Demystifying the District’s Debt

As we enter the second year of the control board’s program of forced fiscal wellness, one would assume that the city is finally returning to fiscal sanity. Yeah, and Martha Stewart buys her Christmas decorations from Wal-Mart.

The District’s fiscal future seems complicated beyond human understanding, but it is not so much hard to understand as it is just more horrible than can be imagined. The District might just get through the current year on a wing and a prayer, but next year looks so bleak that it makes the current travails seem downright manageable.

The House that Barry Built—otherwise known as the District of Columbia—is still struggling in virtual bankruptcy (unlike the actual House of Barry in Ward 8, which has been nicely refurbished by friends and taxpayers). If debtors’ prison still existed, the District would be occupying the presidential suite.

The simple fact of the matter is that the District’s expenses continue to outpace its revenues at an alarming rate. D.C.’s problems are virtually the same as those of any family facing a financial crisis—too little income, out-of-control expenses, and a history of massive credit abuse.

A Serial Pay Cut

Some time back, Labor Secretary Robert Reich introduced us to the idea of the anxious class, which he defines as families that are not sharing in the prosperity they see around them. In much the same way, the District has become the anxious city. As the metropolitan region gets richer, the District sees that its take-home pay has stagnated (and declined the past two years). Fewer and fewer residents are rendering unto Caesar, and many have left for greener fiefdoms. Thirteen thousand denizens left last year—along with their income- and sales-tax payments—leaving whole swaths of the realm vacant, especially in Ward 7. The vacancies have, in turn, led to lower property-tax assessments, fewer inhabited houses to tax, and a revenue decline.

The District has tried any number of ways to increase its income. The mayor has sought a higher federal payment (which has fallen to a historically low level in relative terms) from Congress. But Congress, playing Mr. Dithers to Barry’s Dagwood Bumstead, refuses to grant a raise because the city does not deserve it, would only squander it, and hey, they don’t have the money anyway.

Barry has also broached the subject of dunning tax-exempt organizations like Fannie Mae, and commuters who visit often, party hard, and don’t clean up after they leave. But Congress has remained steadfast in defending freeloaders and stiffing the District. The District might want to take a second job to earn more income, but it’s having a hard enough time screwing up the one it has.

Money for Everything

Many households get in trouble when their incomes stagnate and their monthly expenses continue to increase. The District is an exemplar of runaway household spending with nothing under the mattress. The mayor’s financial projections for fiscal years 1997-2000 vetted by Chief Financial Officer Anthony Williams show expenses increasing 6 percent annually while revenues grow (optimistically) at less than 2 percent. This is when the family is supposed to decide whether it really needs cable TV, the country club membership, and the instant credit line with the Home Shopping Network. Similarly, District leaders need to cull the wish list to align themselves with grim financial realities.

But after debating this question for years, the mayor’s office and the D.C. Council have decided that everything remains a priority. Back in 1991, Sharon Pratt Kelly eliminated the summer jobs program for one summer, and the community issued a fatwa against her. (Someone might want to inform the seldom-seen Kelly that the fatwa has been lifted.) She never broached the subject again. And while Barry’s four year “Vision Thing” rethinks, re-engineers, and privatizes, it does not cut programs. For all the budget savings city officials coughed up this year to meet Rep. James Walsh’s budget mark of $4.994 billion, most have only nibbled away at existing programs. Dubious endeavors like summer jobs, the D.C. Law School, and D.C. General Hospital are still hanging on, sucking up nonexistent funds.

While the goodies continue to flow unabated, the District’s crumbling infrastructure goes virtually unfunded. Almost all the city’s revenues and borrowed money go toward meeting its current expenses. Thus, the city has virtually zilch to pay for streets, roads, schools, and atsug (all that stuff underground). The results are self-evident. The city’s infrastructure needs are beyond frightful, and a first-year engineering student can tell you that the less money you put into maintaining infrastructure the more it will cost in the long run. Perhaps Congress will provide some extra cash if one of its members falls through a behemoth pothole, but it doesn’t look promising.

Problems of cash flow and cost control become even more intractable when you look at how little financial control the city has over its departments. It’s as if the household breadwinner gave every member of the family a credit card with an unlimited credit line. That’s precisely the problem the control board has with Vernon Hawkins, czar of the city’s $1.6-billion health and human services department. Hawkins apparently won’t stay within budget and is trying every which way to sneak contracts past the eyes of the control board. Consequently, City Administrator Michael Rogers took away Hawkins’ checkbook. The city’s inspector general, Angela Avant, is supposed to make District workers think twice about committing waste, fraud, and abuse, but instead appears to be participating in the Bureaucrat Witness Protection Program.

There is a good reason that Hawkins, Tilden J. LeMelle (President of the University of the District of Columbia), and other city administrators should pay attention to budgetary limits. They can land in jail if they don’t; the control board legislation says so. That’s why Williams has required every city financial official to get approval before spending D.C.’s precious money. District bureaucrats are not happy with this inefficient, draconian fix, but it’s the only way Williams can keep the District from overspending its budget.

Credit for Nothing

With its income inert and expenses out of control, the city would like to do what every American dreams of doing: borrow, borrow, borrow! But the District is already in hock to the hilt. If banks treated the city like a family, the District Building’s furniture would be strewn all over the sidewalk of Pennsylvania Avenue.

Fortunately, the control board legislation allows D.C. to continue to borrow from the U.S. Treasury despite its substantial history as a deadbeat. Borrowed money is the lucre that is allowing the city to limp through this dismal year. Including an expected loan from the U.S. Treasury for $219 million, the District will have borrowed $660 million this year to make up the difference between revenues and expenditures. The loans account for almost 13 percent of the city’s revenues in its $4.994 billion budget. So not only is the city continuing to live beyond its means, it’s digging a bigger debt hole for itself.

Unfortunately, next year will be worse. Look what happens on Oct. 1, 1996, the day when the city usually gets its 1997 federal payment. On Oct. 1, the Treasury will cut a check for $660 million, the District will deposit it, and the District will immediately cut a check to pay the Treasury back for this year’s loans. In a New York minute, the District will have spent its entire federal payment without buying so much as a pencil sharpener.

The District used to spend the federal payment to pay off the previous year’s bills. But beginning on the first day of fiscal year 1997, the District will pay its overdue bills by borrowing against its fiscal year 1998 federal payment. Next year, the District will have fewer proceeds from borrowing against its federal payment to close the income/expenses gap. The Peter-to-Paul cycle of borrowing that has allowed the District to creep from year to year is about to come crashing to a halt. The District can’t borrow any more money from the U.S. Treasury and is still shut out of the Wall Street markets.

It’s going to take lots of long-term borrowing from private financial markets to balance the District’s books. That’s why the control board decided last month that it needs to enter the bond market to convert $600-$700 million from short-term to long-term debt. Instead of borrowing hand-to-mouth to make each payroll and pay vendors, city officials could spend more time focusing on cutting expenses. At least that’s the theory.

Pork Futures

This budget synopsis assumes the best and still produces a financial horror show. It could get worse; the District could be faced with rising interest rates, a health crisis, or emergency infrastructure repairs that could cripple it further. Then again, Congress might double the federal payment, District bureaucrats might become efficient managers, and surrounding counties might tithe 10 percent of their taxes to the District’s coffers for the greater good. Yeah, and pigs might fly.CP

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