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Natwar M. Gandhi, Chief Financial Officer
Testimony on the mayor's FY2005 proposed budget and financial plan
March 29, 2004

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PUBLIC BRIEFING
THE MAYORíS FY 2005
PROPOSED BUDGET AND FINANCIAL PLAN

Before the
Committee of the Whole
Council of the District of Columbia
The Honorable Linda W. Cropp, Chairman

March 29, 2004; 2:00 p.m.
Council Chamber

Remarks of
Natwar M. Gandhi
Chief Financial Officer
Government of the District of Columbia

Good afternoon, Chairman Cropp, Mr. Evans, and members of the Committee of the Whole. I am Natwar M. Gandhi, Chief Financial Officer for the District of Columbia, and I would like to offer brief remarks about the Fiscal Year 2005 Proposed Budget and Financial Plan.

The Office of the Chief Financial Officer has worked with the executive leadership team, as well as agency program and budget staff, to address numerous budget issues to produce a balanced budget. We will continue to support this collaborative process as the Council deliberates.

FY 2005 Budget and Financial Plan Overview

The proposed FY 2005 gross funds operating budget is $6.25 billion, an increase of $545.6 million, or 9.6 percent, over the approved FY 2004 gross funds budget of $5.70 billion. The local funds component of this budget is $4.17 billion, an increase of $340 million, or 8.9 percent over the approved FY 2004 local budget of $3.83 billion. The federal funds component of this budget is $756.6 million, an increase of $8.0 million, or 1.1 percent over the approved FY 2004 budget of $748.6 million. The federal Medicaid payment component of this budget is $993.1 million, an increase of $100.8 million, or 11.3 percent over the approved FY 2004 budget of $892.3 million. The private grant funds component of this budget is $13.3 million, a decrease of $453,000, or 3.3 percent from the approved FY 2004 budget of $13.8 million. The special purpose revenue funds component of this budget is $309.8 million, an increase of $65.3 million, or 26.7 percent over the approved FY 2004 budget of $244.5 million. Attached to my testimony are two charts that provide more detail.

Expenditure Growth Rates

The expenditure growth rate for FY 2005 does not set the mold for FY 2006 and beyond. Expenditures are expected to grow at 4.1, 4.6, and 4.3 percent for fiscal years 2006, 2007, and 2008, respectively. It is important to note for these out years that Medicaid is projected to grow at 6 percent annually. It is clear to the Districtís elected leadership that the FY 2005 local funds expenditure growth of 8.9 percent, or $340 million, is not sustainable. The Mayorís FY 2005 Proposed Budget and Financial Plan includes the impact of $94 million in FY 2004 spending pressures that are recurring in nature. The FY 2005 baseline budget, the starting point for the formulation of the Mayorís proposed budget, includes important budget corrections or increases to recognize the true cost of providing the current level of services, including entitlements, court order compliance costs, attainable projections of Medicaid reimbursements, and operating costs of completed capital projects. Due to the Districtís history of experiencing chronic spending pressures, the baseline budget was built on a realistic but not an overly conservative assessment of operating costs.

The Balancing Proposal

The executive branch began the formulation of the proposed budget with a $249.8 million gap, the difference between baseline revenues and expenditures. Mayoral enhancements of $45.5 million and baseline budget fixes of $16.9 million increased the FY 2005 budget gap to $312.2 million. After a baseline revenue adjustment of $6.4 million, the Mayor took the following actions to balance the FY 2005 operating budget:

  1. Drew down $54.0 million of unreserved fund balance, in addition to the $26.0 million that was already assumed as part of the baseline budget;
  2. Utilized $58.8 million of tobacco trust funds;
  3. Reduced the contingency reserve contribution by $8.3 million, to set aside only the legally minimum level;
  4. Cut expenditures by $62.6 million;
  5. Transferred $28.1 million of eligible costs to special purpose funds;
  6. Capped the dedicated revenues of the Housing Production Trust Fund to $20 million per year, re-directing $20.5 million to local funds;
  7. Raised miscellaneous fees, permits and fines to produce additional revenues of $47.8 million; and,
  8. Raised selected taxes by $27.4 million.

On a net basis, the Mayoral gap closing actions produced an FY 2005 operating surplus of $1.7 million.

To balance the remainder of the General Fund five-year financial plan (fiscal years 2006 through 2008), the proposed budget continues the following through FY 2008:

  1. the annual $20.0 million cap on Housing Production Trust Fund dedicated revenues;
  2. maintenance of the enhanced revenues from fees, permits, fines and taxes; and
  3. utilization of Tobacco Trust Funds for local funds purposes.

