Read: Gray’s State of the Budget
Almost Mayor Vince Gray gave a speech today on the state of the District's budget. The only news is that Gray is going to order a freeze on capital projects that haven't yet started and establish a blue ribbon panel to prioritize future projects.
Not mentioned in the speech: any specifics on what Gray plans to do in terms of budget cuts and tax/fee increases. We'll have to wait a few more days for that info, it seems.
After the jump, read the whole prepared speech as it appears on Gray's transition website.
I want to take some time this morning to speak to the people of the district – honestly, directly, and transparently– about the state of the district’s budget and finances.
Let me BEGIN by thanking Dr. NAT Gandhi and his staff who have worked with me to do a top-to-bottom review of the District’s immediate budget deficit and the structural challenges that we will face next fiscal year. I would also like to acknowledge and thank my colleagues, starting with Chairman-elect Kwame Brown, and Councilmembers….who have joined us here today.
I’m also happy to be joined by the co-chairs of my budget and fiscal responsibility transition committee, Alice Rivlin and former Mayor Anthony Williams – two people who know a thing or two about the district’s finances, and whose expertise I will rely on as we deal with the challenges ahead.
During my campaign for Mayor, I often spoke about the need for more transparency in DISTRICT government. Nowhere is this more important than in talking about the District’s budget, and how we are treating taxpayer dollars.
After all, it’s your money we’re dealing with – you deserve to hear honest talk about what’s going on with it.
The next few weeks are a critical time for all of us. we are about to embark on a very important — and condensed — process to balance the current year’s budget before the end of the year.
That leaves us with very little time to deal with some very significant challenges.
Summary of the District’s Budget and Finances
As All District residents and business owners know, our city has not been immune from the country’s worst economic crisis since the Great Depression.
As the national recession wreaked havoc on the city’s finances, the council took several long-term structural measures to ensure the District continues to live within its means.
Over the past few years, we unanimously passed legislation to:
- place a 12% cap on all General Fund tax-supported debt;
- use any end-of-year surplus to replenish monies that have been taken out of our General Fund balance,
- devote 25% of all local revenue growth to pay-as-you-go capital funding in order to gradually shift the District towards a more sustainable approach to capital investments;
- And to create a Department of Health Care Finance to help aggressively and accurately bill Medicaid for all federal funds the District is entitled to receive.
Despite these measures, the city faces many challenges ahead.
Since May 2008, when the District of Columbia experienced its first drop in revenue in over 5 years, our local revenue estimates for the current fiscal year have declined by $931.5 million — an almost 16% decline in just two and a half years.
While the District has certainly made many serious cuts to its operating budget and found some ways to increase revenue, the District’s expenditures will have exceeded its revenues four years in a row.
On top of that, we’ve seen a huge drop in the District’s Cumulative General Fund Balance. some decline in the fund balance is understandable during a recession. But we’ve had a projected drop of 57% in just four years – Leaving the district’s fund balance dangerously low and unable to help if revenue continues to decline or there are additional spending pressures over the next two years.
this situation would have been even worse, had the Council not taken action in November 2008 and July 2009 to preserve $166.4 million in fund balance through a combination of spending cuts and revenue increases.
so, to recap – for four straight years, the District has spent more than its taken in, and we’ve had to raid the fund balance to make up for it.
As any District family or business would tell you – that’s simply not sustainable.
So how deep of a hole are we in?
Fiscal Year 2011 Budget Gap: $187.8 million
The District of Columbia currently faces a $188 million gap in its operating budget for Fiscal Year 2011.
That gap is based on revised CFO figures that show $99.8 million less in projected local revenue, and $88.1 million in projected agency overspending and other spending pressures – like special education cost overruns, salary increases, higher health and life insurance costs, and less federal dollars than expected. (a detailed list can be found on our website at www.dccouncil.us)
As everyone knows, the District of Columbia is required to maintain a balanced budget, so we will need to complete a plan to close this budget gap before the end of December. Having received the Mayor’s budget proposal today, the Council has two weeks before it must vote on a revised budget gap-closing plan. this requires us to move forward with a compressed budget process that is by no means ideal but doable.
