To answer the three questions, we analyzed information provided by the District of Columbia on past, current, and projected borrowing and met with District officials to discuss the District’s debt. We also analyzed applicable laws that authorize borrowing and impose limitations on that borrowing. We obtained information on other jurisdictions debt limitations, debt ratios, and bond ratings from Moody’s Investors Service, Standard & Poor’s Corporation, and Fitch Investors Service, Inc. and discussed this information with officials of those organizations. We did not independently verify the information provided by the investor service organizations on other jurisdictions. We conducted our work from August 1994 to October 1994 in accordance with generally accepted government auditing standards. The District of Columbia provided comments on a draft of this report. These comments are discussed in the “Agency Comments and Our Evaluation” section. We have incorporated agency views where appropriate. The Home Rule Act authorizes and sets limits on various types of short- and long-term debt that is backed by the full faith and credit of the District. The limits have not been revised since enactment of the provisions in the Home Rule Act that authorized the various types of debt. The District also is authorized to issue revenue bonds that are not backed by the full faith and credit of the District. Finally, the District is authorized to borrow from the U.S. Treasury to meet the District’s general expenses. The District can issue Tax Revenue Anticipation Notes (TRANS) to compensate for expected cash shortfalls related to delays in receipt of projected tax revenue. Although TRANS are renewable, they must be repaid no later than the last day of the fiscal year in which the notes were issued. The total amount of outstanding TRANS at any time is limited to 20 percent of the District’s total anticipated revenue for the fiscal year. The amount of TRANS borrowing is discussed later in this letter. The District can also issue short-term general obligation notes to meet appropriation requirements when budgeted grants and private contributions are not realized. Similar to TRANS, these notes are renewable. However, they must be repaid no later than the last day of the fiscal year following the year in which they were issued. The amount of general obligation notes issued during a fiscal year is limited to 2 percent of the District’s total appropriations or approximately $70 million for fiscal year 1994. District officials said they have never issued this type of note. In lieu of these short-term borrowing vehicles, the District has borrowed moneys from its capital projects fund. The District’s annual appropriation specifically states that “the Mayor shall not expend any moneys borrowed for capital projects for operating expenses of the District of Columbia government.” The District’s Corporation Counsel has concluded that the District does not violate the appropriation act restriction as long as borrowings from the Capital Projects Fund are repaid before the end of the fiscal year in which the borrowing is made. The District borrowed $140 million from the Capital Projects Fund in fiscal year 1993 to finance seasonal cash flow needs. These funds were repaid before the end of the fiscal year. In fiscal year 1994, the District again borrowed from the Capital Projects Fund to compensate for cash flow shortages due to a delay in the receipt of the Federal Payment. The District borrowed $40 million in October 1993 and repaid it shortly thereafter; and, the District borrowed $40 million from the Capital Projects Fund in early September 1994 and repaid it before the end of the month. The District also has the authority to issue long-term debt. Long-term debt generally takes the form of general obligation bonds. The District can issue general obligation bonds to refund (that is, refinance) existing debt or to finance capital projects. In fiscal year 1991, the District also received authority to eliminate the general fund’s existing accumulated deficit by issuing general obligation bonds. The Home Rule Act restricts the District from issuing long-term general obligation bonds if total debt service in a fiscal year will exceed 14 percent of the District’s estimated revenues for the year the bonds are issued. This debt limitation is calculated by the Treasurer’s Office when the District requests new general obligation borrowing. At that time, the highest projected cost of debt service (including debt service from both general obligation bonds as well as long-term U.S. Treasury debt) for any fiscal year including debt service on the projected borrowing cannot exceed 14 percent of the District’s estimated revenues for the fiscal year the bonds will be issued. Revenues for this calculation do not include court fees and any fees or revenues directed to servicing revenue bonds, retirement contributions, revenues from retirement systems, revenues from Treasury loans, and the sale of general obligation or revenue bonds. This debt service calculation does not include refinancing costs of previous bonds and any obligations associated with the Redevelopment Land Agency, the National Capital Housing Authority, or