In addition, the plan requires the deferral of additional tax parity provisions through FY 2007.

The Impact of the Structural Imbalance

It is precisely these types of actions needed to balance the five-year plan that demonstrate the impact of the Districtís structural imbalance. As noted by the U.S. General Accounting Office, the District has a substantial recurring need for infrastructure improvements and has a disproportionate number of persons living at the federal poverty level who need a wide range of human support and educational services. These factors, combined with a high cost of living, result in a structural imbalance between resources and needs, ranging from $0.5 billion to $1.1 billion per year. This problem is particularly evident during economic downturns, when demands for social services are even higher, but fewer resources from the Districtís economically sensitive taxes are available to meet program needs.

Impact on FY 2006 and Beyond

It is important to note the impact of the proposals in this budget submission on the subsequent years of the multi-year plan. The first is that virtually all projected subsequent year revenue increases will need to be dedicated to meeting baseline costs. Any flexibility to fund new program initiatives will have to come from corresponding program reductions elsewhere or additional revenue enhancements. Second, the proposal assumes that the provisions of the Tax Parity Act are further deferred for two years, so that tax reductions would resume in FY 2008 rather than FY 2006. Third, the set-aside for the tobacco trust fund has been eliminated and the funds will continue to be used to cover operating expenses.

While I am committed to protecting the fiscal integrity of the District at all costs, I want to emphasize what I believe are some of the effects of the Districtís long-term fiscal structural imbalance. Due to the structural imbalance, the District is forced to tax its residents and businesses at higher tax rates than the surrounding jurisdictions just to provide basic-level services. As a result, attempts to reduce the tax burden in the District must be delayed, so that we can continue to finance policy priorities and government operations, or essential services will have to be cut to balance the budget in the out years.

As the following charts illustrate, if the District were to proceed with Tax Parity and funding of the Tobacco Trust Fund per current law, expenditures would significantly exceed revenue not just in FY 2005, but for the foreseeable future. By suspending Tax Parity and the Tobacco Trust Fund, the District is able to maintain a balanced budget. Again, these choices are not easy, but the structural imbalance forces us to make these and other difficult choices.

Chart 1: Projected Revenues and Expenditures FY 2005-2008 including Tax Parity and Funding the Tobacco Trust Fund

Without Suspension of Tax Parity and Tobacco Contributions

 

Chart 2: Projected Revenues and Expenditures FY 2005-2008 without Tax Parity and not Funding the Tobacco Trust Fund

With Suspension of Tax Parity and Tobacco Contributions

 

The Districtís FY 2005-2010 Capital Improvement Plan (CIP)

The proposed FY 2005 capital budget is $556 million, and the six-year total budget is $1.96 billion. The FY 2005 ĖFY 2010 local CIP proposes an increase in funding of $824 million over the next six fiscal years for 97 ongoing projects and 114 new projects, with a rescission of $418 million. The net increase of funding is $406 million. D.C. Public Schools constitutes the majority of the planned expenditures, and a significant portion of the funding also goes to the Washington Metropolitan Area Transit Authority and the Office of the Chief Technology Officer. This budget proposes $389 million in General Obligation Bond funding, $101 million in reallocated General Obligation Bond proceeds, $37 million in Rights of Way funding, $19.5 million in Equipment leases, $5 million in sales of assets, and $3.5 million in other grants.

Performance-Based Budgeting

This budget also continues our progress in implementing performance-based budgeting (PBB), increasing the total number of agencies transitioned to 57. Under PBB there is a clear relationship between the funding agencies receive, the programs they operate, and the results that they must achieve. Agency narratives have been restructured to better emphasize this relationship. In addition, we have begun the process of developing program benchmarks to supplement the program information in the budget documents. The benchmarks will assist all District officials, as well as the public, to more clearly assess the value of the Districtís programs and determine where opportunities for improvement exist.

While the District continues to face fiscal challenges, I know that the leadership provided by the Mayor and the Council, along with the hard work of the Office of Budget and Planning and others in the Office of the Chief Financial Officer, allowed us to produce a balanced budget for FY 2005. As a result, I am certifying that the FY 2005 Budget and Financial Plan, as proposed, is balanced for FY 2005 and beyond.

I look forward to continuing to work with the Mayor and the Council during the forthcoming budget deliberations.

