintain cash flow while the city coffers await the spring’s tax receipts.) The ratings agencies typically rate those issuances about a week in advance, and it is not surprising that Moody’s would take the opportunity to reassess the general obligation rating, given its handling of neighboring jurisdictions after the federal debt-ceiling showdown.
Officials in Gandhi’s office expect the other two raters, Standard & Poor’s and Fitch, to follow suit in the next day or two, though they might not necessarily address the GO rating.