Mayor Anthony A. Williams Releases Proposed FY2003 Budget
March 18, 2002

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GOVERNMENT OF THE DISTRICT OF COLUMBIA
EXECUTIVE OFFICE OF THE MAYOR

Mayor Anthony A. Williams Releases Proposed FY 2003 Budget
Plan Calls for Balanced Budget With Modest Increase in Spending

(Washington, DC) Mayor Anthony A. Williams unveiled his Proposed FY 2003 Budget this morning at a press briefing in One Judiciary Square. Joined by Council Chairman Linda W. Cropp and other members of the DC Council, Williams outlined the major highlights of the $5.629 billion plan. The budget provides for a 3.3% increase in local revenues and a 4.7% increase in spending over the District’s FY 2002 budget.

“The good news for the District of Columbia is that we ended our 2001 fiscal year with a surplus of $76.6 million and a fund balance of $562 million. We will fully fund our congressionally mandated cash reserves by the end of this fiscal year, and because of mid-year corrective measures already underway, we will end the current fiscal year without a deficit,” said Williams.

“Nevertheless,” Williams said, “I have communicated to the public that for next year, we face a budget gap of roughly $200 million. The budget I propose today closes that gap in a responsible and sensible way that will allow us to continue making progress in the areas that are most important to me and to our citizens.”

The key components of the mayor’s proposed budget include spending reductions of slightly over $90 million. It also includes $32 million in tax relief with provisions to reduce the corporate franchise tax and to protect homeowners who have received notices of property assessment increases to a maximum single year adjustment of 25%. The mayor’s plan will defer further reductions in the District income tax rates. “I do not believe that further reductions in the income tax as provided for in the Tax Parity Act of 1999 can be realized in the coming fiscal year. While everyone recognizes the merit of this program the simple truth is we cannot afford to fund these reductions at this time,” Williams added.

“The past year has been a difficult one in so many ways. At the end of 2000, the federal budget looked as though it would contain surpluses for decades to come. Now it is clear that the federal budget could be in a deficit posture as early as Fiscal Year 2003. Almost all states have revenue shortfalls and many face potential deficits. Just last month, the National Governors’ Association identified runaway Medicaid costs as the primary budget problem facing their states. 

“No one could have foreseen the tragic events of September 11, the anthrax crisis we endured here in the Washington area, or the full impact of the lingering national recession. No one predicted the loss of use of Reagan National Airport and the devastation it brought to our tourist-dependent businesses. But nonetheless, these things happened, and we must deal with the realities now before us,” the mayor said. 

There will be some new spending in the budget, specifically in education and wages for employees. The budget will include more than $80 million in strategic enhancements such as $30 million for public schools, more than $22 million in priorities identified by the council, and several million for neighborhood priorities identified by residents through the Strategic Neighborhood Action Plans (SNAPS).

“As we approach the challenges facing us at the advent of this budget process, let’s not forget how much we have already achieved. We have reduced the full-time workforce of this city by roughly 12,000 employees in the past 10 years. We have revitalized our revenue and tax collection systems that were largely dysfunctional just a few years ago. We have made enormous improvements in agencies such as DMV, Parks and Recreation, and Transportation (to name just a few). We have transformed the health care system for the District, replacing a poorly managed independent corporation with a full service health care program that is cost efficient and responsive. 

“We have taken agency after agency out of receivership and brought them back under our control with competent management and dramatic service improvements. We have set in place performance-based management programs and improved service delivery to our citizens with a level of success no one thought could be achieved just a few short years ago. And we have done all this with five successive balanced budgets.

“While we will clearly face some challenges in the months ahead, we need to recognize that the budget problems we face today are entirely manageable. I am confident that a majority of the council will agree with the fundamental decisions that we propose here today because we all recognize that our future lies in sustained economic development, improved schools, and vibrant communities,” Mayor Williams concluded.

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Mayor's Talking Points
on
FY 2003 Budget Proposal

