U.S. PUBLIC FINANCE

CREDIT OPINION28 November 2017

New Issue

Contacts

Nicholas Samuels +1.212.553.7121VP-Sr Credit Officer/Managernicholas.samuels@moodys.com

Timothy Blake +1.212.553.4524MD-Public Financetimothy.blake@moodys.com

Emily Raimes +1.212.553.7203VP-Sr Credit Officer/Manageremily.raimes@moodys.com

Pisei Chea +1.212.553.0344Analystpisei.chea@moodys.com

CLIENT SERVICES

Americas 1-212-553-1653

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District of ColumbiaNew Issue - Moody's assigns Aa1 to $507M DC GO bondsSeries 2017D; outlook stable

Summary Rating RationaleMoody's Investors Service has assigned a Aa1 rating to the District of Columbia's $507million General Obligation Bonds, Series 2017D. The ratings reflect the District's healthy fundbalance position; significant financial flexibility provided by its low pension and other post-retirement benefits (OPEB) liabilities; its strong financial governance; a robust and growinglocal economy; and an elevated bonded debt burden reflecting the District's combinedfinancing responsibilities of a city, school district, county and state.

Exhibit 1

DC Reserves Continue to Grow

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

FY 2012 FY 2013 FY 2014 FY 2015 FY 2016

Operating Revenue (000S) Net Direct Debt (000's)

0%

2%

4%

6%

8%

10%

12%

14%

16%

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

9,000,000

FY 2012 FY 2013 FY 2014 FY 2015 FY 2016

Operating Revenue (000S) Available Fund Balance as a % of Revenue

Source: District of Columbia audited financial statements; Moody's Investors Service

Credit Strengths

» Vibrant, growing and historically stable local economy, reflecting the core base of federalemployment

» Strong institutionalized financial governance

» Low pension and OPEB liabilities, resulting in significant budget flexibility

Credit Challenges

» Shifts in federal employment could have an outsize impact on the District's economy

» High government service burden as the District performs the functions of a city, county,school district and state

» Constrained ability to access its tax base, due to large proportion tax-exempt property,and congressional prohibition on taxing incomes of non-resident commuters

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Rating OutlookThe outlook is stable, reflecting the District's strong financial position, its notably strong pension position and other post-retirementbenefits position, low liquidity risk, and its exposure to its single largest employer, the federal government.

Factors that Could Lead to an Upgrade

» Materially stronger fund balance ratios compared to sector medians

» The ability to access currently off-limits portions of the tax base, such as the large portion of exempt property or non-residentcommuter incomes

Factors that Could Lead to a Downgrade

» Erosion of the District's strong financial management practices, particularly leading to budget imbalance or draw-downs of fundbalance below adequate levels

» Federal budget actions that have a material negative impact on the District's economy or finances, including significant reduction inthe federal work force or entitlement cuts

Key Indicators

Exhibit 2

District of Columbia FY 2012 FY 2013 FY 2014 FY 2015 FY 2016

Total Full Value (000s) 146,501,957 151,744,722 160,300,070 176,911,153 189,102,606

Full Value Per Capita 231,688 234,736 243,287 268,498 287,000

Median Family Income as % of US 129.6% 129.3% 133.5% 135.6% N/A

Operating Revenue (000S) 6,584,468 6,854,593 7,095,400 7,661,325 8,073,856

Available Fund Balance as a % of Revenue 11.9% 11.5% 12.2% 12.9% 14.4%

Cash Balance as a % of Revenue 26.0% 30.9% 28.0% 33.6% 30.8%

Net Direct Debt (000's) 7,884,214 8,511,455 8,787,192 9,494,183 9,581,066

Net Direct Debt to Operating Revenue (x) 1.2x 1.2x 1.2x 1.2x 1.2x

Net Direct Debt as % of Full Value 5.4% 5.6% 5.5% 5.4% 5.1%

Moody's ANPL (3-Year Average) to Full Value (x) 0.6x 0.8x 1.0x 1.2x 1.6x

Moody's ANPL (3-Year Average) to Operating Revenues (x) 0.1x 0.2x 0.2x 0.3x 0.4x

Source: District of Columbia audited financial statements; Moody's Investors Service

Recent Developments

» On September 29 the DC CFO released a revised revenue forecast for fiscal years 2017 through 2021. For fiscal 2017 (which endedSeptember 30) tax revenue is estimated to have increased 2.2%. For fiscal years 2018 through 2021, it is forecast to increase by0.6%, 2.8%, 3.0% and 3.1%, respectively. The estimates overall reflect reasonable growth assumptions in property, personal incomeand sales taxes. Low growth in fiscal 2018 reflects a decrease in business income tax rates that drives estimated collections of thosetaxes down by 10%.

