D.C. REVITALIZATION*
Update: Spring 1999
The League of Women Voters of the National Capital Area

Overview

The District of Columbia's financial and political revitalization made significant in the second half of 1998 and the first quarter of 1999. Although the recent dramatic improvements are encouraging, further substantial efforts will be required to ensure a healthy future for the District.

The roots of the District's financial crisis were both (a) the management failures of local government officials and (b) structural problems stemming from the fact that the District of Columbia is a one-of-a-kind political and financial entity. This update, prepared in April 1999, presents management reform highlights, and it reviews the impact of the 1997 Congressional Revitalization Legislation on the District's systemic budget problems. It also discusses reestablishing the federal payment in order to ensure an adequate revenue base for the District. Finally, a discussion of improving the relationship between the District of Columbia and the federal government focuses on the District's budget process and on voting representation for District citizens in the U.S. Congress.

Management Reform

CONGRESSIONALLY MANDATED REFORMS

The District government's need for management reform was widely recognized by members of Congress, District officials, citizens throughout the city, and many people from suburban Washington. The Revitalization Act (National Capital Revitalization and Self Government Act of 1997) directed the District of Columbia Financial Responsibility and Management Assistance Authority, or Control Board, to establish management reform plans for the nine major District government agencies and critical functions such as procurement, that involve all agencies. In FY1998, the District spent $289 million on management reform projects. Two-thirds was spent for such long term benefits as information systems and school repairs. The impact of the investment in information systems is expected to be significant, but it will be at least several months before it is apparent.

The Control Board's FY1998 Report on Service Improvements and Management Reform lists four key management reform goals for the city and examples of success in meeting these goals:

• Improve Customer Service — Commuters have no doubt noticed some of the 40,000 repaired potholes. Also, for D.C. residents, motor vehicle services were stream-lined by a queuing system that reduces customer wait time. Similarly, vehicle inspection waiting time was reduced from one hour to 15 minutes and achieved a 97% customer-approval rating.
• Reform the Way We Do Business — Technology upgrades were key to success on this goal. New phones for D.C. employees resulted in a 50% savings in voice-mail costs. D.C. suppliers were paid a total of $52 million, as a three-year invoice backlog was eliminated. Moreover, new procedures corrected unjustified supplier payments that would have cost $4 million.
• Be Financially Strong — The District's FY1997 financial report produced a clean audit for the first time in three years and an upgraded investment rating. The replacement of antiquated parking meters increased meter revenue from $200 thousand to over $1 million per month. (Not included in the Control Board report but worthy of note is the improvement in tax collections which resulted in an increase in revenues of approximately $40 million.)

• Invest in Workforce — The report emphasizes a variety of training needs, including computer training for system administrators. Mayor Anthony Williams' proposed FY2000 budget requests $6.1 million in new spending to provide city workers with better training.

DISTRICT-INITIATED REFORMS

A major reason Anthony Williams is the District's new mayor is that his reform of the city's financial operation inspired a group of D.C. citizens to persuade him to be a candidate. At least one activist was motivated by receiving the 1997 D.C. income-tax refund before the one from the IRS. Shortly after the Mayor took office, he announced a series of reforms that he would achieve during his first six months in office, and he promised achievements in eight areas by the end of March. According to a March 30 assessment by The Washington Post, five of the eight end-of-March deadlines were met. One of the achieved goals was the establishing of extended service hours, so that residents with full-time jobs can register their cars, obtain marriage licenses, and conduct other government related business without taking time off from work. A goal that has not yet been met is a single phone number for the D.C. Government. Eventually, callers will be able to dial one number and be connected to the appropriate agency.

While his "quick hits" boost morale, the Mayor's proposed FY2000 budget signals investment in the systemic improvements needed to produce a better quality of life for D.C. residents. For example, the proposed budget includes a 5% pay raise for all teachers, principals, and school staff. Key spending increases will enable the city to better enforce its laws and respond to proposals from developers for renovation or new construction projects.

Impact of Revitalization Legislation on Reducing Expenditures

PUBLIC SAFETY AND JUSTICE

• Department of Corrections — Under the Revitalization Act, the Federal Bureau of Prisons will complete the process of assuming responsibility for the District's sentenced adult felons by October 1,2001. The budgetary impact, beginning with FY1998, was to relieve the District of the cost of adult felons.
• Court System, Pretrial Services, Parole and Public Defender — The federal government has assumed responsibility for funding the District's Superior and Appeals Courts and paying for the administrative agency that provides personnel and financial operations to the court. The federal government will also assume responsibility for parole supervision and both pretrial and public defender services. The total public safety and justice savings resulting from revitalization legislation in FY1998 were approximately $241 million.
• Medicaid — Title IV of the Balanced Budget Act of 1997 increases the federal match from 50 to 70%, but it is still well below the maximum federal match of 83%. The savings to the District from the higher Medicaid match were approximately $136 million in FY1998.

