Fitch Ratings assigns an 'A-' underlying rating to the District of Columbia's $147.25 million multimodal general obligation (GO) bonds series 2004C (auction-rate securities). The bonds are scheduled to be issued in three subseries on Dec. 7 through negotiations led by Goldman, Sachs & Co. (series 2004C-1, and C-2) and Loop Capital Markets, LLC (2004-C). The bonds are expected to be insured by Capital Assurance, whose insurer financial strength is rated 'AAA' by Fitch. Fitch also affirms the 'A-' underlying rating on about $3.7 billion in outstanding GO bonds. The Rating Outlook is Positive.

The Positive Rating Outlook on the District of Columbia's (the district) 'A-' GO bond rating reflects the continued financial improvement started in the late 1990's.

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 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 district's financial position and operations continue to strengthen despite significant challenges. Operating deficits projected during fiscal year 2004 did not materialize; rather the district projects a large fund balance increase which will be used to reduce out-year debt and post-retirement 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, healthcare, 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 GO debt levels affordable. The district's locally funded six-year capital improvement plan (CIP) for fiscal years 2005-2010 totals $2 billion, most of which is proposed to be financed with GO 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.