With details still scarce, Mayor Adrian M. Fenty's budget proposal holds sacred education and public safety, while finding sundry service cuts and fee hikes to close an approximately $550 million budget gap.

The budget proposal eliminates 385 full-time equivalent positions; a Fenty official estimated than one-half of those positions are already empty, the other half will be laid off. The proposal also seeks to freeze automatic "step" increases in government worker salaries, saving $20 million. All told, general spending is falling 1.2 percent against the current fiscal year.

The big news is what is increasing: Fenty is proposing actually hiking funds for D.C. Public Schools and charter schools by as much as $140 million. The per-student funding formula would increase by $175, to $8,945. Fenty is also proposing a modest increase, 4 percent, for the Fire and Emergency Services Department.

What Fenty isn't proposing: No additional money for Metro, to help offset proposed service cuts. And no local money for vouchers, making up for the federal money lost after Congress refused to reauthorize the program.

How to pay for it all? Fenty, in keeping with a 2006 campaign pledge, is not proposing any hikes to the "Big Three" revenue generators: sales, income, and property taxes. But, as has become habit, there is a passel of new fees in the Fenty budget: $28 million in increased traffic fines; $7 million in 911 fees (see below); $150,000 in increased notary registration fees; $3.6 million by hiking parking meter rates from $.75 per hour to $1 per hour; $3.1 million from a "fee for steel plates on roadways"; $920,000 from additional fees for business licenses and public space permits; and $16.1 million in other fee hikes.

There are other cuts, too: Changing hazardous-waste dropoffs from weekly to monthly; eliminating the police department's pager contract; and merging the Office of Employee Appeals, Public Employees Review Board, and the Office of Administrative Hearings into a single shop, saving $1.9 million. But there are still no details on core human services functions—health care, homeless services, poverty relief, and other programs that are very costly and are expected to bear heavy cuts. A group of activists, from Save Our Safety Net, briefly interrupted Fenty's press conference this morning to protest the anticipated cuts.

Some big fights to come:

The Enhanced 911 fee, aka E911. Fenty has proposed this fee every year in office, which would add a tax to phone bills raising, an estimated $7 million in FY2011. And every year he's proposed it, At-Large Councilmember Phil Mendelson has cut the fee from the budget. This year, there's a twist: Fenty wants to take the fee and use it not for enhancing 911, according to a CFO analysis, but to pay salaries and benefits for 30 employees. That would require a change to current law—a tough slog for sure.

A tax on hospitals. Fenty is proposing to raise $25 million by levying a "new assessment on net patient revenue" at city hospitals. Standing in front of the John A. Wilson Building today was Robert Malson of the D.C. Hospital Association, a powerful lobby group. "The hospitals are pleased to do their part, but everything has to be on the table" in terms of spending cuts, he says. "We can't afford a one-percent tax on inpatient and outpatient revenues."

Office of the Tenant Advocate. The city's voice for renters is losing $496,000 in funding, according to the CFO's office. City Administrator Neil Albert pledged today that the office would continue to exist under the Fenty budget, and that it would continue to serve the same role it does in the current fiscal year. But details are quite sketchy indeed, and any attempts to cut its budget will lead to jawing from council progressives.

Fund balance. The Fenty plans spends down the city's savings account by $97 million; Gandhi testified earlier this year that the city was approaching the limit of how much it needs to keep in reserve in order to meet its cash needs and statutory obligations. Gandhi, while certifying the request, warns in a letter that officials should "take steps to augment, or at a minimum, replenish the General Fund Balance." Fiscal hawks like Jack Evans and probably Vincent Gray are likely to make it an issue. A related issue: $97 million in "debt restructuring" that saves the city money in the short term but increases interest costs down the road.

Summer jobs. Last year, Fenty proposed a 10-week Summer Youth Employment Program, a costly mayoral pet initiative. However, the council, in order to cover a late-breaking revenue shortfall, saw fit to reduce the program to just six weeks this year. In 2011, Fenty is again proposing a 10-week program, but says he can do it for only $22.7 million. (A 10-week program in 2008 cost well over $40 million.) Fenty budget aide Merav Bushlin told councilmembers that program spending "depends on how the program is structured."

Photo by Darrow Montgomery

The bottom line: The mayor and council have to find at least $190 million to balance this year's budget, which runs until Sept. 30. (That number may rise; the CFO has identified $87 million in overspending, too, but that can be offset by underspending and other cuts yet to be identified.) Finding the money, actually, isn't hard: The city's budget reserve can cover it, but at least half would have to be paid back in the next year's budget.

And for that budget, passed by the council last month, they'll have to find another $150 million in cuts even without having to refill the reserve. Add that in, and it's at least $245 million.

Council finance guru Jack Evans says tapping the budget reserve, with only three months left in the fiscal year, "probably makes sense." But he counsels that all of it should be paid back in 2010 to avoid exacerbating other budgetary issues lingering in the 2011 budget.

The shortfalls, according to Gandhi, can be attributed to declines in each of the three major taxation areas: Income tax receipts are down, with declining income and investment losses leading to larger refunds. Property tax collections are underwhelming, too, due to vacant properties being given exemptions from high rates and from a spate of refunds that had been held back pending investigation into the OTR scandal. And sales and use taxes—particularly tourism-related taxes—are precipitously falling.

"The uncertainties surrounding the nation and District economic outlooks remain very worrisome and require careful monitoring," Gandhi writes.

If the council were to decide, as Evans suggests, to borrow from the reserve for this year and pay it all back in 2010, it would have three weeks to find $340 million in cuts before sending the 2010 budget to Congress before its summer recess.

"We'll do it," Evans says. "We've done it before."

The Office of the Chief Financial Officer is announcing this evening that Standard & Poor's, one of three outfits that rate municipal debt, has given the District a "AAA" rating on a recent bond issue. That's S&P's top mark.

In a statement, CFO Natwar Gandhi calls it "a gilt-edged rating."

Now it's not quite accurate to say that the new rating represents a rise in the District's credit rating, since S&P is passing judgment on a new type of debt instrument, something called income-tax-secured revenue bonds only recently authorized by the D.C. Council. But according to City Administrator Dan Tangherlini, this bond issue is "practically the same as" and "will do the same work of" general-obligation bonds—whose ratings are most commonly cited when referring to the District's creditworthiness.

The District's GO bond rating has been rated by S&P at the medium-investment-grade "A+" since November 2005. Tangherlini declined to say whether he thought corresponding rises would be in order for ratings on GO bonds and other city debt. A look at the bond rating history for GO issuances shows that S&P has been historically the first agency to grant the District ratings hikes in the post-control board era, with other players Fitch and Moodys following close behind.

So what's it all mean?

Most importantly, it means that the District will pay less in interest and related debt-service costs when it needs to borrow cash from Wall Street. Which is good, considering the hundreds of millions the District needs to cut from the fiscal 2010 budget—Gandhi estimates $4 million in savings in 2010 alone.