FY 2005 - FY 2008 Proposed Budget and Financial Plan: General Fund
($ thousands)

  Revenues FY 2003
Actual
FY 2004
Approved
FY 2004
Adjusted
FY 2005
Proposed
FY 2006
Projected
FY 2007
Projected
FY 2008
Projected
1 Taxes 3,293,374 3,339,913 3,441,217 3,628,730 3,822,365 3,978,086 4,122,775
2 General Purpose Non-Tax Revenues 315,780 289,201 286,672 292,447 284,699 289,940 286,290
3 Special Purpose (O-type) Revenues 164,125 191,943 191,943 208,624 212,023 215,152 218,448
4 Transfer from Lottery 72,050 70,200 70,200 71,100 71,100 71,100 71,100
5 General Fund Revenues 3,845,329 3,891,257 3,990,032 4,200,901 4,390,187 4,554,278 4,698,613
6 Fund Balance Use 21,527 149,093 182,018 189,621 9,710 9,710 9,710
7a Revenue Enhancements 0 38,760 0 87,301 127,130 127,687 128,145
7b Suspension of Tax Parity 0 0 0 0 24,000 77,129 117,000
8 Transfer from Federal and Private Resources 0 0 0 6,361 6,502 6,660 6,827
9 Total General Fund Resources 3,866,856 4,079,110 4,172,050 4,484,184 4,557,529 4,775,464 4,960,295
                 
  Expenditures (by Appropriation Title)              
10 Governmental Direction and Support 209,864 226,974 241,074 304,928 286,283 294,922 304,008
11 Economic Development and Regulation 135,234 185,446 187,146 222,456 156,956 161,026 165,333
12 Public Safety and Justice 659,479 735,660 747,060 790,455 814,242 841,114 869,934
13 Public Education System 916,725 990,016 1,018,016 1,057,288 1,085,585 1,112,688 1,141,368
14 Human Support Services 1,262,711 1,109,608 1,137,608 1,235,858 1,277,799 1,328,559 1,382,313
15 Public Works 306,668 321,773 319,373 325,940 333,735 347,218 361,389
16 Financing and Other 322,491 398,855 399,955 468,144 524,243 570,462 608,279
17 Tax Increment Financing (TIF) 0 1,940 1,940 9,710 9,710 9,710 9,710
18 Grant Disallowances 0 57,000 57,000 0 0 0 0
19 Cash Reserve (Budgeted Contingency) 0 50,000 300 50,000 50,000 50,000 50,000
20 Tobacco Trust Fund (Program Funds) 0 0 0 0 2,000 4,000 6,000
21 Tobacco Trust Fund (Investment Funds) 0 0 0 0 0 0 0
22 Operating Costs of Capital and Lease Purchases 0 0 0 0 5,000 10,000 35,000
23 Deposit into the Emergency Reserve Fund (4%) 0 0 0 15,500 3,231 7,366 8,145
24 Deposit into the Contingency Reserve Fund (3%) 0 0 0 2,202 2,241 15,130 6,109
25 Total General Fund Expenditures 3,813,172 4,077,272 4,109,472 4,482,481 4,551,026 4,752,194 4,947,588
26 Operating Margin, Budget Basis 53,684 1,838 62,578 1,703 6,503 23,270 12,707
                 
27 Beginning General Fund Balance 865,328 897,357 897,357 759,857 579,351 571,326 597,092
28 Operating Margin, Budget Basis 53,684 1,838 62,578 1,703 6,503 23,270 12,707
29 Projected GAAP Adjustments (Net) (21,655) (20,000) (20,000) (20,000) (20,000) (20,000) (20,000)
30 Deposits into 4% & 3% Reserve Funds (From Fund Balance) (5,069) (31,609) (31,609) 0 0 0 0
31 Deposits into 4% & 3% Reserve Funds (To Cash Reserves) 5,069 31,609 31,609 17,702 5,472 22,496 14,254
32 Unspent TIF Reserve 0 1,940 1,940 9,710 9,710 9,710 9,710
33 Fund Balance Use 0 (149,093) (182,018) (189,621) (9,710) (9,710) (9,710)
34 Ending General Fund Balance 897,357 732,042 759,857 579,351 571,326 597,092 604,053
                 
  Composition of Fund Balance              
35 Emergency Cash Reserve Balance (4%) 145,029 163,091 163,091 178,591 181,822 189,188 197,333
36 Contingency Cash Reserve Balance (3%) 108,771 122,318 122,318 124,520 126,761 141,891 148,000
37 Fund Balance not in Emergency & Contingency Reserves 643,557 446,633 474,448 276,240 262,743 266,013 258,720
38 Ending General Fund Balance (Line 34) 897,357 732,042 759,857 579,351 571,326 597,092 604,053
 

Local Funds Component of the General Fund Financial Plan
($ thousands)

