S&P Global Ratings' rating on Washington, D.C.'s general obligation (GO) debt (AA+/Stable) reflects management strengths, high reserves, and a strong institutional framework (IF). We believe D.C.'s robust reserves, which equal more than 30% of general fund revenue, 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, notwithstanding recent uncertainty injected into the city's fiscal 2025 budget by Congress and the impact of a sizable reduction expected in the federal workforce.
What's Happening
Congress approved a continuing resolution (CR) to fund the federal government through September 2025 but omitted a longstanding provision allowing D.C. to continue spending under its current fiscal 2025 budget. At the same time, the Senate unanimously passed a bill restoring D.C.'s spending authority for fiscal 2025; however, until the bill is signed into law, top-line spending must not exceed the fiscal 2024 budget, resulting in the need to cut more than $1 billion (about 5% of total governmental expenditures) over the remaining six months of the fiscal year.
Furthermore, although federal employment has fallen as a percentage of total employment in D.C. since the early 1990s, it still accounts for approximately 25% of the total workforce. Management projects federal employment could be cut by one-third, equal to 8.3% of D.C.'s total workforce. Although some of the employees laid off could join the private sector or may be rehired later, management anticipates sizable revenue reductions.
Why It Matters
Congress has effectively cut the city's budget and it is unclear whether it will further alter D.C.'s budgeting framework and independence or if this is a one-off situation. Either way, this puts D.C. in a different financial situation midway through the year. Management said it will make all mandatory contractual payments, such as payments for debt service and to Washington Metropolitan Area Transit Authority, and it is still identifying cuts to meet the new expenditure limitations, if necessary. We expect reductions would come primarily through cutting personnel costs in departments that comprise the largest portion of the budget, including public education (28% of general fund expenditures), social services (22%), and public safety (12%).
General fund revenues, the vast majority of which are locally derived from income, property, and sales taxes, might not be affected by a reversion to the fiscal 2024 spending budget. As a result, despite a recent revenue revision downward that reflects reduced federal employment, D.C. could end fiscal 2025 with a sizable surplus if it needs to make required midyear budget cuts.
Management reduced its fiscal 2025 revenue projection by $21.6 million (0.2% of general fund revenues) based on revenue trends in the first half of the year as well as its projections of federal employment levels, resulting in lower sales and income taxes. Furthermore, D.C. revised its five-year financial projections by dampening revenues by $342 million (3% of revenues) on average annually over the next three fiscal years.
What Comes Next
Should the rules governing D.C.'s budget and financial operations become increasingly unpredictable, it could lead us to revise D.C.'s strong IF. The IF comprises the formal rules and laws that shape the environment in which governments operate. Our IF considers D.C.'s historical ability to appropriate and spend local funds as well as passive congressional oversight of its budget. A downward revision to the IF score could lead us to lower our rating on D.C.'s GO debt.
However, given the breadth of D.C.'s taxing base and management's ability to leverage various revenue streams, along with a demonstrated willingness to raise taxes as needed, we expect D.C. will maintain a sound financial position. We will continue to evaluate the impact of federal legislation on D.C.'s budgeting and economic trends, but we believe D.C. can withstand near-term volatility while maintaining credit quality commensurate with the current rating.
Dalia Bereket contributed research for this report.
This report does not constitute a rating action.
| Primary Credit Analyst: | Timothy W Barrett, Washington D.C. + 1 (202) 942 8711; timothy.barrett@spglobal.com |
| Secondary Contacts: | Christian Richards, Washington D.C. + 1 (617) 530 8325; christian.richards@spglobal.com |
| Nora G Wittstruck, New York + (212) 438-8589; nora.wittstruck@spglobal.com | |
| Lauren Freire, New York + 1 (212) 438 7854; lauren.freire@spglobal.com |
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