• Unfunded Pension Liability — The Revitalization Act transferred to the federal government the pension obligations for current and retired District police, firefighters, and teachers through June 30,1997, as well as complete responsibility for the pensions of District judges. Those obligations included a ballooning pension liability incurred before the D.C. home-rule government was established. Federal assumption of those obligations was significant because it resulted in a saving of $250 million for FY1998. Moreover, it dramatically improved the long-term fiscal health of the District by removing a burgeoning debt that made it difficult and expensive for the city to borrow money — a debt that would have reached $7 billion by 2004.

The ballooning pension liability was not the result of mismanagement. The Revitalization Act, in fact, acknowledged that the District pension board fully met its obligations and was in no way delinquent.

Remaining Unique Financial Obligations

Since it is not part of a state, the District of Columbia has to provide state-type services for its residents. All other U.S. cities receive state revenue that, for the most part, pays for health and welfare services and partially funds public education.

MEDICAID AND OTHER HEALTH COSTS

The District still pays a higher percentage (30%) of the cost of Medicaid for its citizens than any other U.S. city. New York City, for example, pays only 25% of its total Medicaid costs - 25 % being paid by New York state and 50% by the federal government.

The District also spends nearly $200 million annually for mental health and substance abuse services, and it subsidizes D.C. General, its public hospital. D.C.'s overall health care costs make up more than 15% of its total general-fund expenditures, over half of which are paid with local funds. In contrast Baltimore spends about 7.8% of its annual budget on health care services, and city revenues pay only 12% of the cost.

EDUCATION AND OTHER STATE FUNCTIONS

The District of Columbia is the only urban area that must rely almost entirely on local tax revenues to fund elementary and secondary public education. Moreover, unlike Baltimore, New York, and most other cities, it must also provide all the funding for the University of the District of Columbia and its law school. By contrast, Baltimore City Community College has been fully funded by Maryland since 1990.

The District is still responsible, without federal compensation, for certain state-like functions, such as foster care ($60 million in 1995); Temporary Assistance for Needy Families, which replaced Aid for Dependent Children ($62.8 million in 1995); and Developmental Disabilities ($27 million in 1995).

SERVICES NEEDED TO SUPPORT THE FEDERAL PRESENCE IN THE CITY

Because the District is also the nation's capital, it must provide services to the federal government and the organizations and companies that locate here in order to do business with the federal government, even though many such groups are exempt from (or pay reduced) taxes. The services include traffic control, police and fire protection, and road maintenance. Increased demand for the services is often created by national celebrations and demonstrations.

Impact of Revitalization Legislation on Revenue

ELIMINATION OF FEDERAL PAYMENT

The federal government has provided revenue for the District of Columbia throughout most of the District's history. The federal payment in FY1997 was $060 million, and in FY1998, it dropped to $190 million and was renamed "federal contribution." The District's budget for FYl999 includes no federal payment or contribution. It does, however, include $127 million appropriated by Congress for 10 specific purposes, including management reform, fire fighter and southwest waterfront improvements.

INCREASED BURDEN ON LOCAL TAX BASE

D.C.'s capacity to tax is severely limited by Congressional action and by the fact that the District is the nation's capital. More than 50% of D.C.'s land is exempt from property taxes. This prime land includes foreign embassies, national offices of certain organizations, museums, and government properties. Moreover, there are numerous exemptions from sales tax and business tax. The greatest loss, however, is in personal income tax. Congress prohibits the city from taxing income earned in the District by non-residents, although such an option is available to every state level taxing authority and, in fact, is routinely used to raise revenue for urban cities. Two of every three dollars earned in the city are earned by non-residents.

The city's limited ability to tax puts an inequitable burden on the individuals and businesses who do pay taxes to the District. According to the analysis of the D.C. Tax Revision Commission, the District is forced to tax at rates that make it difficult to attract and retain residents and businesses. For example, the District's commercial and hotel property tax rates are nearly double those of Arlington, Montgomery, and Prince George's Counties. The District's corporate income tax rate of 9.975% is well above the rates of 7% in Maryland and 6% in Virginia.

