Because the increase, to $2.50, catapulted the District's rate over Maryland's $2-per-pack rate, Gandhi explains, many Maryland smokers who'd bought their tobacco in the District switched back to buying in Maryland. Add that to all the D.C. smokers who started buying cheap-as-dirt Virginia smokes, and you get the picture---instead of $45.4 million in revenue, Gandhi says the District will only bank $30 million.

But the legislative screw-up is more profound than that: The projections are now that this year's estimated cigarette tax revenues will fall below the pre-hike FY2009 levels ($37.6 million)---in other words, the tax hike got the city less revenue, not more.

Of course, council do-gooders will protest that this is really about a key public-health issue and that they're glad that fewer people are buying cancer sticks in D.C.

All true, and certainly admirable. But that wasn't the thinking at the time the tax was raised, LL can tell you that. The decision was made last July in a closed-door Wilson Building conference room (LL and a few other reporters were allowed inside). The cig-tax hike was on a menu of revenue-raising possibilities presented by Gandhi's office---and taxing smokers was a no-brainer for a legislative body looking to close a $660 million shortfall. LL recalls very little debate about the decision, and little mention of public health.

The good news: Maryland's currently considering another cig-tax hike, to $3.

For the current fiscal year, which started last Oct. 1, Gandhi is now estimating $17.7 million less in revenue. So what was a projected $223 million budget gap is now $240 million. And for the upcoming fiscal year, the revenue projection is down by $49.4 million from December estimates, meaning a $556 million problem is now a $605 million problem.

In a letter to the mayor and council, Gandhi explained why: ongoing weakness in the real-estate market, for one. But also because the city hasn't implemented new traffic penalties fast enough, it's given up some $18 million. And perhaps least surprising: The D.C. Council's move to hike cigarette taxes backfired; by raising the rates above Maryland's, Maryland smokers who'd been buying in D.C. switched back to Maryland. That miscue will cost about $15 million below projections in the current fiscal year

Get ready to do this all over again in June!

There's a twist: Neither of the parties is suing.

Chief Financial Officer Natwar M. Gandhi, independent of both, has announced he's going to D.C. Superior Court to settle an ongoing dispute over review of city contracts. He'll be asking a judge "in the interest of maintaining good governance" to determine whether the council has the authority to order payments stopped on certain city contracts not submitted for the council's approval.

Background: This whole thing is about something called "option-year contracts." Until last January, the executive branch sent the council all contracts worth up to $1 million per year, as well as any renewals (or "option years") of those contracts. But last fall, Ward 8 Councilmember Marion Barry started filing a rash of contract disapproval resolutions, including on option-year renewals, a situation that nearly led to the stoppage of certain important city services.

That led Attorney General Peter Nickles to send an order to city functionaries ordering them not to send option-year renewals. The council realized what was happening and passed legislation requiring the city to send the renewals for approval. Nickles refused to comply, and so to force his hand and maintain institutional prerogatives, the council passed emergency legislation ordering the CFO's office to stop payment on all contracts not submitted for council approval.

If the payments are stopped, city officials fear nothing short of a government shutdown. Vincent Gray and the council's lawyers say the legislature has that power; Nickles says it does not. LL will summarize their legal positions thusly: Nickles makes a constitutional claim that the legislature cannot "abrogate" contracts; the council says that you can't abrogate a contract that's void---and contracts not approved by the council are void.

According to a letter sent by Gandhi, the two branches "are continuing to discuss a compromise" but "neither has indicated that any agreement may be achieved soon, if at all." Thus the litigation.

David Umansky, Gandhi's spokesperson, says a suit is likely to be filed "within a week or two." The CFO's office has hired the firm Wiley Rein and is in talks with partner Larry Mirel, a former D.C. insurance commissioner.

Gandhi's hand was forced, he says, when the mayor and council ponied up differing legal conclusions on the contracts issue. "It's almost Marbury v. Madison," he says. "The executive says one thing, the legislative says another."

Nickles calls the suit "a wise move," adding, "I think the key point is that he's going to continue to pay the vendors."

The litigation will mark the first time an interbranch battle has gone to a judge since the halcyon days of Sharon Pratt Kelly and John A. Wilson. In that case, Wilson, and the council, lost.

