OREANDA-NEWS. August 11, 2015. Fitch Ratings has assigned an 'AA-' rating to the \\$141 million in District of Columbia (DC) southwest waterfront project revenue bonds (the Wharf project), series 2015 (federally taxable).

In addition, Fitch has upgraded to 'AA-' from 'A+' the rating on the following District tax increment revenue bonds:

--(Gallery Place Project) tax increment revenue refunding bonds, series 2012;
--(City Market at O Street) tax increment revenue bonds, series 2011

The Rating Outlook is Stable.

SECURITY

The bonds are special obligations of the District, secured by a lien on and pledge of project-specific revenues, and in the event those are insufficient, a lien on available Downtown TIF increment revenues. The available Downtown TIF increment revenues serve as the basis for the ratings.

KEY RATING DRIVERS

DISTRICT'S ECONOMY SUPPORTS SOLID COVERAGE: The 'AA-' rating reflects the demonstrated resilience of the District's economy through federal contraction, strong debt service coverage provided by available Downtown tax increment financing (TIF) increment revenues, and limitations on future leveraging. Offsetting this, incremental property tax revenues are reduced to cover an allocation first for general obligation (GO) debt service before being made available for payment on the bonds. The District's GO bonds are rated 'AA' by Fitch, with a Stable Outlook.

DOWNTOWN TIF AREA IS SUBSTANTIAL: The Downtown TIF area represents a significant portion of DC's central business district, and more than one-third of the district's overall tax base. The tax base is well-diversified with the top 10 taxpayers in the Downtown TIF accounting for just 7.4% of the fiscal 2014 assessed value. Fitch links the performance and outlook for Downtown TIF revenues to the District's overall economy.

LIMITATION ON ADDITIONAL LEVERAGE: Additional leveraging of the available increments of Downtown TIF revenues requires 3 times (x) coverage of projected maximum annual debt service (MADS); this test is stringent among municipal credits of this type rated by Fitch. Carve-outs of the Downtown TIF area revenues for smaller 'footprint' projects are subject to a separate test that partially mitigates concern regarding pledged revenues dilution.

RATING SENSITIVITIES

STRENGTH OF COVERAGE: The rating is sensitive to any indication of significant weakening in the solid coverage levels, or substantial further dilution of the Downtown tax increment financing area pledge with new financings or significant District of Columbia GO issuance that could increase the GO allocation.

CREDIT PROFILE

The 'AA-' rating on the bonds reflects the District's strong and stable economic performance through federal sequestration and deficit reduction efforts, robust coverage provided by the available incremental revenues produced by the Downtown TIF area and the limitation on future leveraging of bonds backed by these revenues.

Debt service on the series 2011, 2012 and 2015 bonds is intended to be paid from revenues generated within the respective project areas (City Market at O Street, Gallery Place, and the Wharf). Fitch views the available real property increment and available sales tax increment revenues within the Downtown TIF area (together, the available Downtown TIF increment revenues) as more substantial and reliable revenue streams than the project-specific revenues. The rating is based solely on the available Downtown TIF increment revenues, which covered debt service on all obligations directly secured with the Downtown TIF pledge in fiscal 2014 by 37x, and pro forma MADS by 24x. Coverage including the GO debt service allocation in fiscal 2014 is lower, but a still robust 9x.

INCREMENTAL REVENUES PLEDGED FOR BONDHOLDERS

The Downtown TIF area produces incremental revenues from both real property and sales tax sources - after various reductions the resulting available Downtown TIF increment revenues are pledged to various project bonds (the parity obligations). Real property tax and PILOT revenues in excess of the amounts generated by assessed valuation (AV) as of Jan. 1, 1999 are available to the series 2011, 2012, and 2015 bonds on a subordinate basis to the District's 2002 Mandarin Oriental bonds (senior obligations) and on parity with several other projects (collectively with the series 2011, 2012, and 2015 bonds, the parity obligations).

In addition to the senior obligations, allocations to cover the District's GO debt service and incremental revenues associated with footprint TIFs within the Downtown TIF area also reduce Downtown TIF incremental property tax revenues available for the parity obligations. The resulting revenues are the available real property tax increment revenues. In recent years, the District restarted GO bond issuance, thereby reducing the Downtown TIF incremental property tax revenues that would otherwise be made available. Based on the District's expectations for future GO bond issuance, and DC's statutory debt limit, Fitch anticipates the allocation for GO debt service will not substantially weaken coverage on the Downtown TIF area's senior and parity obligations.