The Council will have a public hearing on November 30, on both the Mayor’s Budget Request Act and Budget Support Act gap-closing legislation. I encourage members of the public to come to the hearing and give us ideas on how to solve the budget gap we are facing.
But, as you advance ideas, please let it be more than don’t cut this or that without offering ideas to balance the budget.
On December 7, the Council will have its first and only vote on the Budget Request Act and its first of two required votes on the Budget Support Act. Then, on December 21, at its final legislative meeting of this session, the Council will vote on the Budget Support Act a second time.
Despite this very tight timeline, I will do everything possible to ensure that this budget gap-closing is as transparent as possible. I will ensure that budget deliberations will be broadcast live on Channel 13, and we will ensure that budget documents are posted promptly for public viewing on the Council’s website.
In addition to solving this $188 million gap, we have to take steps to preserve our fund balance. The budget approved last spring uses $186.2 million from the fund balance to help balance this budget. I had originally hoped to approve a revised Fiscal Year 2011 budget that didn’t rely on the fund balance, so that this $186.2 million could be used to offset our longer-term structural gap in Fiscal Year 2012. However, given the time we have remaining, this is no longer a realistic goal.
I do believe, however, that we can preserve $50 million out of that $186.2 million, by placing these funds in a reserve account – just as the Council did in Fiscal Year 2009.
This $50 million reserve would protect us from having to rely upon our congressionally mandated Contingency Cash Reserve to cover unforeseen pressures, because this Rainy Day Fund account would have to be repaid in Fiscal Years 2012 and 2013.
While I believe that this $50 million reserve goal is achievable, we will need to remain flexible as we see how this compressed budget process unfolds. The $50 million cash reserve might have to be made available if revenue is revised downward further or if additional spending pressures emerge.
But if we are fortunate enough to avoid additional revenue declines and new spending pressures, this $50 million can be used to help offset the severe structural budget gap we will face in Fiscal Year 2012.
This is where our most daunting challenges lie.
Structural Operating Budget Deficit in Fiscal Year 2012: $345.1 million
Even after solving the $188 million gap in Fiscal Year 2011, we will still face a gap of around $345 million in Fiscal Year 2012 when the baseline budget is released.
Among the sources of this gap are higher than expected spending in areas like debt service, medicaid, and district employee benefits (including retirement); less than expected federal dollars; repayment of additional funds for the United Medical Center; and local obligations for city programs previously paid for with one-time federal contributions.
It also includes the fund balance we’re using to close this year’s gap that, of course, will not be available to help with next year’s gap. In fact, in fiscal year 2012, for the first time in four years, we will have to balance the district’s budget using existing revenue, and without the fund balance to rely upon.
A gap of $345 million clearly will require us to begin to examine what truly are the core service functions of this government. While I remain hopeful that the District’s economy will turn around before we present our proposed fiscal Year 2012 budget next spring, we can’t plan that way. The Reality is that it could be a number of years before the District’s economy fully rebounds.
Challenges we will face in Budget Gap-Closing
So how difficult will it be to tackle this hole in our budget? Let’s first take a look at what our operating budget.
The District’s total local Operating Budget is Roughly $5.3 Billion.
$1.5 billion of the budget is from Fixed costs, debt service payments, and inter-jurisdictional obligations – such as METRO. Those costs don’t give us much room to play with, and historically have been difficult to achieve substantial savings from.
That leaves us approximately $3.8 billion from which to find the remaining savings.
Of this $3.8 billion budget:
- roughly One-Quarter goes to pay for the salaries of District employees at just three agencies: D.C. Public Schools, the Metropolitan Police Department, and Fire and Emergency Medical Services.
- About 25% goes to pay for the salaries of All other District employees.
- Another 25% is used to pay for the Local match for D.C. Medicaid and the D.C. Public Charter School payment.
- And the final 25% goes to pay for everything else.
This illustrates how difficult it will be to solve a gap of over 10% of the District’s budget during the next two years, because traditionally, Medicaid, public safety, and schools have been spared from major cuts.
We face just as many challenges when we look at the revenue side of the ledger. Over 80% of the District’s local revenue comes from three sources: property tax, sales tax, and income tax. And as we’ve already seen, the economic slump we’re in has resulted in lower than expected revenue.