The District's individual income tax rate is one of the highest in the country. In her 1997 study, The Orphaned Capital, Carole O'Cleireacain compares 1995 per capita income tax payments. In the District, they were $1,135, while state and local taxes for Baltimore residents totaled $809. O'Cleireacain, a former budget director and finance commissioner of New York City, is a non-resident senior fellow at the Brookings Institution and a consultant for the Control Board. Her October 1998 policy brief for Brookings points out that the elimination of the federal payment makes the District even more dependent on tax revenues. Taxes will carry nearly 60% of the budget in FY1999 compared to 53% in 1997 and 49% in 1993. That same year, tax revenue carried an average of 15% of the budgets for Baltimore, Boston, Cleveland and Seattle, according to a study by McKinsey & Company. And since 1993, the revenue mix for those three cities has not changed significantly.

Maintaining a Balanced D.C. Budget

The current budget picture is positive. FY1997 and 1998 budget surpluses of $186 million and $445 million have eliminated the District's accumulated deficit. The surpluses result largely from higher tax revenues, which stem from more effective collection procedures and the robust economy. The four-year financial plan (FY2000 - FY2003) prepared by the District's Office of Budget and Planning projects an annual 3% growth in expenditures and a 3.14% growth in revenue. The financial plan also includes a significant "extra budget" assumption. Below the bottom line for those years, "federal contributions" are listed for mental health, school construction, and special education. The total proposed extra-budget federal contribution for FY2000 is approximately $220 million.

Prospects for D.C. Sustaining Financial Health While Providing Adequate Services

REVENUE

There are several possible contingencies that could reduce or eliminate the 0.14% margin between revenues and expenditures. A stagnant or declining economy could reduce tax revenue, which accounts for approximately 60% of the city's budget. Tax revenue will also be reduced in FY2000 if the "lift" from improved tax administration is below the projected $24 million. Continued loss of population and commercial enterprises is yet another possible cause of reduced tax revenue. The District's current revenue mix prevents the city from stimulating economic growth by reducing commercial tax rates to make them competitive with suburban rates.

EXPENDITURES

• Medicaid — Medicaid expenditures, which account for approximately 21% of the District's annual budget expenditures, are often difficult to predict and control. The District's four-year financial plan projects a 5% to 6% growth in Medicaid expenditures. However, if it becomes necessary for the District to increase Medicaid spending by more than 6%, the 0.14% margin of revenues over expenditures will be significantly reduced.
• Other Programs and Services — During the 1990s, as a slowing economy and loss of population reduced tax revenues, the District government began to reduce spending in education and health and human services even before the establishment of the Control Board. Analysis by the Fair Budget Coalition of the faith based and social service organizations reveals that, in these areas lacking strong political constituencies, $251.4 million was cut from the city budgets for FY1992 through FY1997. For example, expenditures for the support of people with mental retardation and developmental disabilities were cut 25%; substance abuse treatment, 34%; and mental health services, 42%. Behind the numbers are human tragedies. A March 1999 Washington Post series documented alarming abuse and neglect, which in some cases proved to be fatal, in the publicly-supported, contractor-operated programs and facilities for the mentally retarded. Those programs and facilities are supposed to be monitored by the District's Mental Retardation and Developmental Disabilities Administration. An official from that agency did, in fact, testify at a budget hearing that cutting the agency's budget would reduce its capacity to monitor the quality of the services provided by contractors.

Even though the Mayor's proposed FY2000 budget includes increases in spending for education and health and human services, the funds requested for the support of people with mental retardation and developmental disabilities and for substance abuse treatment are below FY1997 levels.

• Infrastructure — Leaking roofs, faulty plumbing, and other problems resulting from deferred maintenance are typical of D.C. school buildings, police precinct stations, and numerous government office buildings. The historical Wilson Building, which had functioned as the District's city hall for over 100 years, fell into such disrepair that it had to be temporarily vacated. The city was so broke that the only way it could finance the renovation now underway was to first lease over half the space to the General Services Administration.

The city's spending dilemma is revealed in testimony about revenue projections for FY2000 presented by the District's Chief Financial Officer to the Control Board.

Conflicting considerations enter into the revenue estimate. The District's control period will end during FY2001 only if budgets are successfully balanced in FYl999 and FY2000.... These factors mitigate in favor of conservative revenue estimates to protect the long-term goal of home-rule. On the other hand, the District has critical human service, public works, education and other needs that press for budgets based on more generous revenues.

Should D.C. have to choose between protecting home rule and a budget that meets the needs of the city?

Reestablishment of Federal Payment

MORE LIKELY THAN A "COMMUTER TAX"

Washington is the only U.S. city expressly prohibited by law from taxing non-resident income. Had the city been able to collect a 3% income tax from its nonresident workers in 1996, its revenue would have increased 16%.

