Washington Borrowing Least Shows Shutdown Dismissed: Muni Credit

Washington is set to offer its smallest note sale since 2008, a sign of improving fiscal health that helped the nation’s capital weather the 16-day federal-government shutdown.

The city is issuing $405 million of one-year obligations today, 40 percent less than a year ago, to provide cash in months when tax revenue is insufficient. Treasurer Jeffrey Barnette said in an interview that he expects investors will demand as little as 0.2 percent to hold the tax-free securities, about 25 percent less than the interest rate on benchmark municipal debt, data compiled by Bloomberg show.

Washington didn’t suffer as much as other cities during the longest recession since the 1930s because its economy relies on U.S. government spending, which continued to flow. The city’s population grew at triple the U.S. rate from 2010 to 2012, and its median household income is almost 20 percent higher than the national average, Census Bureau data show.

“Washington has been enjoying stability while other cities around the country saw a shrinkage in their economic activity,” said Richard Ciccarone, chief research officer in Oak Brook, Illinois, for McDonnell Investment Management, which holds about $8 billion in munis. “The overall impact is reflected not only in its economy, but in its financials as well.”

Urban Rebound

The city of 632,000 is among localities whose finances are reviving with the growing U.S. economy, stock market gains and rising home values. Cities project increased revenue this year for the first time since 2006, according to the National League of Cities in Washington. Municipalities have taken longer to rebound from the 18-month recession that ended in 2009 than states, where tax collections have risen for 15 consecutive quarters, Census data show.

Washington’s revenue grew 11 percent in the year through September 2012, and 3.4 percent during the year ended last month. The city drew on reserves to stay open during the federal shutdown, when it couldn’t spend much of its cash because its budget needs congressional approval.

The “reserves have allowed us to reduce the overall borrowing we need to do,” Barnette said.

Federal Flow

The decline in short-term borrowing from $675 million last year demonstrates a stronger cash position, said Eric Kim, who monitors the city for Fitch Ratings in New York.

Today’s issue is the smallest such note sale since a similarly sized offer in November 2008, data from the city show. Those securities, with a September 2009 maturity, were priced to yield 1.09 percent, according to Bloomberg data.

“During the recession, the district was able to maintain a stable economy, partly because of the federal government,” Kim said. “As a result, they were able to build up a reserve while other cities were drawing on theirs.”

The city’s budget was authorized by legislation reopening the federal government. The municipality may benefit from demand for short-term securities as investors bet the Federal Reserve will curb its bond-buying program, causing interest rates to rise.

Short-term munis have gained 0.9 percent this year through Oct. 25, compared with a 2.3 percent loss for the entire $3.7 trillion municipal market, Standard & Poor’s data show. The return is better than any maturity segment tracked by S&P.

Maturity Demand

“There’s strong demand at the short end of the curve and not a lot of supply,” said Daniel Solender, director of munis in Jersey City, New Jersey, for Lord Abbett & Co., which manages $16.5 billion of local bonds. “We’ve seen some people concerned about where rates might be headed,” which should draw interest to Washington’s deal, he said.

The city’s notes carry the highest credit rating from Fitch and S&P. The size of the sale is less than half the $820 million it borrowed two years ago.

Some city securities have been rallying. Tax-exempt general obligations maturing in June 2017 traded last week at yields about 0.2 percentage point more than benchmark munis, Bloomberg data show. That compares with an average spread of about 0.3 percentage point from May through September.

The relative gains may signal little blowback for the city after the U.S. government’s first shutdown since 1996. The impasse idled hundreds of thousands of federal workers and closed museums and monuments.

Lost Revenue

Mayor Vincent Gray said the city, with annual revenue of more than $6 billion, lost $12 million in tax revenue from the closures. Employment growth slowed in the three months through July as the number of federal jobs dropped by about 5,900 from a year earlier, according to a report from Natwar Gandhi, Washington’s chief financial officer.

The federal government cushioned the city from the worst of the recession and will remain central to its economy, Gandhi said. At the same time, “it can no longer be counted on to be a source of significant growth,” he said.

Federal spending cuts pose a challenge to the district’s finances, Moody’s Investors Service said this month. About 25 percent of employed residents work for the U.S. government, according to the city.

The metropolitan region’s jobless rate was 5.5 percent in August, compared with 7.3 percent nationwide. The city’s median household income of $61,835 compares with the national average of $52,762, Census Bureau data show.

“The effects of the shutdown are very manageable for the district,” said Kim, the analyst at Fitch, which has a stable outlook on the city. When the shutdown ended, Congress agreed to pay furloughed workers, easing the influence on residents’ incomes.

Market Week

In the market for long-term debt, issuers from Florida to Alaska are set to offer about $4.6 billion this week with benchmark yields at a four-month low.

The interest rate on AAA 10-year munis is 2.68 percent, Bloomberg data show. That compares with a 2.52 percent yield on similar-maturity Treasuries.

The ratio of the yields, a gauge of relative value, is about 106 percent, compared with an average of 94 percent since 2001. It has remained above 100 percent since June 24. The higher the figure, the cheaper munis are compared with federal securities.

Following is a pending sale:

New Jersey's Economic Development Authority is borrowing about $457 million the week of Nov. 4 to help finance the Goethals Bridge replacement. The span connects Staten Island to New Jersey, and the project will cost an estimated $1.5 billion.

Before it's here, it's on the Bloomberg Terminal.