» In late October the CFO also updated the District's six-year capital plan. The plan identifies $4.2 billion of unfunded capital needsthrough fiscal 2023 ($1.9 billion of maintenance projects and $2.2 billion of new projects).

Detailed Rating ConsiderationsEconomyInstitutional presence is a credit characteristic of the District of Columbia like few other large cities, reflecting its unique position as thenation's capital. Federal employment is 26% of total employment, 25% of resident employment, and reflects 31% of resident wages

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 28 November 2017 District of Columbia: New Issue - Moody's assigns Aa1 to $507M DC GO bonds Series 2017D; outlook stable

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and salaries. Total federal spending in the District (including salaries and wages, procurement, grants, retirement and other benefits)totals approximately 60% of its gross domestic product.

Changes in District employment have generally been counter-cyclical, buttressed by its core of federal jobs. Declines in federalemployment as part of federal budget sequestration, however, have been offset by gains in private sector employment (mostly in the“professional services” sector) and reflect a small shift in the District's economy. Nonetheless, private sector employment will notexhibit the stability that direct federal employment has over the long run and the District remains sensitive to federal budget balancingactions. That challenge remains heightened as Congress works to find offsets to tax cuts and funds to increase spending for functionssuch as defense.

Growth in the high wage professional and business services sector help to drive the District's strong income metrics. Personal incomeper capita was 152% of the US level in 2016 and median family income in 2015 was 135% of the national level. Population growth hasoutpaced the US level since 2008. Since 2005, the District's population has increased by more than 20% and at 681,170 is higher thanit has been since 1977.

Exhibit 3

DC Population Increases 20% Since 2005000s

0

100

200

300

400

500

600

700

800

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Po

pu

latio

n

Source: Bureau of the Census

Finances and LiquidityThe District has rebuilt its financial position to healthy levels following several draw downs during the recession. Based on fiscal2016 audited results, the District's GAAP-basis available operating fund balance was a healthy 14.4% of operating revenue, with abudgetary basis surplus of $152 million. The bulk of the available fund balance reflects two Congressionally-mandated reserve fundsthat combined must equal 6% of the operating expenditures stated in the most recent Comprehensive Annual Financial Report, netof general obligation debt service. It also includes two additional reserves the District created in 2011 (the Fiscal Stabilization Reserveand the Cash Flow Reserve). Those funds totaled $1.1 billion at the end of fiscal 2016 and based on the current financial plan will bemaintained at that level through fiscal 2021. The District’s goal is to build its total fund balance to a level equal to 60 days' operatingcash. The available fund balance only reflects a portion of that amount because of policy and budgetary restrictions, but we expect theDistrict's available fund balance ratios will remain similarly strong going forward. Based on the current financial plan and the District'sgenerally conservative forecasts, reserve balances will average 16.2% of tax revenue through fiscal 2021. Nonetheless, the District issignificantly exposed to potential federal spending cuts, not because of its role as the nation's capital but because it functions in therole of a city, school district, county and state. The District receives more federal funding as a percentage of its operating funds budgetthan any of our largest local governments, 32%, most of which reflects the federal share of Medicaid.

LIQUIDITYThe District has ample liquidity to meet unforeseen circumstances, and its liquidity risk related to its debt portfolio has beensubstantially reduced compared to recent years. At the end of fiscal 2016 the District had unrestricted cash and cash equivalents of$1.5 billion, or healthy 18% of GAAP-basis general fund revenue. Reflecting its stronger cash position and the addition of the Cash FlowReserve, the District did not issue tax revenue anticipation notes (TRANs) in fiscal 2017 and does not plan to in fiscal 2018, a significantimprovement in cash management. In recent prior years, TRAN issuance had average $400 million per year.