Gandhi's letter in full:

Natwar M. Gandhi
Chief Financial Officer
January 29, 2010

The Honorable Adrian M. Fenty
Mayor of the District of Columbia
1350 Pennsylvania Avenue, N.W., Suite 327
Washington, B.C. 20004

The Honorable Vincent C. Gray
Chairman of the Council of the District of Columbia
1350 Pennsylvania Avenue, N.W., Suite 504
Washington, D.C. 20004

Re: Option Year Contracts

Dear Mayor Fenty and Chairman Gray:

This letter is to outline my immediate actions with regard to both the Unauthorized Contract Stop Payment Emergency Act of 2009 (A 18-2009) (the "Stop Payment Act") and the Unauthorized Contract Stop Payment Extension Emergency Act of 2010 (B18-620) (the "Postponement Act"). The Stop Payment Act became law on January 13, 2010, and requires the Chief Financial Officer to stop payment at midnight on January 20, 2010 (the "Stop-Payment Date") on certain $1 million contracts let in calendar year 2009 unless the Council ratifies the contracts (the "Affected Contracts").

The Executive did not submit the Affected Contracts to the Council. In response, on January 19, 2010, the Council adopted the Postponement Act which repeals the Stop Payment Act and directs that the Chief Financial Officer stop payment on the Affected Contracts on January 27, 2010 unless they have been received by the Council by that date. Although the Postponement Act was not yet law, given the clear intent of the Postponement Act to delay the effect of the Stop Payment Act until January 27, 2010, and after consultation with Chairman Gray, I did not stop payment on the Affected Contracts on midnight January 20, 2010.

During the last few days all parties have informed me that stopping payment on the Affected Contracts may, among other concerns, create hardships for those District citizens receiving benefits or services under some of the Affected Contracts, create financial difficulties for some of the contracting parties that have provided services under some of the Affected Contracts, and increase future District contracting costs because of concerns about the reliability of the timing of contract payments.

The Affected Contracts have yet to be delivered to the Council, so the Council's implementation delay until January 27, 2010 has expired. Despite my understanding that the Council and the Executive are continuing to discuss a compromise, neither has indicated that any agreement may be achieved soon, if at all. Thus, I have considered the materials provided to me by both the Executive and the Council and decided to take the following course.

Pursuant to the Home Rule Act authority granted to the independent Chief Financial Officer by the Congress and the intent behind that grant of authority, I am compelled to act pursuant to section 424(d) of the Home Rule Act (D.C. Official Code § l-204.24d) ("Notwithstanding any provisions of [the Home Rule Act] which grant authority to other entities of the District, the Chief Financial Officer shall have the following duties and shall take such steps as are necessary to perform these duties...."), section 424(d)(6) of the Home Rule Act (the Chief Financial Officer is charged with "[supervising and assuming responsibility for financial transactions to ensure adequate control of revenues and resources."), and section 424(d)(16) of the Home Rule Act (the Chief Financial Officer must determine "the regularity, legality, and correctness of... bills, invoices, payrolls, claims, demands or charges.").

Accordingly, in the interest of maintaining good governance in the District of Columbia, to continue those operations of the District government which would otherwise cease if the Affected Contracts were to be suspended, to prevent a rash of lawsuits against the District from affected contractors, and to protect the District's credibility in the financial markets, for the time being I will authorize payments under the Affected Contracts, when such payments are properly due and owing pursuant to the Affected Contracts. In addition, because the Council and the Executive have advanced differing legal opinions and facts regarding this issue, I have retained counsel and initiated the process to seek a declaratory judgment from the D.C. Superior Court to determine the controlling law in this disagreement between the Council and the Executive.

I remain available to further discuss these matters with you at your convenience. Sincerely,

Natwar M. Gandhi
Chief Financial Officer

cc: All Councilmembers
Neil Albert
Peter Nickles
Eric Goulet
Brian Flowers

"If you put me back in there today, I could get each of you a check."

—tax scammer Harriette Walters, June 30

The greatest instance of municipal larceny in District history came to a quiet end this year with the sentencing of Walters, who led a ring that stole nearly $50 million from city tax coffers. Justice came for Walters in Judge Emmet Sullivan's federal courtroom, ending a string of pleas and sentences in the case discovered in 2007. But how much has changed since then? Natwar M. Gandhi, the man who oversaw the city tax office while Walters' scheme was absorbing enormous sums of taxpayer money, remains the District's chief financial officer. And Walters, while expressing deep regret and repentance upon receiving a sentence of 17-and-a-half years in prison, insisted in the above quotation that perhaps not all of the loopholes she opened have been closed.

More from LL's Quotes of 2009

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."

Yesterday, the Washington Post printed some very obvious news to anyone who's been on South Cap. Street in the past year: Nationals Park hasn't sparked much revitalizing in Southwest. The city spent $1 billion in infrastructure upgrades and developers have made huge holes in the ground and left a lot of buildings still vacant.

