One of the biggest costs putting the city in the red: the Department of Youth Rehabilitation Services' continued insistence on placing youths in out-of-state residential treatment facilities. The juvenile justice agency is projected to spend $8.4 million more than originally allocated for this outsourcing. In a recent cover story we outlined reasons why this is an outdated, extremely costly, and ineffective use of public funds.

The DC Behavioral Health Association raised similar concerns about DYRS' emphasis on residential treatment in a 2010 report.

Millions and Millions: A month ago, Mayor Vince Gray’s team released their new, terrifying estimate of the budget gap facing the District in fiscal 2012: $600 million. But today, chief financial officer Natwar Gandhi declared the actual shortfall will be $312 million. The difference, apparently, is due to higher than expected tax revenue from commercial properties; real estate taxes are expected to be up 16 percent next year. If the budget is really getting healthier at a rate of $70 million a week, maybe the city can lease a Lincoln Navigator for everyone by the fall! +3

Go Ride a Bike: At times during last year's mayoral election, you could be forgiven for thinking it was, instead, a referendum on bike lanes. New Census data makes clear, though, that the lanes are good for something—they get people riding bikes. Rates of Washingtonians commuting to work on two wheels are highest in neighborhoods where the city has installed good bike infrastructure. (No word on whether the Census findings have been adjusted to take former Mayor Adrian Fenty's job teaching at Oberlin into account; for a commute that far, you'd need to use a SmartCar, not a bike.) +2

One (Healthy) City: If the only thing hold the D.C. government back from greatness is junk food, greatness will soon be upon us. (Of course, that could be a big if.) Councilmember Mary Cheh is introducing legislation to replace the vending machines in city and federal buildings with offerings that have at least one ingredient besides high fructose corn syrup. Last year, Cheh brought veggie burgers to DCPS lunch menus, so she's probably serious. City workers can now look forward to vending machines always being out of celery around 4 p.m. every day. +2

Riggo Goes to Kenya?: The perfect gift for a football-loving wildlife photographer can be hard to think up. Nature and the NFL don't always go together perfectly, after all. Fortunately, John Riggins has solved the problem. The Washington Redskins career leading rusher ran a sweepstakes for a Kenyan photo safari on his website, which is now closed, but you can still purchase a trip for the low price of $2,995. On closer examination, it's unclear whether Riggo will necessarily accompany the winner on the trip, but so what? Remember: To get a reclusive cheetah to pose for a picture, just whisper to it, "Loosen up, cheetah baby." +1

Yesterday's Needle rating: 21 Today's score: +8 Today's Needle rating: 29

IN CASE YOU MISSED IT:

• Elites win the dawn
• Pizza delay
• The real reason LeBron went to Miami

Good morning sweet readers! Has anyone else seen the trailer for the new movie about Facebook "founder" Mark Zuckerberg? Creepy. Just watching that thing makes LL want to delete his account this instant. But first things first—the news:

Hit the Road, Marc: There's a new boss in town for the city's troubled juvenile justice system. Marc Schindler was shown the door yesterday; he was replaced by Robert Hildum, a top aide to Attorney General Peter Nickles.  "[H]is appointment took many people inside and outside DYRS by surprise and raised fears among some advocates that juvenile justice reform in the District could be set back," reports Henri Cauvin in the Post. Also gone: "Deputy director David Brown and head of internment David Muhammad resigned from the agency, citing uncertainty about its future, a source with knowledge of their decisions told The Washington Examiner," Freeman Klopott reports. Klopott says the move was a power grab by Nickles in a sidebar:  "Neither outgoing DYRS interim director Marc Schindler, nor his predecessor Vincent Schiraldi, reported to Nickles as other agency heads do, one source said. By placing Hildum at the top of DYRS, Fenty has added another agency to Nickles' zone of influence."  LL once visited Nickles' zone of influence. Nice place to visit, but you wouldn't want to live there.

AFTER THE JUMP: Gray's education plan panned; cash rules everything around Gandhi; more on Bullet Proof...

