The District's Financial Health: Avoiding 7 'Deadly Sins'
On Feb. 2, District of Columbia officials made their annual trip to Wall Street. Every February, the mayor, the D.C. chairman, myself as head of the Committee on Finance and Revenue and chief financial officer Nat Ghandi visit the three bond rating agencies – Standard and Poor’s, Moody’s and Fitch Ratings. The purpose of the meeting is to present the District’s financial situation, which helps the rating agencies determine our bond rating. Our bond rating is important for two reasons: it determines the amount of interest the District pays when borrowing money, and it acts as a report card on our overall financial health.
At the beginning of our fiscal year on Oct. 1, the District is authorized to borrow a large sum of money, typically several hundred of millions of dollars, for cash-flow purposes. Over the course of the year, as our collections come in, the money is repaid. Our big collection dates are January 15 (fourth quarter payments), March 15 (first half of property taxes), April 15 (income taxes), and September 15 (second half of property taxes).
Our bond rating determines the interest we pay on the money that we borrow – the higher the rating, the lower the interest. For example, in the early- to mid-1990s, as the District’s finances deteriorated, the bond rating fell to a “B,” greatly increasing the interest we paid. By 1995, our finances were so bad that we couldn’t borrow money at all, which was the primary reason for the Control Board -- which did what it sounds like: controlled D.C.'s finances. It was only when the Control Board came into existence in April 1995 that the District could once again borrow money.
After the District met several criteria, the Control Board went dormant on Sept. 30, 2001. But what many people don’t know is that it can be reactivated if any one of the following seven events occurs:
- Requisitioning by the mayor of advances from the Treasury
- Failure to provide sufficient revenue to the debt service reserve fund
- Default on borrowing
- Failure to meet payroll
- Existence of a cash deficit at the end of any quarter
- Failure to make required payments to pensions
- Failure to make required payments to entity under interstate compact
The Mayor and the council must remain focused to ensure that none of these seven “deadly sins” occur.
Over the years, our bond rating has increased from “junk bond” status to an “A+” on our General Obligation bonds and the highest rating of “AAA” on our income tax bonds. The District’s finances remain strong, and we had a good story to tell when we visited the rating agencies on Wall Street.