OREANDA-NEWS.  Fitch Ratings has assigned an 'AA+' rating to the District of Columbia (Washington, D.C.; the District) $95.57 million income tax-secured revenue refunding bonds, series 2015A.

The bonds are expected to sell via negotiation during the week of November 9. Series 2015A proceeds will be used to currently refund the District's income tax-secured revenue refunding bonds, series 2011B (Adjusted SIFMA Rate) and series 2011E (Adjusted SIFMA Rate) both maturing on Dec. 1, 2015, and to pay costs of issuance.

In addition, Fitch affirms the following ratings:

--Approximately $4.6 billion in outstanding District of Columbia income tax-secured revenue bonds at 'AA+'.

The Rating Outlook is Stable.

SECURITY

The income tax revenue bonds are special obligations of the District with a statutory first lien on and pledge of personal income and business franchise tax revenues and without recourse against other assets of the District.

KEY RATING DRIVERS

STRONG LEGAL PROVISIONS: Bondholders have a statutory first lien on available tax revenues superior to that of any other person, including general obligation (GO) bondholders. The District's Home Rule Act expressly stipulates that revenue debt can be issued with a valid, binding and perfected security interest in the revenues pledged. Additional bondholder protections include a non-impairment covenant tied to coverage, strong additional bonds test (ABT), and revenue retention and lockbox provisions.

NO BANKRUPTCY RISK: Under federal law, the District cannot file for chapter 9 bankruptcy protection, which insulates the income tax-secured bonds from general operations, permitting a rating that is higher than the District's 'AA' GO rating.

SOLID DEBT SERVICE COVERAGE: Pledged revenues provide consistently solid coverage, despite volatility during recessionary periods. Coverage of projected maximum annual debt service (MADS) from historical pledged revenues back to fiscal 2002 never declined below the 2x ABT. Fitch anticipates coverage will continue to meet or exceed the ABT.

CONTINUED, BUT SLOWING, ECONOMIC GROWTH: Government employees, particularly federal, comprise a significant portion of the District's employment and personal income base. Historically this has been an important source of stability, but sequestration, along with the potential for ongoing federal government contraction and disruption reflect the risks of this economic concentration. Fitch anticipates continued private sector expansion but believes federal austerity limits the District's economic growth prospects over the medium term.

RATING SENSITIVITIES
FUNDAMENTAL CREDIT CHARACTERISTICS: The 'AA+' rating on the District of Columbia's income tax revenue bonds is sensitive to significant weakening in the solid debt service coverage levels, as well as overall economic trends in the District which drive pledged revenues.

CREDIT PROFILE

The 'AA+' rating reflects strong legal provisions and the nature of the pledged revenues, which provide ample debt service coverage. The bonds are secured by a statutory first lien and pledge on personal income and business franchise tax revenues, superior to that of any other person, including District GO bondholders. (Fitch rates the District's GOs 'AA' with a Stable Outlook.) Pledged revenues are not reduced by amounts refunded to taxpayers. The District's Home Rule Act expressly stipulates that revenue debt can be issued with a valid, binding and perfected security interest in the revenues pledged, without a sale of the pledged revenues and without requiring annual appropriations. Like states, the District is ineligible to file for protection under the U.S. Bankruptcy Code.

PLEDGED REVENUES TIED TO ECONOMIC GROWTH
Pledged revenues grew 4.6% on an average annual basis over the past decade reaching $2.3 billion in fiscal 2015, with the District's overall economic expansion offsetting limited recessionary weakness. PIT revenues comprise the largest share of pledged revenues (79.9% in fiscal 2015) and grew 5.4% on an average annual basis between 2005 and 2015, inclusive of several rate changes. The generally stable withholding portion of personal income tax (PIT) revenues (67.6% of PIT collections in fiscal 2015) grew in nine of the past 10 years on a year-over-year (YOY) basis and had only two years of double-digit percentage change. This consistency offsets the much greater volatility inherent in non-withholding PIT revenues (12.3% of fiscal 2015 pledged revenues), which declined three times YOY and had only one year with a single-digit percentage change in the same period. Similarly, business franchise tax revenues (20.1% of fiscal 2015 pledged revenues) grew 3.8% on an average annual basis since fiscal 2005, but exhibited considerable YOY volatility with declines in four of the past 10 years.