Been There, Done That: DCPS gives D.C. Council Chairman and mayoral candidate Vincent Gray a smackdown over his proposed education plan, reports the Examiner's Leah Fabel. "D.C. Council Chairman and mayoral candidate Vincent Gray's campaign promise of 'birth-to-24' public education is already under way and succeeding, according to school officials aligned with Gray's opponent, Mayor Adrian Fenty." It's hard to tell how much of the pushback from DCPS is the usual sort you'd expect from bureaucrats defending the system after Gray criticized it—and how much has something to do with schools Chancellor Michelle Rhee's obvious preference for a Fenty win. LL prediction: Gray will keep pushing the education plan, even if DCPS says it's redundant; his camp knows he needs to demonstrate commitment to school reforms.

Love Letter:The Examiner's Harry Jaffe has the  news that CFO Natwar Gandhi is composing a letter to the mayor and the council about his recent visit to Wall Street and its bond rating agencies. "The good news is D.C. gets to keep its gold-plated rating for now; the bad news is that if our politicians add to the debt and keep dipping into the savings account, the ratings will go south and the cost of borrowing will go north and add millions more to the cost of government. Gandhi has tried to be a reliable 'Dr. No,' forcing the pols to spend within their means. He needs help now from the only council member to veto the budget: Jack Evans, chair of the finance committee. As a tag team, they might be able to rein in the pols freely spending our cash. Otherwise, the city goes broke—or we pay higher taxes."

Pay No Attention to What I Said Last Time: Speaking of Evans, on D.C. Wire, Nikita Stewart reports he pops up in the latest round of Fenty TV ads. "On Saturday, the Fenty campaign unveiled three new 15-second testimonials, including one in which Evans (D-Ward 2) addresses one of the criticisms of Fenty: 'Some people say that Adrian Fenty doesn't play well with others.' 'Some people' would include Evans. In November, he told The Washington Post that Fenty has always tended to 'operate alone.' In 2006, when Fenty successfully ran against then-Council Chairman Linda W. Cropp, who was endorsed by Evans, the Ward 2 council member made a number of unflattering statements about Fenty."

If You Build It, Pols Will Come: NBC 4's Tom Sherwood braved the heat to report on a library groundbreaking in Ward 8 yesterday.  Both Fenty and Gray are taking credit for the project. LL invites readers to check out the awkward bro-hug at the 10-second mark.

What's In a Name? The Post's Mike DeBonis has even more to share about Kwame Brown's boat, Bullet Proof:  "Brown insists the name is 'not about violence.' Rather, Brown said in interviews that his wife, Marcia, named the boat. He was somewhat fuzzy on the precise inspiration, but he said it was a reference to President Bill Clinton—'a comedy type of thing' involving either Chris Rock or Saturday Night Live. (Brown has worked in the federal Commerce Department during the Clinton administration.)"

Crash photos [NBC4]

Proposed pot site draws concern [NEWS 8]

Murder house for sale [FOXDC]

Mayor and the Council, no public schedule

Hello, sweet readers, and welcome to the first Loose Lips Daily of the Alan Suderman era. LL is eager to drag you along with him through the wonderful world of D.C. politics, and trusts you'll soon enough be asking yourself, "DeBonis who?"

IN CASE YOU MISSED IT:

• D.C. Council rants, Peter Nickles swims
• Air conditioning still a problem at D.C. General homeless shelter
• Building industry throwing down for unopposed Mary Cheh

How about that Paul the Octopus oracle, who correctly predicted eight out of eight World Cup games, including Spain becoming champs yesterday. LL has an idea: Let's pass the hat and pay for Paul to predict the winner of this year's mayoral race so the rest of us can relax until September? No? Okay, let's get to it then.

Trouble on the Home Front: The Post's Nikita Stewart takes the pulse of Mayor Adrian Fenty's home turf, Ward 4, and finds discontentment a'bloomin'. Stewarts talks to Ethel Delaney Lee, the "matriarch of modern Ward 4 politics," who has thrown her support behind D.C. Councilman Vince Gray, after feeling ignored by Fenty. "The cellphone that I had for him, someone always answered for him," said Delaney Lee, 84, of North Portal Estates. "I wrote a letter... I never heard a word. Now, the mayor says he never received the letter and says he wishes he had." Money grafs: "Nowhere does Fenty have more to lose than in Ward 4. Conventional wisdom and political tarot readers have wards 5, 7 and 8 potentially in Gray's column. Fenty would win wards 1, 2 and 3. They would split Ward 6. That clears they way for the mayor's former epicenter of popularity to become the battleground in the Sept. 14 Democratic primary." ... "The ward's word-of-mouth work helped Fenty become mayor almost four years ago. This time, it's hurting him. Former Fenty supporters who back Gray recount personal insults and lament laid-off or transferred city employees. The mayor's supporters apologize for their candidate."

