Fitch Rates District of Columbia's $250MM GOs 'A-'; $250MM TRANs 'F1+'.

NEW YORK -- Fitch Ratings assigns an 'A-' rating to District of Columbia's approximately $170,000,000 general obligation bonds, series 2004A, and $80,000,000 general obligation bonds, series 2004B (CPI bonds). The bonds are scheduled to be sold through negotiation with a syndicate led by M.R. Beal & Co. on Nov. 17. Maturity schedules have not been finalized. Series A bonds will be subject to optional redemption beginning June 1, 2014, while series 2004B bonds will not be subject to redemption prior to maturity. Fitch also assigns an 'F1+' rating to the district's approximately $250,000,000 tax revenue anticipation notes, which are scheduled to be sold competitively on Nov. 16 and mature Sept. 30, 2005. Fitch affirms the 'A-' rating on about $3.5 billion in outstanding general obligation bonds. The Rating Outlook on the bonds has been revised to Positive from Stable.

The revision of the Rating Outlook on the District of Columbia's (the district) 'A-' general obligation bond rating to Positive reflects the continued financial improvement started in the late 1990s. The district's ability to control expenditures, combined with revenue growth in excess of conservative budgeted projections, resulted in a sizable general fund operating surplus in fiscal 2004, the eighth consecutive general fund surplus. Fitch also recognizes increased strength in a number of key economic indicators. The 'A-' rating also incorporates Fitch's concern about the district's high debt levels, which are likely to increase given general government capital needs and plans for debt financing a new baseball stadium and economic development in the Anacostia area of the district.

The 'F1+' rating on the tax revenue anticipation notes (TRANs, or the notes) reflects sound coverage on the repayment date, satisfactory legal protections for noteholders, improved beginning cash position due to a large projected general fund surplus for fiscal 2004, and management's demonstrated ability to respond quickly to funding shortfalls and unexpected expenditure needs. Coverage on the Sept. 30, 2005 note repayment date is expected to be 3.5 times (x) including required cash reserves.

The district's financial position and operations continue to strengthen despite significant challenges. Operating deficits projected during fiscal 2004 did not materialize; rather the district projects a large fund balance increase, which will be used to reduce out-year debt and postretirement liabilities. Reserves far exceed current stringent cash requirements. These requirements will be reduced starting in fiscal 2005 but remain strong. The fiscal 2005 budget calls for notable expenditure growth but is supported by what Fitch believes are conservatively estimated revenues, only partly capturing continued growth generated by a strong real estate market and growing income and sales tax bases. Financial challenges remain, including spending pressures, particularly in the areas of education, health care, and social services; and the inability to tax commuters and a large percentage of the district's property base.

Strong revenue growth in income, sales, property, and other taxes reflect an improved economic base. Most economic indicators show improvement, housing sales and property values are very strong, office vacancy rates are low, jobs in the district are increasing, and hotel occupancy rates and airport passengers are growing. Offsetting these gains are the still high unemployment rate and continued population losses. The district's forecasts assume continued strong real estate market growth and moderate income gains. Unemployment in the metropolitan area has consistently been low.

Debt levels are very high and likely to increase moderately given the backlog of deferred capital needs. Proposed bonding for a new major league baseball stadium and related economic development projects would further increase tax-supported debt levels to a significant extent, although legal and policy restrictions should keep general obligation debt levels affordable. The district's locally funded six-year capital improvement plan (CIP) for fiscal years 2005-2010 totals $2.0 billion, most of which is proposed to be financed with general obligation bonds and equipment leases. The CIP does not include the stadium and related projects, which could add about $1 billion in debt supported by dedicated tax and other sources.