Sales tax revenues in excess of those generated in calendar 1999, exclusive of prior allocations to bonds issued for DC's Convention Center and incremental revenues associated with established footprint TIFs within the Downtown TIF, are similarly pledged to the parity obligations. These available sales tax increment revenues made up approximately one-fourth of available Downtown TIF increment revenues, with the balance from available real property tax increment revenues.

TIF PERFORMANCE LINKED TO CITY'S ECONOMY

The Downtown TIF area comprises 2,500 acres, encompasses the District's central business district, and represents a substantial 37% of DC's entire fiscal 2014 AV. The area includes over 15,000 taxable properties, the majority of which are commercial in nature. Concentration among the top taxpayers in the Downtown TIF area is relatively low at 7.4% for the top 10, although the federal government is an overall concentration risk for the District's economy.

Fitch views the growth prospects for the TIF to be linked closely to DC's overall economic profile. A September 2014 upgrade of the District's GO rating partially reflected economic resilience despite contraction in the federal government, historically a key engine in DC's growth. While growth slowed as sequestration and other federal measures took hold, strength in the private sector more than offset federal reductions and DC continued gaining jobs, personal income and population. Solid performance in the Downtown TIF reflects its linkage to the overall District economy.

Property tax base growth in the Downtown TIF area over the base year has been significant, and the incremental valuation (IV) for fiscal 2014 was more than three times (333.5%) the base level. While IV in the Downtown TIF area declined by 17.6% in fiscal 2011, it rebounded strongly with three consecutive years of double-digit percentage growth. Available real property tax increment revenues moved in line and totaled \\$640.1 million in fiscal 2014. Available sales tax increment revenues declined earlier in fiscal 2008 before fully regaining all losses by fiscal 2013, and reached \\$206.3 million in fiscal 2014.

Going forward, Fitch views as achievable the DC CFO's official forecast for strong growth in District-wide property and sales taxes in the current fiscal year followed by much more modest growth in the out-years. The District's projections for available Downtown TIF increment revenues over the next five years indicate slow, steady growth. Since the Downtown TIF area comprises such a large portion of DC's overall tax base and economic activity, Fitch also views these projections as reasonable and achievable. Prolonged sequestration, another government shutdown, or other federal government austerity measures could further constrain growth, though the ample debt service coverage provides an important offset.

ROBUST LEGAL PROVISIONS AND COVERAGE

Available incremental revenues provide solid debt service coverage of pro forma MADS, which occurs in 2021 and which includes the series 2015 bonds, additional bonds to complete the Wharf project and future borrowing for another authorized project (Skyland). These revenues are not subject to appropriation by the District's city council or the U.S. Congress.

Available fiscal 2014 Downtown TIF increment revenues of \\$846.4 million cover pro forma MADS by approximately 24x. An additional bonds test (ABT) requiring 3x coverage of projected MADS serves to limit additional leveraging. In addition, tax increment revenue bonds, as well as GO and income tax-secured bonds, are included in the calculation of the District's statutory debt limitation (capping debt service at 12% of expenditures) providing an additional constraint.

Fitch ran two stress scenarios to test the resilience of available Downtown TIF increment revenues, and in both cases the revenues maintained robust coverage. The first scenario was based on the indenture test for additional carve outs of portions of the Downtown TIF as footprint TIFs whose incremental revenues would be dedicated first to a specific project area before being available for parity obligations. Assuming a 30% decline from fiscal 2014 available real property tax increment revenues and a 15% decline in available sales tax increment revenues, MADS coverage remained strong at nearly 18x.

A second test applied the worst single year percentage decline for the available real property (12%) and sales tax increment revenues (26%) since the recession, to every year from fiscal 2015 through the MADS year, 2021. Coverage in that year remained solid at 8.1x. Additionally, Fitch calculates available Downtown TIF increment revenues would need to decline between 36% and 37% annually through 2021 to reach sum-sufficient pro forma MADS coverage. Fitch views such a substantial and sustained decline as highly unlikely. The worst single historical decline was 10.7% in fiscal 2011.

Coverage including the prior GO debt service allocation is lower, but still strong. Fitch calculates an alternative, all-in coverage metric including the allocation for GO debt service, as well as debt service on the senior TIF bonds and parity obligations. Fiscal 2014 coverage by this measure is very strong at 9x. The District projects the GO debt service allocation will increase steadily with recent and planned GO debt issuances reaching \\$199.5 million by fiscal 2019, from \\$75.1 million in fiscal 2014. Based on the District's reasonable projections for available Downtown TIF increment revenues, Fitch projects all-in coverage will remain a strong 5.5x.