AFTER THE JUMP:Vincent Gray fundraiser in Georgetown; Nickles fights back; school's in!

Show Me the Money: A Post editorial gives Gray a slight tap on the hiney for having an education platform that is so ambitious "that it is hard to discern what are his priorities and, more significant, how he would pay for them." The Posties give credit to Gray for his focus on charter schools but take him to task for past meddling and unilateral actions as council chairman. "Most disappointing is the absence of any detail on what his proposals would cost or how—other than a vague promise of savings in special education—he would pay for them. It's easy to promise comprehensive pre-natal-to-toddler programs for families with special-needs children, more resources for charter schools or a doubling of school guidance counselors. Coming up with money, particularly in these tough fiscal times, is an entirely different matter."

Shut Your Hole and Know Your Role: The Examiner's Jonetta Rose Barras takes the D.C. Council to task for their meddlesome ways, affirming Nickles' assessment that they act like "mini-mayors." Barras singles out At-Large Councilman Michael Brown for proposing legislation that would mandate field trips for public school students. "Rather than just gripe about the problem, I offer this cure for the mini-mayor-micromanaging syndrome: less time in the John A. Wilson Building. After all, the job of council member is, by law, part-time—except for the chairman. Many legislatures hold clearly defined legislative sessions—sometimes spanning just 90 or 120 days. The city could follow suit. If there was an emergency, the chairman could call a special meeting." LL doesn’t need an octopus to predict the odds of that happening.

Anger Makes the Money Flow: The Georgetown Dish's Molly Redden covered Gray's Georgetown fundraiser Friday. Redden's take: Even among many of the avid Gray supporters at the ornate reception hall of the City Tavern Club, there were bitter feelings about Fenty that were as strong as the feelings for the man of the hour. There can't be any doubt any more—this election seems more and more like a referendum on Fenty's (un)likableness. Admirable as he may be for his "maturity" and "character"—words many used to describe him—Gray, it seems, scores extra points simply because he isn't his despised opponent.

'Cause I Say So: Nickles has fired back against the complaint Robert Vinson Brannum filed against schools Chancellor Michelle Rhee. Refresher from The Examiner's Leah Fabel: "The complaint was filed with the city's Office of Campaign Finance in June by Robert Vinson Brannum, a reliable Rhee antagonist and president of the D.C. Federation of Civic Associations. It charges that Rhee violated city law and standards of conduct when she "solicited or accepted private funding to support certain provisions of" the school system's contract, passed in late June by the D.C. Council. The $1.4 billion contract, which is partially funded by nearly $65 million in private donations from four foundations, grants teachers a 22 percent salary raise through 2012, retroactive to 2007. It also lays the foundation for teachers to be paid large bonuses depending on their successes in the classroom. The Office of Campaign Finance deemed Brannum's complaint worrisome enough to open an investigation in early June." Nickles called the complaint "baseless." Bill Turque reports that Rhee told the District's Office of Campaign Finance on Friday that she gained nothing financially from the private foundations that are underwriting part of the new teachers contract, nor did she have anything to do with a provision allowing donors to reconsider their support if DCPS leadership changed hands.

School's In: The Post's Stephanie Lee checks in with the District's new community college. The Community College of the District of Columbia, which split from UDC, has seen its enrollment jump from 960 in the fall to 2,335. Lee reports that the CCDC's growth is part of a national trend. "CCDC is starting as two-year colleges are enjoying a kind of renaissance. In the Washington region in the 2009-10 academic year, community college enrollment increased by 12,000 students, or 10 percent. Students are signing up in record numbers nationwide, though budget cuts make it impossible to accommodate them all."

Can Somebody Tell Me What the Crime is Here?: "The 19-year-old man suspected of impersonating a Metro driver and crashing a Route B2 bus carrying five adults and a baby before fleeing the scene initially drove so well that passenger Thomasena Thompson still thought he was a real Metro driver Sunday evening. "If he wasn't a driver for real," Thompson said, "he's been watching somebody for a real long time." William Jackson, the suspect, was polite and knew the bus's exact route, Thompson said. He stopped at Washington Hospital Center and even left the bus idling for her as she ran to it from the McDonald's she had stopped at after transferring from the X2 Friday afternoon." [Post]

It's Getting Hot in Here: The Examiner's Freeman Klopott reports that Ward 3 Councilwoman Mary Cheh has introduced emergency legislation "that would prevent power and gas companies from shutting off residents' utilities during extreme heat."

