It seems like just as fast as a $750 million public financing deal for a convention center hotel was put on the table, it was taken off. One of the driving forces behind the fall of that proposal? DC’s recently enacted debt cap. It’s an early sign that this tool will help keep our leaders fiscally honest, especially when it comes to economic development subsidies.
Just last fall, the DC Council adopted legislation saying that the District cannot allocate more than 12 percent of its total annual budget toward debt payments. The additional borrowing that was proposed for the Convention Center hotel would have pushed our debt above the 12 percent cap.
Why put a limit on debt? Any debt the District issues creates a long-term payment obligation. When DC issues bonds, it pledges its tax revenue to pay it back – often for 20 years or more. And those bonds must be repaid, no matter what happens to the economy. So even though our resources are now shrinking, we still have to pay back all of the debt we have issued. Too much debt can squeeze resources needed for other important programs and services.
Debt limits are also something that Wall Street pays close attention to. When a city or state’s debt gets too high, it can lead to a lower bond rating. That in turn, means higher interest rates when it’s time to issue bonds for things like schools or libraries. Managing debt well, by contrast, can lead to better bond ratings.
DC already has more debt than most cities and states, and there is pressure for more. The city is borrowing a lot to fix up schools and other public facilities. And we have authorized over $1.5 billion in debt to subsidize economic development projects over the past decade, like the retail center at Gallery Place. Until the debt cap, there’s been no real limit on economic development subsidies.
That’s why a cap is so key. Knowing we cannot issue an unlimited supply of debt, elected officials must make choices and set priorities over the infrastructure and development projects they want to support with public tax dollars.
With the new debt cap, a decision to publicly finance the entire convention center hotel project could have forced officials to scrap many long-planned developments around the city such as the Southwest Waterfront redevelopment. When faced with that decision, officials decided that the convention center hotel could not trump those already- planned projects and had to find another way to make the project go forward
Hooray for DC’s debt cap!