The D.C. Council has showed little appetite for taking politically unpopular moves in an election year to address the city’s shrinking reserves, leading lawmakers to worry that the city’s high bond ratings might be in jeopardy.
The city’s reserves have dropped from $1.5 billion to about $822 million in three years, and are on pace to dip to $600 million by the end of fiscal 2012 under Mayor Adrian Fenty’s proposed budget, according to council staff.
The “handwriting [is] on the wall” that the city’s bond rating could go down unless spending is cut or revenues are raised to increase the city’s reserves, Council Chairman Vincent Gray said recent council meeting last week.
The bond rating determines the interest rate at which the city can borrow money. The city’s income tax revenue bond is currently at the highest or next highest level with the three major rating agencies. A dip in the ratings could cost taxpayers millions of dollars more to finance large-scale construction projects.
Chief Financial Officer Natwar Gandhi said the bond ratings are not threatened “at this moment,” but he is urging Fenty and the council to “adopt a plan to rebuild [reserves] and that they stick to it.”
But the council has shown little appetite to rebuild reserves while grappling with a host of unpopular budget cuts and potential tax increases to bridge a $550 million budget gap.
Ward 2 Councilman Jack Evans’ call for massive cuts to department budgets to restore more than $165 million in reserves evoked little support from other council members last week when the council met to hash out the details of next year’s budget.
Evans said the problem will only get worse next year, but he expects his colleagues will be more receptive after this election cycle.
“The appetite will come at some point because you will run out of options,” Evans said. “If we don’t do it, at some point the whole house of cards comes falling down.”
In the mid-1990s, the city’s reserves fell to a negative $500 million, contributing to a federal takeover of city finances.
Bond rating agencies can be influential in local politics. When Moody’s Investor Service threaten to write down Montgomery County’s highest ranked AAA rating because of low reserves, the county answered with a huge energy tax increase.