We Bought a Hospital: "The city now owns United Medical Center, the only hospital serving residents east of the Anacostia River, after bidding $20 million for the beleaguered facility at a five-minute foreclosure auction Friday that drew no other bidders." [Post] And Fenty named five to the hospital's board. [WBJ]

I'm Going to Disneyland! WBJ's Michael Neibauer finds that "rarely do D.C. staffers miss an opportunity to travel well."

Spare a Dime?: D.C. Wire reports that the fiscal note on a law making it a crime "for city employees to engage in politicking or electioneering while on duty or dressed in a city uniform or driving a taxpayer funded vehicle" would cost upwards of $100,000 in fiscal year 2011. CFO Natwar Gandhi said the city can't afford the price tag.

D.C. Council Schedule: 2 p.m. roundtable to discuss Peaceoholics' construction project at 1300 Congress St. SE

In hockey, this week was the worst
The Caps seem to really be cursed
Game 7: they choked
Got totally smoked
An outcome in which they're well-versed

Farewell to the late Dorothy Height
(Whose hats could both awe and delight)
The eulogy, tender
Showed speech-giving splendor
From start to the final sound bite

The teachers continue to wonder
If talks are just doomed to go under
Since Gandhi won't say
The city can pay
Does that tear this contract asunder?

A really sick way to get kicks
Is killing a possum with bricks
But here is some scratch
For helping to catch
Those morally bankrupted dicks

For once, city workers can smirk
Today, they alone don't have work
With boozing extended
Life's even more splendid!
There's one word for them and it's: jerk.

Once freed from their desk or a meeting
Perhaps D.C. lackeys are tweeting
Now saved for posterity
All your hilarity
Twitter. No longer so fleeting…

The Summit is now in the past
Commutes are no longer harassed
One lesson to learn
Is look 'fore you turn
'Cause this left us all quite aghast

This saga is slowly unfolding
With Gandhi acerbic'lly scolding:
For all of Rhee's zeal
The surplus ain't real!
Could this mean the contract is folding?

Two days after Chancellor Michelle Rhee told D.C. Council members that she would pay for a groundbreaking teacher contract, in part, with $34 million in surplus funds, Chief Financial Officer Natwar M. Gandhi today posted a letter to Rhee telling her there is in fact no such surplus.

In fact, Gandhi asserts that there not only is no surplus, but Rhee did not consult with the CFO's office prior to announcing a contract agreement. In other words, Gandhi says that Rhee signed a deal she didn't know how to pay for.

Writes Gandhi: "[D]espite the fact that my office was neither consulted nor included in the negotiations regarding the WTU, my staff took the initiative and proactively engaged in the process of analyzing potential resources to support the proposed contract, should a final agreement between parties be reached."

Gandhi goes on to recount how George Dines, the acting DCPS financial officer, e-mailed Rhee a preliminary figure indicating a potential surplus. But that figure was never finalized.

"I was incredulous to learn in your...presentation to the Council on the contract, you asserted that a surplus is available to fun the proposed salary increases based on preliminary information," Gandhi writes. "I am at a loss to understand why you did not consult with me directly or with any of my DCPS financial staff about the viability of the proposed package prior to your public announcement."

There is a $34 million surplus in school-based underspending, he adds, but it is more than offset by overspending in the central office and other places. An overall surplus, he writes, "does not exist."

In closing, Gandhi offers support for the agency CFO on whose information Rhee relied.

"I want to reiterate my support for George Dines. I have the highest degree of confidence in his capabilities and appreciate his willingness to step in as Interim CFO at DCPS, especially in this challenging fiscal situation," Gandhi wrote.

By popping this surplus bubble, Gandhi turns a multifaceted political mess into a much simpler one. Where pressure was coming on two fronts—to rehire laid-off teachers or to press forward with the contract proposal—the issue is now simply: Where the contract money at?

