"This reduction could lead to a negative outlook or even a downgrade on the District's [bond] ratings, which would result in higher interest costs," CFO Natwar Gandhi advised the council in a written statement.
But the council went forward with the measure anyway Tuesday, voting 7-6 to approve a measure to spend $13.4 million previously designated for the city's savings account to offset the first year of a tax on the bonds.
"We go up to Wall Street every year, and any questions they have, we can explain to justify what we did," said Ward 2 Councilman Jack Evans.
Last month, when the council approved the city's $5.6 billion operating budget for the coming fiscal year, it determined that the first $22 million of any new revenue would be spent shifting funding for certain jobs from the capital budget to the operating budget. The remainder would be sent to the city's savings account. Two weeks later, Gandhi estimated the District would raise about $77 million more than previously expected. The funding to offset the tax on municipal bonds tax for one year comes out of the $23 million that was headed to the savings account.
The muni bond measure was introduced by Ward 3 Councilwoman Mary Cheh, who said taxing the bondholders starting on Jan. 1, 2011, was unfair because they had purchased the bonds believing the interest they earned wouldn't be taxed. Cheh said she planned to introduce a budget amendment to raise the income tax rate on the wealthy to offset the bonds tax, but decided not to because she didn't have the votes.
But sources involved in the vote counting said Cheh did have the votes. By not moving forward with the income tax rate increase, though, Cheh fell in line with Council Chairman Kwame Brown, who earlier in the day announced a committee shake-up that had Cheh as the big winner.
The council approved Brown's request that Ward 6 Councilman Tommy Wells be stripped of the powerful transportation committee and give it to Cheh, whose government operations committee was then given to Ward 4 Councilwoman Muriel Bowser. Wells acquired Bowser's old committee, parks and recreation, which is widely perceived as the weakest council committee.
Brown said the "thought process" behind the unprecedented midyear committee shuffle "was not about any individual."
Wells, who issued a report earlier this year that was critical of Brown's push for a taxpayer-funded, fully loaded Lincoln Navigator, said he was "baffled" by the shake-up.
"Everyone knows I'm uncompromising regarding campaign finance and ethics reform," Wells said, adding "there's no place I won't go with oversight, but sometimes there might be repercussions for that."