Stakes rise in Washington, D.C., budget battle

DC.Gov

Washington, D.C., is attempting to convince the Republican-controlled House to support a Senate bill that puts $1.1 billion back into the city's budget as the bond market and rating agencies are already reacting to the turmoil.    

"We believe D.C.'s robust reserves, coupled with a highly experienced management team and sophisticated, forward-looking financial planning policies and practices, support the stability of D.C.'s credit quality," said S&P Global Ratings credit analyst Timothy Barrett. 

The city's ongoing wrestling match with its budget became more intense via the continuing resolution passed by the House last week. Language in the bill is forcing the city to adhere to its 2024 budget instead of its already approved 2025 budget resulting in a $1.1 billion cut. 

On Wednesday, CreditSights reported out on D.C., Maryland, and Virginia munis while noting a mix of market signals.  

"Spreads for some Washington, D.C. area credits have widened recently but demand has been resilient," said CreditSights. 

"As the market has reacted to the prospect of federal job and spending cuts, D.C., Maryland, and Virginia bonds have outperformed the market, but not consistently, as bonds from some issuers are outperforming, others are lagging." 

The city has a complex relationship with the federal government which is the largest employer in the area while occupying acres of non-taxable property. The city is required by law to maintain balanced budgets on a four-year cycle and is subject to Congressional oversight. 

On Tuesday Fitch Ratings put the District of Columbia on "rating watch negative," due to "heightened uncertainty and execution risk created by enactment of a federal government continuing resolution that funds the federal government through the end of the fiscal year." 

Per Fitch, "required actions to comply with the CR may be difficult to implement in a relatively short amount of time, and the consequences of a failure to comply with the CR are uncertain."

"District management reports that the CR does not directly impinge on its ability to collect revenues or its ability to make full and timely payment of debt service on outstanding obligations." 

On Monday the city's Mayor Muriel Bowser, City Council members, and the CFO held a press conference to address concerns and outlined a strategy for resolving the issue.  

"We have a bipartisan, unanimously approved resolution from the Senate, led by Susan Collins," said Bowser.

"Senator Collins coordinated with the House. She spoke very clearly that she had the support of representative Cole and President Trump in advancing the bill. I think both of those things go a long way." 

The House is back in session March 24 as the onus for dealing with the situation falls to Speaker Mike Johnson along with input from the Rules Committee and the Appropriations Committee chaired by Rep. Tom Cole, R – Okla. 

Earlier this month Moody's reassessed the financial climate in Washington before the CR was signed into law by putting the District of Columbia's credit ratings under review for a possible downgrade. 

The city is also dealing with a predicted $342 million revenue drop that was preceded by a $169.7 million revenue gain in January.