obligations pursuant to the authority contained in the District of Columbia Stadium Act of 1957. The specific amount of long-term borrowing is discussed later in this letter. The District may also borrow funds from the U.S. Treasury to finance its general expenses. Between 1939 and 1983, the District routinely borrowed from the U.S. Treasury under this provision. It has not borrowed from the U.S. Treasury since then. Under this provision, which originated before the enactment of the Home Rule Act, the Mayor of the District of Columbia may requisition the Secretary of the Treasury for “such sums as may be necessary, from time to time, to meet the general expenses of said District, as authorized by Congress, and such amounts so advanced shall be reimbursed by the said Mayor to the Treasury out of taxes and revenue collected for the support of the government of the said District of Columbia.” The interest rate to be applied, if any, and the term of these borrowings are not specified. These borrowings are not subject to the 14-percent limitation on long-term debt. All general obligation and TRANS offering documents refer to this section of the D.C. Code and specify that the Mayor shall request funds from the U.S. Treasury as may be necessary to pay the principal and interest on the bonds when due. In addition, the District previously had authority to borrow funds from the U.S. Treasury to finance capital projects. While the authority for new U.S. Treasury borrowing for capital projects was terminated by 1983, the District had $71.8 million and the District’s Water and Sewer Authority had $15.1 million outstanding debt issued under this authority at September 30, 1994. The District’s $71.8 million U.S. Treasury debt is scheduled to be repaid by 2003, and the Water and Sewer Authority’s U.S. Treasury debt is scheduled to be repaid by 2014. As previously noted, the debt service on U.S. Treasury long-term capital projects debt is included in the 14-percent limitation calculation described in the previous section of this report under long-term borrowing. The District of Columbia also is authorized to issue revenue bonds, notes, or other obligations to finance or refinance undertakings in the areas of (1) housing, (2) facilities for health, transit, utility, recreation, college, university, or pollution control, (3) college or university student loan programs, and (4) industrial and commercial development. Such revenue obligations are not general obligations or debt of the District backed by the full faith and credit or the taxing power of the District. Instead, they are payable from earnings of the respective projects and may be secured by mortgages on real property or creation of a security interest in other assets. In addition to the current types of financing allowed, the District is proposing to partly finance the construction of a new convention center and sports arena by authorizing District enterprises to issue revenue bonds that would include as security a pledge of dedicated taxes. This proposed method of financing requires amending the Home Rule Act. Specifically, the Home Rule Act would need to be revised to authorize the District (1) to issue such revenue bonds and (2) to delegate authority to District enterprises to issue the bonds and to receive and expend the dedicated revenues. Under this proposal these bonds would not be subject to the 14-percent long-term debt service ceiling. The District’s primary borrowing involves short-term tax revenue anticipation notes and long-term general obligation bonds. In May 1994 the District borrowed $200 million in short-term Tax Revenue Anticipation Notes which were paid in September by the end of fiscal year 1994. The District anticipates that in fiscal year 1995 it will need $250 million in short-term Tax Revenue Anticipation Notes ($125 million in February 1995 and $125 million in June 1995). These notes will be due in September 1995. The fiscal year 1994 short-term debt represented 6.0 percent of total anticipated revenues, and the fiscal year 1995 short-term debt represented 7.2 percent of total anticipated revenues—considerably below the 20-percent limitation on TRANS borrowing discussed earlier in this report. The District does not make short-term borrowing projections beyond the year for which a budget has been submitted to the District of Columbia Council. Also on September 30, 1994, the District had $3.65 billion in long-term debt (both general obligation and U.S. Treasury debt). As calculated by the District Treasurer’s Office, total debt service for these long-term obligations is expected to be $409 million in fiscal year 1998, the highest projected year, or 11.42 percent of total expected fiscal year 1994 revenues. This debt service percent is projected to grow in the future. The Budget Office estimates that capital borrowing will be $250 million annually from fiscal years 1995 through 1998 and $190 million in each of fiscal years 1999 and 2000. Based on these estimates of future general obligation borrowing and Budget Office projections of revenues, we estimate that the debt service percent will rise to 13.84 percent by 2000. Figure 1 shows the debt service percents for fiscal years 1989 through 2000.