And as we’ve also seen in recent years, fee and fine increases are not an effective or long-term solution to increasing the District’s revenue.
This means that the District would not raise significant revenue unless we target one or more of the major tax categories.
Let me be clear – all options will have to be on the table if we’re going to fix this gap in our operating budget.
But let me be equally clear about this – i know that too many District families and businesses are hurting from the recession as much as or even more than the District government. So I will not ask District residents or businesses to pay one single dollar in tax increases without first assuring them that we have scrubbed the budget and found every last dollar in savings first.
And, that we can be clear about the consequences of not raising new revenue.
Challenges in the Capital Budget
If things aren’t bad enough looking at the operating budget, the challenges in the District’s capital budget are perhaps even more serious. Since 2002, the District’s outstanding debt has more than doubled, going from $3.5 billion in 2002 to $7.1 billion in 2010. Had the Council not established a 12% debt ceiling, we would likely now be well above 12%.
With recent reductions in revenue, about $120 million will need to be reduced each year from the District’s annual capital improvements plan to stay within the debt cap by Fiscal Year 2014.
Additionally, after working with the Chief Financial Officer, we have identified $44.7 million of capital Full-Time Employee/Equivalents (known as FTE’s) and contracting services that more appropriately belong in the operating budget. In Fiscal Year 2012, we will likely shift all or a portion of these FTEs and services back to the operating budget, in order to restore appropriate budgeting and relieve $44.7 million of pressure annually from the capital budget. but doing so will obviously add more pressure to the gap we face on the operating side of the budget in Fiscal Year 2012.
To fix this, The District of Columbia needs to do a better job of setting priorities and making tough choices about which capital projects it decides to finance. simply put, as is true with any family or business facing tough times, it’s time we distinguish between the projects we NEED versus the projects that we want.
I am going to propose a freeze on all capital projects not yet underway. I then intend to establish a Blue Ribbon panel of capital experts to make recommendations on prioritizing our capital needs within the confines of the 12% debt cap. And, once again, I will ask Mayor Williams and Dr. Rivlin to assist. Exceptions to the freeze will be considered on a case-by-case basis.
After the Blue Ribbon panel releases its capital findings, Fiscal Year 2011 capital projects that are consistent with the panel’s report may be unfrozen with little or no delay to the project’s timetable.
In conclusion, the fiscal challenges we face are daunting. and the decisions we are about to make are tough. as your next Mayor, I commit to addressing these challenges head on. I will not use short-sighted budget gimmicks to push the problem off until later. The budget that I propose next spring will be straightforward and we will make the tough choices that are necessary to secure the District’s financial future.
Many of these decisions are going to be painful. And let me be clear up front – everyone is going to have to take a hit and share in the sacrifice. That’s the only way we’re going to be able to keep our city on sound financial footing in both the short and long term.
That’s why we need your help. As I mentioned earlier, the process for dealing with the current year’s budget shortfall is going to be compressed. But we still need to hear from you. Come to the public hearing on Nov. 30. Send us your comments and thoughts on our website. however you do it, Make sure we hear from you.
And as we look towards next year’s budget crisis, I promise to engage the community every step of the way. By fully involving the public and all stakeholders in budget development, people not only will be better able to understand the tough choices we are making, but they will have a voice in the process. As I’ve said many times before, that is the only way we can truly come together as One City, in which everyone has to make sacrifices, but no one is treated unfairly.
And while we’re working on dealing with our current fiscal challenges, we’re going to simultaneously work on getting our economy back on track, creating more jobs for DIstrict residents, and helping our small business owners succeed. recently we announced that we will hold a District job creation summit on December 13. If we help more DIstrict residents get back to work, and help more District small businesses thrive, it not only helps District families, but will help create the revenue we need to invest in the city’s core services.
Finally, let me say this. as we enter this week of Thanksgiving, allow me to offer my thanks to the people of the District of Columbia who have proven time and again their resilience and willingness to sacrifice to help create a great city. As we prepare to face a new set of challenges, I know that everyone will step up and do their share once again – and for that, I am humbled and extend my personal thanks.
It is that spirit which truly makes us One City.