If the Congressional prohibition against the District taxing non-resident income had been lifted, Maryland and Virginia would probably have reciprocated and levied a 3% tax on the incomes of non-residents working in those states. Maryland would then have had a net revenue loss of about 3% and Virginia a loss of about 2%. Because of the strong opposition of Maryland and Virginia Senators, as well as Congressional Representatives from the greater Washington area, it is highly unlikely that Congress will allow the District to levy a "commuter" or non-resident income tax in the foreseeable future.

FEDERAL-PAYMENT HISTORY

For almost 130 years, the District of Columbia has received compensation directly from Congress. The Home Rule Act of 1973 required the District to submit, as part of its annual budget request, a proposed amount for the federal payment, with supporting documentation on the costs of services provided for the federal government and the revenues unrealized because of the federal presence. Although the District government continued to provide the required costs and documentation, the amount of the payment in any given year was determined by what Congress was willing to appropriate at the time, and it was always less than the documented costs of services provided and revenues unrealized. The annual federal payment during the l990s through FY1997 ranged from $600 million to $660 million. The 1997 revitalization legislation replaced it with a one-time, lower "federal contribution" of $ 190 million for FY1998. The city's FYl999 and 2000 budgets include no federal payment or contribution to the District's general fund.

FEDERAL-PAYMENT FACTORS

Cost of D. C.-Provided Services — The cost of services provided to the federal government is specified in the Home Rule Charter as one of the factors on which the federal payment will be based. The federal government is, in fact, on a very small scale, already paying the District government for services through its participation in the business improvement district in which federal offices are located. The payments are determined by a contract between the General Services Administration (GSA) and the Downtown Business Improvement District.

• Taxes That the District Cannot Levy - The cost of "revenues denied" is also specified in the Home Rule Charter as one of the factors on which the federal payment will be based. An annual payment in lieu of | property taxes can be justified by the fact that federally owned office buildings receive the same services as federally rented and privately owned office buildings. In recommending that the federal government make this annual payment to the city, the D.C. Tax Revision Commission explains:

There are adequate legal and policy precedents because the federal government already makes payments in lieu of taxes in other parts of the country and . . . pays imputed property taxes on the spaces it leases in the District.

Phillip Dearborn, former executive director of the Tax Revision Commission and president of the Greater Washington Research Center, states:

The payments in lieu of taxes would not require a direct annual appropriation to the District. They could come through the GSA building services revolving fund.

The revenues that are unrealized because of the income and sales taxes the District cannot levy can easily be calculated, although the mechanism for collecting a federal payment in lieu of these revenues would have to be established.

• Cost of D.C.-Provided State Services — In The Orphaned Capital, Carole O'Cleireacain recommends that the federal government pay half the cost of state-like functions the city performs.
• Parity With Other U.S. Cities — O'Cleireacain recommends that the federal payment help D.C. achieve parity with other U.S. cities that receive substantial financial support from non-local sources. The state of Maryland, for example, provides 25% of Baltimore's general fund revenue, and that city's combined funding from external sources accounts for approximately 70% of its total budget.

Improving the D.C./Federal Government Relationship

THE BUDGET PROCESS

The way the city's budget is developed and approved is a legacy from pre-home-rule days when there was justification for putting the District's budget through the process required to appropriate money for federal agencies. Today, it is difficult to justify that cumbersome and costly process. Each year, Senate and House Appropriation Sub-committees spend time and resources reviewing and approving the expenditure of funds that come solely from local D.C. taxes. Federal funding of the state functions that the Mayor is requesting for FY2000 will involve other appropriation subcommittees. As Delegate Eleanor Holmes Norton explains:

Requiring the city to present its budget to Congress creates a costly and lengthy 18-22 month budget process which hampers the city's ability to accurately forecast its budgetary requirements, costing the city more in interest and needlessly complicating city government.

The budget process for the cities of Baltimore and Richmond is very different. It is linear, with each step building on the previous one. Neither the federal government nor a state is involved in developing or approving the budgets for these cities.

CONGRESSIONAL VOTING REPRESENTATION FOR D.C. CITIZENS

A number of efforts are underway to make voting representation in the U.S. Congress a reality for District residents. The League of Women Voters of the United States (LWVUS) has made this goal one of the major components of its current national campaign, Making Democracy Work.

On April 19, oral arguments will be presented in two suits filed in the Federal District Court for the District of Columbia. In Alexander v. Daley, the plaintiffs claim that it is unconstitutional for U.S. citizens who live in the District of Columbia to be denied representation in their national legislature; their suit does not seek a specific remedy Plaintiffs in this suit include several members of the League of Women Voters of D.C. The plaintiffs in Adams v. Clinton are suing for statehood, one possible remedy; the D.C. League has no formal or informal involvement in this suit.

