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Rating Action:

Moody's assigns Aa3 to $141M District of Columbia tax increment revenue bonds; outlook stable

Global Credit Research - 07 Aug 2015

DC will have $295 million of TIF bonds outstanding after current issue

New York, August 07, 2015 --

Moody's Rating

Issue: Southwest Waterfront Project Revenue Bonds (The Wharf Project), Series 2015 (Federally Taxable); Rating: Aa3; Sale Amount: $141,000,000; Expected Sale Date: 8/20/2015; Rating Description: Tax Allocation/Tax Increment

OPINION

Moody's Investors Service has assigned a Aa3 rating to the District of Columbia's $141 million Southwest Waterfront Project Revenue Bonds (The Wharf Project), Series 2015.

SUMMARY RATING RATIONALE

The Aa3 rating reflects the breadth and strength of pledged real property increment and sales tax increment revenues collected in the "Downtown TIF", effectively the entirety of Washington, DC's central business district, an area that encompasses 37% of the District's assessed value. While the Southwest Waterfront Project is expected to be self-supporting from its own real estate PILOT payments and sales tax increment, the support of the Downtown TIF is the route to the rating. The two notch distinction from the District's Aa1 general obligation rating reflects the amount of the District's tax base being accessed to support the bonds and links their credit quality to the GO rating, rather than the PILOT/TIF district generating revenues expected to support the bonds.

OUTLOOK

The bonds are linked the District of Columbia's general obligation rating and therefore carry its stable outlook. That outlook eflects the District's strong financial position, including improved available fund balance, low liquidity risk, and its notably strong pension position and other post-retirement benefits position, as well as its exposure to its single largest employer, the federal government.

WHAT COULD MAKE THE RATING GO UP

-- A stronger leverage constraint or stronger limits on the District's ability to create additional revenue carve outs from the Downtown TIF

-- An upgrade in the District's general obligation rating

WHAT COULD MAKE THE RATING GO DOWN

-- Outsized declines in assessed value or in sales tax collections

-- Additional carve outs of revenues from the Downtown TIF, increased leverage of other bonds that have a pledge of Downtown TIF revenues, or increased leverage of the District's general obligation credit, that have a material impact on coverage of the tax increment bonds

-- A downgrade of the District of Columbia's general obligation rating

OBLIGOR PROFILE

The District of Columbia has a population of 658,890, larger than two states.

USE OF PROCEEDS

Bond proceeds will be used to help finance construction of the Southwest Waterfront Project. The project encompasses 24 acres of land and 50 acres of water being developed into 3.2 million square feet of residential, hotel, office, restaurant, retail and cultural space in the area just south of the downtown business district and just west of the District's major league ballpark.

LEGAL SECURITY

To aid in financing the project, the District established the Southwest Waterfront Improvement Benefit District. The bonds are secured by a first lien pledge of payments in lieu of taxes (PILOT) made by property owners within the improvement district (equal to the real property taxes they would otherwise pay) and incremental sales taxes collected within the improvement district. The bonds are ultimately secured by real property increment and sales tax increment derived from the Downtown TIF, greater than those collected in the "base year" (January 1, 1999 for property taxes and calendar year 1999 for sales taxes).The allocation of real property taxes is subordinate to the pro rata share of the tax collected in the Downtown TIF needed to support the District's general obligation bonds, is subordinate to the claim of one other series of TIF bonds (which mature in 2021), and is on parity with several other TIFs. Although the senior TIF bonds have a first claim on the downtown revenues, they have always been self-supporting from certain dedicated revenues of their own. Including the Southwest Waterfront, the District has established eight tax increment districts that can draw on the Downtown TIF revenues on a parity basis. The current issue will nearly double the amount of TIF-supported debt the District has outstanding, to $295 million.

Coverage provided by the Southwest Waterfront-derived revenues is expected to average 1.6 times maximum annual debt service (MADS) through 2019. To bolster bondholder security, the indenture requires the District to make available tax increment revenues derived from the existing Downtown TIF. Coverage of MADS on all of the District's TIF bonds is 24.1 times based on fiscal 2014 revenues. Including amounts allocated to general obligation debt service as well as the TIFS, MADS coverage from the Downtown TIF is 7.7 times.