Bottom line: Rhee messed with the savviest political player in town by blaming the surplus mess on Gandhi's shop. Now Dr. No is taking off the gloves. This may get good.

UPDATED 6:05 P.M.

A week after a new D.C. Public Schools teacher contract proposal was rolled out with great fanfare, fiscal revelations aired today leave its ultimate implementation very much in doubt.

Chancellor Michelle Rhee and Washington Teachers' Union head George Parker appeared at a D.C. Council administrative meeting earlier today to brief councilmembers on the agreement. Rhee was grilled on the deal's financing details and revealed that retroactive raises are being funded by a $34 million DCPS surplus.

With that revelation, "everyone's ears perked up," says a person at the meeting. That's because less than eight months ago, the school system was pleading poverty and ordered layoffs for 266 teachers to close a $40M budget gap.

The surplus, Rhee told the room, was the result of a miscalculation by the Office of the Chief Financial Officer. Specifically, she said expense projections had been based on an average teacher salary of $81,000 when the actual figure is nearly $15,000 less.

Councilmembers were aghast at the disclosure—an admission that at least some of the layoffs, which tore the local body politic asunder, were unnecessary. D.C. Council Chairman (and mayoral candidate) Vincent C. Gray was "stunned and astounded," a spokesperson says. Rhee said she had "recently" learned of the miscalculation, says a meeting attendee.

The political ramifications are heavy.

Bearing the brunt of the disclosure, at least immediately, is union president Parker—who will have to decide whether to seek reinstatement for the fired teachers with the surplus, or to press forward with a contract. In either case, his hard-line opponents within the union have a new avenue of attack; he stands for re-election next month. Parker claimed today that he had no knowledge of the surplus prior to the meeting.

Also in the hot seat: CFO Natwar M. Gandhi, who certified the erroneous figures last summer. Rhee named her former agency CFO Noah Wepman as the culprit, meeting sources say, but Wepman was supposed to be accountable to Gandhi—not Rhee.

In the wake of the fall layoffs, tough questions were raised about Wepman's independence from the chancellor, and he was forced out after a poor showing at a council hearing. Questions about Gandhi's stewardship of school finances now reappear. Note also that Rhee's fingering of Gandhi represents a shift of political blame to an entity ostensibly independent of the mayor; Gandhi, of course, has survived much worse.

Other folks with egg on their face: Katherine Bradley, who is spending $100,000 in her foundation's money, to hire former White House communications chief Anita Dunn to handle, among other things, the rollout of the teacher contract. And this is what they get?

The big questions going forward: Assuming Parker doesn't withdraw from the contract agreement and that Gandhi certifies the deal, will teachers vote for big raises knowing it comes at the expense of wrongfully fired ex-colleagues? And if they do vote to ratify, will a feisty group of D.C. councilmembers, led by a mayoral candidate, abide by their wishes and vote to approve the contract in this election year?

LL was not in the room; Examiner's Leah Fabel was there, among other reporters.

Fabel quotes Gray's reaction: "If I were one of the fired teachers, I would be ready to put my hands around someone's throat and squeeze till there was no air left....At the end of the day, some people's pay raises [would be] funded with someone else's job."

UPDATE, 6:05 P.M.: A Rhee spokesperson challenges LL's reporting that she identified Wepman as the source of the bad information; LL has asked in what context Rhee might have uttered his name.

Gandhi's office has issued a statement: "All of the facts, figures and information concerning the finances of the teachers contract will be released when the CFO’s analysis of the contract is made public."

And a statement from the WTU:

To put it simply, this is unacceptable.

We once again request that DCPS reinstate the teachers who were laid off. If the teachers are not reinstated, the WTU requests a new hearing on the RIF, at which time the newly available budget information will be provided to the court.

We also are requesting that the D.C. city council take legislative action to ensure greater transparency in the budget process. In particular, we would like to see more rigorous guidelines for determining what does—and does not—constitute a crisis that allows for unregulated actions like October’s RIF.

The WTU calls for a close review of the unilateral powers currently accorded the chancellor and the mayor, to determine if more must be done to ensure that there is greater accountability, both to the council and to the people of the District of Columbia.

Nothing can give back to the teachers, the students and the community what was lost as a result of either malevolence or mismanagement of the budget. We must, however, take all necessary steps to ensure that it does not happen again.

Photo by Darrow Montgomery

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.