The Washington Post

District faces possible debt downgrade that was entirely avoidable


As if the District government didn’t already have enough headaches, there’s a real chance Wall Street could lower its bond rating for the first time in 15 years because our elected officials have gone too far in raiding the city’s reserve fund.

Chief Financial Officer Natwar Gandhi, who met with credit-rating agencies Tuesday and Wednesday morning in New York, said afterward that he was “very concerned” about the possibility that more than a third of the District’s bonds will be downgraded — or at least whacked with a warning that a downgrade looks probable.

Robert McCartney is The Post’s senior regional correspondent, covering politics and policy in the greater Washington, D.C area. View Archive

In the long term, such a change would potentially cost the city millions of dollars in higher interest payments on future borrowing.

More immediately, any blow to the credit rating would further damage the District’s reputation in a year when it’s already been tarnished by ethics and hiring scandals embroiling Mayor Vincent Gray and much of the D.C. Council.

Those controversies — somewhat unfairly, but inevitably — have already triggered comparisons to past wrongdoing in high places by former mayor Marion Barry.

A downgrade would also revive memories of how reckless spending forced the city to hand over its finances to an outside control board during the 1990s.

In fact, the District today is in far better financial condition than it was during the control board era. Reforms instituted then, such as creating Gandhi’s office as an independent watchdog agency, led to seven straight upgrades in the city’s bond rating. None of those safeguards have been weakened.

Moreover, if the District is downgraded, part of the blame will rest with an institution over which the city has zero control: the U.S. government. The prospect of federal spending cuts, which would hurt the District’s economy, is one of the main factors giving Wall Street the jitters over the city’s bonds.

Nevertheless, this whole problem was avoidable. The District’s elected leaders could have dodged the prospect of a downgrade altogether had they been willing to make some hard choices earlier.

In particular, they should have moved convincingly to put more money into the city’s sagging fund balance, a kind of reserve that the New York credit raters watch closely. It has dropped by more than half from a peak of $1.6 billion in 2005.

Gandhi, who has been sounding alarms about a possible downgrade since 2007, is especially unhappy about some budget choices for the fiscal year starting Oct. 1. When $77 million in unexpected revenue materialized, Gandhi would have liked to add all of it to the fund balance. So far, the mayor and the council are putting only about a third of the money into it.

“Rebuilding reserves . . . would send the positive signal the rating agencies and investors are looking for. One way to do that is put all possible additional revenues into the fund balance,” Gandhi said.

The government should also have formed a realistic plan for selling or salvaging United Medical Center in Southeast. Wall Street views publicly owned hos-pitals as a long-term cash drain.

In separate interviews, the mayor’s budget director, Eric Goulet, and Council Chairman Kwame Brown said they take Wall Street’s concerns seriously. But they also were quick to blame others for the trouble.

Goulet chided the previous mayor, Adrian Fenty, for tapping the fund balance for $200 million to balance the budget for the current fiscal year.

Even though the Gray administration has been in charge for nine of the 12 months that the budget covers, Goulet said, “Once you’ve got past the first quarter, it’s hard to change the budget, because the majority of contracts and grants are encumbered and any personnel reductions must include severance payments.”

Brown fingered the mayor for the delays in reaching a plan for United Medical Center. “It’s the executive’s responsibility to deal with the hospital,” Brown said, adding that the council is “waiting on a proposal from him.”

A prompt solution that staves off a negative Wall Street move this fall would be an excellent way for the District’s leaders to claw back some of the prestige that the city lost earlier this year.

I discuss local issues at 8:51 a.m. Friday on WAMU (88.5 FM).


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