  Revenues FY 2003
Actual
FY 2004
Approved
FY 2004
Adjusted
FY 2005
Proposed
FY 2006
Projected
FY 2007
Projected
FY 2008
Projected
1 Taxes 3,293,374 3,339,913 3,441,217 3,628,730 3,822,365 3,978,086 4,122,775
2 General Purpose Non-Tax Revenues 315,780 289,201 286,672 292,447 284,699 289,940 286,290
5 General Fund Revenues (Local) 3,681,204 3,699,314 3,798,089 3,992277 4,178,164 4,339,126 4,480,165
6 Fund Balance Use 1,802 96,498 129,423 80,000 9,710 9,710 9,710
7a Revenue Enhancements 0 38,760 0 95,755 133,674 137,382 140,533
7b Suspension of Tax Parity 0 0 0 0 24,000 77,129 117,000
8 Transfer from Federal and Private Resources 0 0 0 6,361 6,502 6,660 6,827
9 Total General Fund Resources (Local) 3,683,006 3,834,572 3,927,512 4,174,393 4,352,050 4,570,007 4,754,235
                 
  Expenditures (by Appropriation Title)              
10 Governmental Direction and Support 199,089 206,824 220924 258,257 265,930 274,061 282,610
11 Economic Development and Regulation 56,520 53,336 55,036 55,584 57,049 58,662 60,362
12 Public Safety and Justice 646,732 716,715 728,115 765,324 795,709 822,067 850,344
13 Public Education System 909,354 962,941 990,941 1,048,316 1,076,455 1,103,331 1,131,773
14 Human Support Services 1,242,888 1,085,277 1,113,277 1,208,418 1,215,384 1,301,392 1,354,354
15 Public Works 293,952 308,029 305,629 299,826 312,173 325,324 339,146
16 Financing and Other 322,491 390,672 391,772 459,554 514,666 565,692 607,977
17 Tax Increment Financing (TIF) 0 1,940 1,940 9,710 9,710 9,710 9,710
18 Grant Disallowances 0 57,000 57,000 0 0 0 0
19 Cash Reserve (Budgeted Contingency) 0 50,000 300 50,000 50,000 50,000 50,000
20 Tobacco Trust Fund (Program Funds) 0 0 0 0 2,000 4,000 6,000
21 Tobacco Trust Fund (Investment Funds) 0 0 0 0 0 0 0
22 Operating Costs of Capital and Lease Purchases 0 0 0 0 5,000 10,000 35,000
23 Deposit into the Emergency Reserve Fund (4%) 0 0 0 15,500 3,231 7,366 8,145
24 Deposit into the Contingency Reserve Fund (3%) 0 0 0 2,202 2,241 15,130 6,109
25 Total General Fund Expenditures 3,671,026 3,832,734 3864934 4172,690 4,345,548 4,546,736 4,741,528
26 Operating Margin, Budget Basis 11,980 1,838 62,578 1,703 6,503 23,270 12,707

Special Purpose Revenue Component of the General Fund Financial Plan
($ thousands)

  Revenues FY 2003
Actual
FY 2004
Approved
FY 2004
Adjusted
FY 2005
Proposed
FY 2006
Projected
FY 2007
Projected
FY 2008
Projected
3 Special Purpose (O-type) Revenues 164,125 191,943 191,943 208,624 212,023 215,152 218,448
5 General Fund Revenues (Special Purpose) 164,125 191,943 191,943 208,624 212,023 215,152 218,448
6 Fund Balance Use 19,725 52,595 52,595 109,621 0 0 0
7a Revenue Enhancements 0 0 0 (8,454) (6,544) (9,695) (12,388)
9 Total General Fund Resources (Special Purpose) 183,850 244,538 244538 309,791 205,479 205,457 206,060
                 
  Expenditures (by Appropriation Title)              
10 Governmental Direction and Support 10,775 20,151 20,151 46,671 20,354 20,860 21,398
11 Economic Development and Regulation 78,714 132,110 132,110 166,873 99,907 102,364 104,972
12 Public Safety and Justice 12,747 18,945 18,945 25,131 18,533 19,047 19,590
13 Public Education System 7,371 27,075 27,075 8,972 9,130 9,356 9,596
14 Human Support Services 19,823 24,330 24,330 27,441 26,415 27,166 27,959
15 Public Works 12,716 13,744 13,744 26,114 21,562 21,894 22,244
16 Financing and Other 0 8,184 8,184 8,590 9,577 4,770 302
25 Total General Fund Expenditures (Special Purpose) 142,146 244,538 244,538 309,791 205,479 205,457 206,060
26 Operating Margin, Budget Basis 41,704 0 0 0 0 0 0

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