3 28 November 2017 District of Columbia: New Issue - Moody's assigns Aa1 to $507M DC GO bonds Series 2017D; outlook stable

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Debt and PensionsDEBT STRUCTUREBecause it needs to finance the functions of a city, county, school district and state, the District's tax-supported debt burden is aboveaverage by some measures. Total debt service expenditures were 7.6% of operating funds expenditures based on audited fiscal 2016figures, high compared to comparably rated local governments, while direct debt per capita of $14,695 is significantly greater. Besidesits general obligation debt, the District also has issued a variety of special tax bonds, including income tax secured bonds (rated Aa1stable); mortgage recordation and transfer tax bonds (A1 stable); bonds to construct a convention center backed by hospitality-relatedsales taxes (Aa3 stable); and bonds to construct a major league ballpark (senior and subordinate liens rated A2 stable and A3 stable,respectively). Tax increment revenue bonds (TIF, Aa3 stable) and payment-in-lieu-of-taxes (PILOT) structures also have leveraged theDistrict's tax base.

Exhibit 4

Bonded Debt Reflects a Variety of Securities and Financing Needs

Security Outstanding ($ millions)

General obligation 4,278

Income tax secured 3,930

Deed tax 110

Convention Center 471

Ballpark 324

GARVEEs 90

TIFs & PILOTs 372

Total bonded debt 9,576

Source: District of Columbia

To control its debt burden, in 2009 the District enacted a debt limitation that going forward provides an important check on thesize of its debt burden. While the Home Rule Act limits debt service on outstanding general obligation bonds to 17% of revenue, thestatutory cap is more restrictive: it limits debt service on all tax and fee-supported debt to 12% of expenditures. Based on the District'scalculations, total debt service is 9.4% of general fund expenditures. Reflecting planned issuance through fiscal 2021, that ratio wouldnearly reach the 12% statutory maximum. However, the District's debt issuance has been more limited recently as it has financed morecapital with cash.

DEBT-RELATED DERIVATIVESLike most large issuers, the District has a mix of fixed and floating rate debt. In recent years, the District has significantly mitigated riskin its variable rate portfolio by refinancing puttable debt supported by bank liquidity facilities with a combination of floating rate directbank loans (based on LIBOR) and SIFMA index bonds. Those structures eliminate unexpected bondholder puts with known tender ormaturity dates, and while they still have refinancing risk, the possibility of unexpected draws on the District's liquidity is low. Includinggeneral obligation bonds and income tax secured bonds, the combination of direct loans, SIFMA index bonds (based on amountsmaturing within the next year), CPI bonds and the current notional amount of a basis swap, 7% of the District's total outstandingnet debt is variable rate, low compared to many large issuers. The District's internal policies limit variable rate debt to 20% of thetotal outstanding. The District has three outstanding interest rate swaps with two counterparties; only one swap agreement requirescollateral posting. Only a downgrade below investment grade would trigger the agreements to terminate early. Scheduled payments onthe swaps are general obligations, while potential termination payments are not.

PENSIONS AND OPEBThe District's pension position is a credit strength relative to most other large local governments. Prior to 1987, District employeesparticipated in the federal health and insurance plans. General government employees hired after then participate in a District-sponsored defined contribution plan. Teachers, firefighters and police hired after 1987 participate in District-sponsored defined benefitpension plans. Because of the pension plans' fresh start and strong pension funding practices since then, the District's adjusted netpension liability (ANPL) is among the lowest of the 50 largest local governments, equal to a three-year average (fiscal 2014, 2015 and2016) of 37% of operating revenue.

4 28 November 2017 District of Columbia: New Issue - Moody's assigns Aa1 to $507M DC GO bonds Series 2017D; outlook stable

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The District's combined pension contributions of $180.5 million in fiscal 2016 were nearly 88% of the Moody's-calculated “treadwater” level of $206 million. The “tread water” indicator measures the annual government contribution required to prevent thereported net pension liability from growing, under reported assumptions. Contributions above this level cover all net pension liabilityinterest plus pay down some principal; this is stronger from a credit perspective compared to contributions below this level. Ratioscomparing government contributions to the “tread water” level and “tread water” costs to government revenues shed light onbudgetary fixed cost burdens.

