Experts say the District of Columbia’s already strongly positive bond credit ratings would continue if it becomes the nation’s 51st state.
The District’s general obligation bond ratings last year were AA-plus from Fitch Ratings; Aaa from Moody’s Investors Service; and AA-plus from S&P Global Ratings.
Its income tax secured revenue bonds are rated AA-plus by Fitch, Aa1 by Moody’s, and AAA by S&P.
Only a material change in the constitution of the new state or a change in the District’s financial management team could have a foreseeable impact, according to S&P.
Delegate Eleanor Holmes Norton, DC’s non-voting member of the House, uses the credit rating as one of her arguments for statehood.
“DC’s bond rating is higher than that of 32 states,” Norton told the House Oversight and Government Reform Committee during its recent approval of the statehood legislation.
Rep. Robert Gibbs, R-Ohio, speculated during the same hearing that DC’s good bond rating might be good because its finances are backed by the full force of the federal government.
Gibbs predicted DC could lose billions of dollars of federal support for Medicaid and other programs if it became a state.
But Gibbs didn’t take into account that federal Medicaid funding is the top area of federal aid to most state governments.
DC’s Interim Chief Financial Officer Fitzroy Lee testified at a House hearing in March that the District in many respects already functions as a state.
"Contrary to a widespread misconception, the District does not receive an annual payment to cover its operations," Lee said. "Over 75% of District revenue is generated from our local taxes and fees. The District’s budget is comparable to other states in its reliance on federal dollars for Medicaid, education, other human services and transportation."
Gibbs and other Republicans also said they consider the legislation to be unconstitutional because a federal district as the nation’s capital is specified in the Constitution.
Democrats have countered that a federal capital area would remain, except it would shrink to a two-square mile area around the White House, the U.S. Capitol and Supreme Court.
The DC statehood admission legislation cleared the House Thursday on a strictly partisan vote with no Republican support.
Passage in the Senate during the current Congress is highly unlikely, however, given that it would require a 60-vote supermajority.
Only 45 of the Senate’s 50 Democrats are on record as favoring statehood while Senate Republicans have labeled the proposal as a power grab by Democrats to line up two additional Senate seats.
Even so, Thursday’s House vote marked the second consecutive year that the House has approved DC statehood, which means the political pressure on the Senate Democratic majority to at least put it to a vote is expected to build.
From a bond rating standpoint, statehood appears unlikely to have an impact in the municipal credit markets despite the warning raised by the Ohio congressman.
“The credit specifics are that DC is a well-run place with a good economy and manages their ability to repay debt to a highly rated level,” said Geoff Buswick, managing director for the S&P Global Ratings government group.
“Should it become a state, unless the management changes in some way, or the constitutional provisions strengthen or weaken in some way, we don’t see any reason to obligate a change,” Buswick added.
None of the three major credit rating agencies, however, have done an in-depth analysis on the impact of statehood on the DC’s ratings.
But Buswick said there’s not much difference in the criteria his agency uses to rate general obligation debt issued by cities and GO debt issued by states.
“They are slightly different, recognizing the inherent sovereign-like strengths of a state,” Buswick said. “But we have cities and states rated up and down the investment grade category. There’s no obligation to change one way or the other.”
Buswick said none of his colleagues at S&P think that DC statehood would automatically change its rating for better or worse.
Matt Fabian, a partner at Municipal Market Analytics who is the lead market and credit researcher there, said the legislation makes no mention of DC's debt. "So existing debt would be unaffected, I presume," Fabian said in an email.
The District's
In that report, DeWitt said his financial team was able to file its report in a timely manner despite the challenges of the COVID-19 pandemic. For the sixth consecutive year, the annual outside audit had “no findings categorized as material weaknesses or significant deficiencies,” he wrote.
“Despite the severe impact the pandemic has had on the economy, the District has been able to ‘weather the storm,’” DeWitt also wrote.
DeWitt credited the District’s high credit ratings for its ability to issue $1.75 billion in income tax secured revenue bonds last year at low interest rates. The proceeds were used for economic development initiatives, infrastructure improvements, and other capital projects.
The District also issued $1.273 billion in income tax secured revenue refunding bonds to refinance outstanding debt, which resulted in reduced debt service costs.