As the article states, District residents weren't just sold a new stadium paid for with public dollars. No. As an old story noted, they were sold the "Stadium District"--a full-service community of new retail and new museums and new parks. The city hasn't come close to a Stadium District. Last week, Fisher wrote about the missing neighborhood as well.

What spilled forth in Sunday's A1 article was a lot of excuse making on the part of city officials and developers.

My favorite:

"It just so happens that implementation is occurring during the worst economic downturn in recent history. So things are going to struggle a little bit," said Neil O. Albert, the District's deputy mayor for economic development.

Really? This effort had been planned for years--long before the recession and banking collapse. The reasons Nationals Park hasn't revitalized the neighborhood are too numerous. But let me try.

*The city took too long fighting and underestimating the old tenants they had to boot to make way for the stadium. There is still a lot of concern over stadium funding and revenue from the games. Councilmember David Catania has said that the city's financial wiz Natwar Gandhi has been basically wrong on everything concerning stadium-related money. As LL reported (in the above link):

"Catania says he has no faith in the latest ballpark numbers—an attitude, he says, informed by history. 'Tell me one thing [Gandhi]’s been right on,' he says. 'He’s been wrong on attendance, wrong on revenue, wrong on environmental remediation, wrong on land.'"

*The city and the Nationals spent most of last season fussing with vendors. So while there were plenty of vacant spaces, vendors fought the city and the team over where they can set up shop and how many could set up shop. This fight dragged on and on and only ended up hurting the one group of people who seemed ready and willing to set up shop near the ballpark. The vendor fight went all the way to D.C. Superior Court.

*The stadium's construction hurt a lot of older tenants when it came to higher property taxes, etc. While new buildings went up without tenants, the old ones got squeezed. One new apartment building wasted a lot of goodwill over a battle with its tenants. The fight was over parking spaces in its garage.

*In March 2007, the Lerners completed construction on a building at 20 M Street SE. After two years, they only have one tenant. Long before the economy collapsed, they couldn't fill their own building.

*The Lerners are trying to make Peter Angelos look good. The Nats owners wasted their first season in the new ballpark refusing to pay rent on the ugly thing. Meanwhile, they fielded a crummy team. At a time when people were just starting to talk about this season, the Nats GM Jim Bowden resigned over allegations of skimming from contract bonus of Latin American players.

*Even the Post's critic hated the stadium's look.

*Nationals Park made history as one of the worst attended new stadiums ever.

*The Lerners and private companies built way too many parking lots.

*The city depended on private developers to pay for other projects. When the private development started failing, projects got stalled.

*Last year, I wrote a silly little blog item wondering about how housing prices could be so high just because the homes were located near Nationals Park. I noted that the surrounding area hadn't quite developed:

"The neighborhood surrounding the ballpark hasn’t changed all that much. It’s still mechanic shops and liquor stores. Aside from the ballpark, the new amenities include a Subway sandwich shop, a Starbucks, and a Five Guys. Those things are all great. Who doesn’t want to eat fresh? Who doesn’t like a super strong cup of coffee? Who can’t resist a juicy burger? But still–$579,000 for a town house?"

I was hammered by Matthew Yglesias for being short-sighted. Looks like I turned out to be right. A Five Guys and a Starbucks still doesn't mean economic development. And a future of skyline of yuppie Lofts is not happening in the near future. What scares me is supposed liberals like Yglesias and neighborhood boosters like JDland are really pining for those Lofts.

JDLand has a personal stake in the revitalization of the neighborhood. It drives traffic to her blog. It makes her feel better. Whatever. JDLand's blog is practically an ad for these new Loft and premo apartment towers. I wonder if she's ever noted the displacement of all those low-income tenants from Arthur Capper? I wonder if she cares what happens to the residents of James Creek who live directly across from the stadium?

So far the discussion concerning the ballpark is all about: when are those lofts coming, when will they be filled with tenants? I hope the discussion turns into a broader one that includes not just the new tenants but the displaced tenants as well. And all the ones that feel left behind to deal with all those empty lots.

*photo by Darrow Montgomery.

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.

In April 2007, Gandhi decided not to accept an offer to become Amtrak's CFO, and he told his employees in an e-mail about his decision. Walters replied to that e-mail, writing, "Sir, I would like to say thank you for keeping us inform of a decision that would have impacted the employees within the CFO Cluster. I appreciate that you respected us to provide follow up to the recent news reports that we read and heard over the pat week. Thank You!"

Replied Gandhi, "Thank you. Keep up the good work."