A complaint has been presented to the Organization of American States (OAS), charging that, by denying D.C. citizens voting representation in the Congress, the United States is violating the "Declaration of the Rights and Duties of Man." The OAS has held two Committee hearings on this complaint and is making plans for a third.

The Coalition for DC Representation in Congress has recently been formed by the plaintiffs in the two federal cases, the OAS complainants, the LWVUS, the D.C. League, the D.C. Statehood Party, and others. If their efforts to educate and the nation are successful, the District of Columbia will no longer be the only national capital whose citizens are deprived of representation in their national legislature.

Acknowledgements

This background paper was developed by a study committee representing seven of the local Leagues that make up the League of Women Voters of the National Capital Area. It included Nancy Bliss and Katherine Ziffer of Montgomery County; Roland Bowers of Falls Church; Arline Calaby of Howard County; Naomi Glass, Elinor Hart, Elizabeth Martin, Kathryn Schmidt, and Barbara Yeomans of the District of Columbia; Maureen Melton of Fairfax County; and Ann and Wade Gregory and Barbara Sherrill of Arlington County. The committee thanks the District of Columbia Office of the Chief Financial Officer for a special, comprehensive briefing.

Bibliography

Boo, Katherine, "Invisible Lives: D.C.'s Troubled System for the Retarded." The Washington Post, March 14 and 15, 1999, p. 1.

District of Columbia Tax Revision Commission, Taxing Simply, Taxing Fairly. Washington, DC, 1998.

Georgetown Public Policy Institute, Washington, D. C. in Transition: Reinventing Our Nation's Capital: A Summary of the Research and Seminars of the Task Force on District of Columbia Governance. Washington, DC, Georgetown University, 1997.

Government of the District of Columbia, District of Columbia. FY1998 Budget and Financial Plan. Washington, DC, September 1998.

_____, FY1999 Budget and Financial Plan. Washington, DC, June 1998.

_____, Proposed FY2000 Budget and Financial Plan. Washington, DC, March 1999.

_____, Financial Responsibility and Management Assistance Authority, FY1998 Annual Performance Report: A Report on Service Improvements and Management Reforms. Washington, DC, October 1998.

_____, Office of the Chief Financial Officer, Testimony Before the District of Columbia Financial Responsibility and Management Assistance Authority Regarding FY2000 District of Columbia Revenue Estimates. Washington, DC, March, 1999.

_____, Office of the Chief Financial Officer, Fiscal Year 1998 Financial Performance Report. Washington, DC, September 1998.

League of Women Voters of the National Capital Area, The District of Columbia's Financial Crisis: Background Paper. Washington, DC, 1998.

Lipton, Eric, "As D.C. Government Rolls, DMV Stalls." The Washington Post, March 30, 1999. p. B-1.

McKinsey & Company, Reassessing the District of Columbia's Financial Future. Washington, DC, January 1998.

O'Cleireacain, Carol, The Orphaned Capital: Adopting the Right Revenue for the District of Columbia. Washington, DC, Brookings Institution, 1997.

_____, Bolstering D. C. 's Fragile Fiscal Recovery: Policy Brief #36. Washington, DC, Brookings Institution, October 1998.

U.S. Congress, House of Representatives, The Balanced Budget Act of 1997. Washington, DC, 1997.

The District of Columbia Self Government and Reorganization Act of 1973, as Amended or Modified. Washington, DC: U.S. Government Printing Office, 1989.

Consensus Questions

1. Given the District of Columbia's limited capacity to raise revenue, is it realistic to expect the District to be able to achieve and sustain financial health while providing an adequate level of services for the people who live and work in the city?
2. If the District requires more revenue than it can raise, should Congress respond by reestablishing a federal payment?
3. If a federal payment is reestablished, should Congress pass legislation setting forth the factors that will be used to determine an annual, predictable federal payment?
4. If Congress passes legislation setting forth the factors on which an annual, predictable federal payment will be based, what should these factors be?
   1. Cost of services provided by the District to the federal government?
   2. Taxes which the District cannot levy?
   3. Cost of state services provided by the District ?
   4. Parity with other U.S. cities in percentage of revenues raised from local sources?
   5. All of the above?
   6. Other?
5. Should the District of Columbia have the same budget autonomy as other U.S. cities, such as Baltimore and Richmond so long as the District is budgeting only locally raised revenue?

6. Even if the federal payment is reestablished, should the District's budget process more closely resemble the budget processes of other U.S. cities or (as it does now) the budget process for federal agencies?

*A follow-up to The District of Columbia's Financial Crisis: Background Paper, by LWV/NCA, February 1998.