The District also has the strongest funded ratio for its other post-employment benefits of any of the 50 largest local governments. TheDistrict established a trust in 2006 to pre-fund its other post-employment benefits (OPEB) obligations and since then has appropriatedthe actuarially-calculated annual required contribution each year; the actuarial funding ratio is 120.1%.

The District's fixed costs (debt service, pension contribution and OPEB requirement) are 10.0% of operating fund revenues. Using thetread water payment, that figure increases slightly to 10.3% of revenue.

GovernanceFinancial management in the District is very strong, characterized by forward-looking institutionalized best practices. The core ofthese is the independent chief financial officer (CFO), who has broad authority to manage the District's fiscal affairs. The CFO preparesthe baseline budget and a required four-year financial plan, monthly financial status reports, debt affordability projections, annualrevenue estimates and quarterly revenue revisions. Neither the mayor nor District council can revise the CFO's estimates. The CFOalso regularly identifies cost pressures early in the budget process that could lead to financial imbalance so that solutions can bedetermined before they lead to severe budgetary stress. For the last two years the District also has published a long-range capital planthat forecasts capital needs over a six-year horizon.

Following a period of fiscal distress and the imposition of a federal financial control board in 1995, the District benefited from thepermanent shift of some program costs to the federal government, including an increased share of Medicaid, funding of the District'scourts, housing its felons, and assuming the pension obligations of pre-1987 district government employees; at the same time that anannual federal payment in lieu of taxes was phased-out. The dormant federal financial control authority provides substantial incentivefor District officials to continue sound financial practices. Federal law provides for the return of a control authority should any of sixunlikely trigger events occur, including default on any bond, note or loan, and failure to make required pension and benefits payments.Under Chapter 9 of the bankruptcy code, the District is considered to be a state and is ineligible to file.

A 2012 voter referendum amends the District's Home Rule Act and allows it to spend local revenues after the budget is enacted by theDistrict council and mayor, rather than being approved as one of the 13 federal appropriation acts. Instead, the budget is submittedto Congress for 30-day review, the same as all other local legislation. A District of Columbia Superior Court ruling requires the mayor,council and chief financial officer to follow the new local budget law, which the District has done since fiscal 2017. Article I Section8 of the US Constitution makes the Congress the “exclusive” legislative body over the District and the local measure could still bechallenged. In addition, the current federal continuing budget resolution allows the District to spend local funds for the full fiscal year,even if federal spending authority lapses at the resolution's December 8 expiration. Regardless of a local or federal appropriation, theDistrict is authorized to pay debt service on its general obligation and revenue bonds.

Legal SecurityThe bonds are full faith and credit obligations of the District but by statute are secured by a special real property tax unlimited as torate or base and separate from the operating levy. All property taxes are collected by a third party collection agent and the amountallocable to the special real property tax are deposited into an account held by a separate third party custodian. Weekly, the custodianmakes transfers to an escrow agent in amounts sufficient to pay debt service on the bonds.

Use of ProceedsProceeds of the bonds will be used to help finance the District's capital plan.

Obligor ProfileThe District of Columbia is the nation's capital and has a population larger than two states.

5 28 November 2017 District of Columbia: New Issue - Moody's assigns Aa1 to $507M DC GO bonds Series 2017D; outlook stable

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MethodologyThe principal methodology used in this rating was US Local Government General Obligation Debt published in December 2016. Pleasesee the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Ratings

Exhibit 5

District of ColumbiaIssue RatingGeneral Obligation Bonds, Series 2017D Aa1

Rating Type Underlying LTSale Amount $507,145,000Expected Sale Date 12/12/2017Rating Description General Obligation

Source: Moody's Investors Service

6 28 November 2017 District of Columbia: New Issue - Moody's assigns Aa1 to $507M DC GO bonds Series 2017D; outlook stable

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8 28 November 2017 District of Columbia: New Issue - Moody's assigns Aa1 to $507M DC GO bonds Series 2017D; outlook stable