Real property taxes reflect 37% of the District's general fund revenue. Residential properties are taxed at a rate equal to $0.85 per $100 of assessed value, while commercial properties are taxed at a rate equal to $1.85 per $100 (for properties valued at more than $3 million) or $1.65 per $100 (for those less than $3 million). Property valuations are performed annually. Sales taxes (17% of general fund revenue) are based on the following rates: 5.75% for general merchandise, 10% for prepared food and beverages, and 14.5% on hotel room rates.

Assessed value in the Downtown TIF has increased strongly recently, increasing at an average annual rate of 7.7% between fiscal years 2003 and 2014, inclusive of a 13% decline in fiscal 2011 during the economic downturn. The District forecasts assessed value to increase by an average of 3.8% through 2019.

Sales taxes are more volatile, with a decline of 11% in fiscal 2008 and a 26% decline in the available sales tax increment, although collections have increased at an average annual rate of 3.0% since fiscal 2005. Available sales taxes in the Downtown TIF declined by 10.1% in fiscal 2014 and are forecasted to grow by an average of 8.9% through fiscal 2019.

All property taxes and sales taxes in the District are collected by a collection agent. Amounts needed for general obligation debt service are segregated first. In fiscal 2014, 11% of real property tax went to pay general obligation debt service compared to 70% in fiscal 2001. That amount declined in recent years as the District used its income tax secured bonds (Aa1 stable) as a major financing tool but is expected to increase over the next several years to 22% as it begins to use general obligation bonds more evenly. After the general obligation debt service set-asides, the collection agent transfers the portion of the hospitality-related sales taxes that are pledged to the WCSA convention center bonds, and the remaining TIF-related revenues flow to their respective trust estates.

Debt service payments on the bonds are each June 1 and December 1. On the last business day of every April and October, the District is required under the indenture to transfer amounts in the Southwest Waterfront Project Fund to the trustee. The trustee is required to notify the District within five days of those transfers if the amounts on deposit are insufficient for debt service. Not less than 15 days before the next debt service payment date, the District is then required to transfer tax increment from the Downtown TIF area to the trustee to cure the deficiency. The transfers do not require an appropriation to be made by either the District council or Congress.

Additional bonds can be issued only as long as Southwest Waterfront bonds provide 1.5x coverage of MADS, and Downtown TIF revenue equals at least 3 times MADS on all bonds that have a claim on its increment revenues. Through the indenture the District has covenanted to apply the second prong of the test to any bonds that will have a claim on the Downtown TIF revenues in the future.

An additional policy constraint to leverage is the District's statutory debt cap, which limits debt service on all tax supported debt-including TIFs-to no more than 12% of revenue. A debt service reserve fund equal to MADS will be cash-funded with bond proceeds. The reserve is permitted to be released into the project fund in 2019.

A credit weakness of the legal structure is the District's ability to form carve outs in the Downtown TIF to create increments to pledge to other projects, which would reduce the amount available to the current bonds. The existing TIF bonds reflect such carve outs. While the District would still have to meet the additional bonds test and fit future debt within its debt cap, coverage could be impacted. Further, creating additional carve outs would add more complexity to an already complex TIF structure, and overall debt portfolio, in the District.

PRINCIPAL METHODOLOGY

The principal methodology used in this rating was US Local Government General Obligation Debt published in January 2014. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

The following information supplements Disclosure 10 ("Information Relating to Conflicts of Interest as required by Paragraph (a)(1)(ii)(J) of SEC Rule 17g-7") in the regulatory disclosures made at the ratings tab on the issuer/entity page on www.moodys.com for each credit rating:

Moody's was not paid for services other than determining a credit rating in the most recently ended fiscal year by the person that paid Moody's to determine this credit rating.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Nicholas Samuels
VP - Senior Credit Officer
Public Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Emily Raimes
VP - Senior Credit Officer
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's assigns Aa3 to $141M District of Columbia tax increment revenue bonds; outlook stable
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