Pledged revenue growth in recent years remains strong, and the District attributes last year's robust performance (9.4% gain) partially to a weak fiscal 2014; revenues weakened in fiscal 2014 due to the lingering effects of a federal tax law change. Going forward, Fitch agrees with the District's forecast for more modest growth over the next several years. A projected 0.5% decline in fiscal 2016 is due to a reportedly high level of one-time activity in non-withholding and business tax revenues in fiscal 2015. Thereafter, the Office of the Chief Financial Officer (OCFO) projects annual increases in pledged revenues between 3% and 5%, in line with the 10-year historical average.

The projections incorporate estimates for implementation of an additional set of tax cuts from recent statutory changes. In 2014 the city council enacted tax changes with a portion of the changes effective immediately and additional changes implemented only if the OCFO's revenue estimate forecasts revenue growth that offsets the projected cost of the changes. The September 2015 OCFO revenue estimate triggered those changes. Fitch notes the risk that actual revenue growth could fall short of estimates thereby risking implementation of tax cuts that are not fully offset with new revenues. The District estimates the cost of the additional tax cuts at $122.8 million. The OCFO's close fiscal monitoring, including quarterly official revenue estimates, and DC's ability and demonstrated willingness to make budgetary adjustments helps offset this risk.

The current projections are slightly ahead of projections cited during the last income tax bond sale in November 2014, reflecting an improved economic outlook. After some weakness in the initial phases of federal sequestration, DC's economy is once again growing. YOY monthly employment gains are back in line with national trends and the unemployment rate resumed its downward trend earlier this year. Notably, federal government employment stabilized at the start of the year, after more than three years of YOY declines.

ABT PROVIDES SOLID BONDHOLDER PROTECTION
Fitch anticipates continued leveraging of the income tax secured revenue lien, subject to the ABT, though coverage should remain robust. The Income Tax Secured Bond Authorization Act of 2008 initially authorized just over $2.9 billion in income tax-secured revenue bonds; after multiple legislative amendments, total authorization now stands at $9.2 billion with over $4.6 billion unused. Limiting future leverage, the two-tiered ABT requires 2x pro forma MADS coverage from withholding PIT revenues and 3x from total pledged revenues, based on any 12-month consecutive period of the preceding 15 months.

Based on the District's baseline assumption of income tax bonds fully supporting its capital improvement plan (CIP; through fiscal 2019), fiscal 2015 withholding revenues and total pledged revenues cover projected baseline MADS of $604.7 million (excluding the federal Build America Bonds [BABs] and Qualified School Construction Bonds [QSCBs] subsidies) by 2.6x and 3.8x, respectively. Fitch anticipates coverage will remain strong and continue to exceed the ABT as at least some portion of the planned issuance to support the CIP will be from GO bonds.

Fitch also anticipates coverage of baseline projected MADS to remain strong through implementation of the tax law changes noted earlier. Inclusive of the tax changes effective Jan. 1, 2015 and the recently triggered additional cuts, baseline projected MADS coverage from total pledged revenues ranges from 3.9x to 4.4x between fiscals 2016 and 2019. In a conservative scenario where the additional tax cuts are implemented and forecasted revenue growth does not materialize such that there is no revenue offset, the change in baseline projected MADS coverage from total pledged revenues is very modest with coverage ranging from 3.7x to 4.2x.

The District's calculation of debt service under the indenture (including for the ABT) nets federal interest subsidy payments to be received in connection with BABs or QSCBs, essentially allowing for slightly greater leveraging of the security. Due to sequestration, the federal government withheld 4.35% of the fiscal 2013 subsidy, 7.2% in fiscal 2014 and 7.3% for fiscal 2015. Excluding all BABs and QSCBs subsidies, projected MADS coverage (baseline assumption of full CIP support from income tax-secured bonds) remains very strong as the subsidies totaled just $16.2 million in fiscal 2015 out of $350.9 million in annual debt service.

STRONG LEGAL PROVISIONS
The bonds include several additional meaningful bondholder protections. The District covenants not to modify the income tax rates or income subject to them, if such modification would reduce MADS coverage by the withholding portion alone to less than 2x. Income tax-secured revenue bonds also are considered within the District's Debt Ceiling Act, which statutorily limits debt service to 12% of expenditures.

Approximately 90% of pledged revenues flow directly to a lockbox account with the collection agent sweeping funds daily to the trustee for application to the accounts created under the indenture. The trustee is required to set aside one-third of the ensuing fiscal year's debt service from the first dollars received in each of the months of April, May, and June, effectively funding debt service five months in advance of the following fiscal year's first payments. After debt service has been provided for as noted above, remaining available monies flow to the District's general fund.