March 18, 2002

Introduction

• Earlier this month at Dunbar Senior High School, I laid out a vision for the future of our City. I spoke then about some of the accomplishments we have made as a city over the past three years to improve the operations of our government. I made specific mention of the challenges we face going forward..:. particularly in the areas of special education, Medicaid, and schools.
• The past year has been a difficult one in so many ways. At the end of 2000, the federal budget looked as though it would contain surpluses for decades to come. Now it is clear that the federal budget could be in a deficit posture as early as Fiscal Year 2003. Almost all states have revenue shortfalls and many face potential deficits. Just last month, the National Governors' Association identified runaway Medicaid costs as the primary budget problem facing their states.
• No one could have foreseen the tragic events of September 11th, the anthrax crisis we endured here in the Washington area, or the full impact of the lingering national recession. No one predicted the loss of use of Reagan National Airport and the devastation it brought to our tourist-dependent businesses. But nonetheless, these things happened and we must deal with the realities now before us.
• The good news for the District of Columbia is that we ended our 2001 fiscal year with a surplus of 77 million dollars and a fund balance of 562 million dollars. We will fully fund our mandated 250 million dollar cash reserve by the end of this fiscal year. And - because of mid-year corrective measures I'm proposing to the Council - we will end the current fiscal year without a deficit. Compared to many of our neighboring jurisdictions, we are in an enviable position.
• I have communicated to the public that for next year, we face a budget gap of roughly $200 million. The budget I propose today closes that gap in a responsible and sensible way that will allow us to continue making progress in the areas that are most important to me and to our citizens.
• As we approach the challenges facing us at the advent of this budget process let's not forget how much we have already achieved. We have reduced the full-time workforce of this city by roughly 12,000 employees in the past 10 years. We have revitalized our revenue and tax collection systems that were largely dysfunctional just a few years ago. We have made enormous improvements in agencies such as DMV, Parks and Recreation, OCTO, and Transportation (to name a few). We have transformed the health care system for the District replacing a poorly managed independent corporation with a full service health care program that is cost efficient and responsive.
• We have taken agency after agency out of receivership and brought them back under our control with competent management and dramatic service improvements. We have set in place performance-based management programs and improved service delivery to our citizens with a level of success no one thought could be achieved just a few short years ago. And we have done all this with five successive balanced budgets.
• I do not believe that further reductions in the income tax as provided for in the Tax Parity Act of 1999 can be realized in the coming fiscal year. While everyone recognizes the merit of this program the simple truth is we cannot afford to fund these reductions at this time. We _ will need to devote the revenues derived from the tobacco settlements to general fund revenues for the near future.
• While we will clearly face some challenges in the months ahead, we need to recognize that the budget problems we face today are entirely manageable. I am confident that a majority of the Council will agree with the fundamental decisions that we propose here today because we all recognize that our future lies in sustained economic development, improved schools, and vibrant communities. As always, I welcome their input in this process and I pledge the full cooperation of those in the mayor's office to help them in their review of this year's budget. We can and will work together to deliver a responsible and balanced budget to the Congress.
• At this time I want to outline some of the details and highlights of the proposed FY '03 budget:
• To start, we need to discuss how my budget closes the gap between revenues and expenditures. It does so by finding the right balance in three critical areas:
  1. Controlling government spending.
  2. Investing in neighborhoods and key city services. 
  3. Postponing some new tax cuts until we can afford them, while providing strategic relief in a few critical areas.
• I'll now go into a little detail for each of these areas

Controlling Government Spending

• For FY03, I am proposing a budget of $5.6 billion. Of this amount, $3.7 billion is our local funds portion, which comes from local revenues. This is the portion over which we have the most control. But it's important to note that even of that $3.7 billion, the CFO estimates only $1.2 billion is truly discretionary. The rest is already committed by statute or formula.
• From the FY02 approved budget, local revenues have increased by 3.3% and expenditures have risen by 4.7%. In looking at this growth, there a two important lessons that require our immediate attention:
  1. We're still feeling the impact of the recession and September 11th, and
  2. A few key cost drivers continue to drive our expenditure growth in a way that must be, and will be controlled.
• This is an important point, because some have raised the concern that there is runaway spending across the District government under my administration. As I've discussed before, actual spending over recent years has grown around 10% each year, but it's important to note that this growth is largely driven by four agencies:
  • DCPS
  • Charter Schools
  • PBC (and the transition costs)
  • Mental Health
• And these four agencies grew around 29% each year. Meanwhile the rest of the government's spending grew on average of 2.8% annually. Chart 1 shows this comparison. 

CHART 1

Historical Expenditure Growth
FY 2000 and FY 2001

• That's the spending picture. When you look at the size of the government workforce, there is also an important lesson. Some will tell you that I as CFO was good at reducing the size of the workforce, but as Mayor I am all about fattening it up.
• As you'll see in CHART 2, the size of the government decreased dramatically over the past 10 years. The decrease began during the financial crisis of the early 1990s, and continued decreasing during my time as CFO. During my years as Mayor, the reduction of the executive branch has continued decreasing, except for the additional investment we have made in the schools.

CHART 2

Historical Increase and Decrease in Size of DC Government

• So as we go ahead, the big concern is not so much focused on runaway spending across the government. The real focus is on the major drivers of our cost increases, which are special education and Medicaid. The question now is how are we going to tackle them? Let's start with Medicaid.
• The District is wrestling with Medicaid for the same reasons as other states: rising health care costs, increased enrollment, and the challenges of cost containment. In addition, we are dealing with the legacy of years and years of operational neglect. What does that mean? We have systems in agencies that can't track patients' eligibility and treatment, so when it comes time to bill the federal government we can't properly document our claims. We also have a whole host of services we deliver that are eligible for Medicaid reimbursement, that we're not even attempting to submit.
• To address this issue, we are going to focus our resources in the same way we focused on solving the problems with receiverships. I am going to appoint a Director of Medicaid Reform to coordinate the very complex functions in agency programs that are needed to bring this issue under control. As a result, we expect to see at least $23 million in savings by the beginning of FY05.
• Until those savings are achieved, my budget proposes to use the Tobacco securitization funds to cover these health-related cost increases. Initially, we wanted to use these tobacco funds for new health programs and investments, but given that these Medicaid cost increases are in part due to expansion of health services, I think it is reasonable to use them for a limited time.
• I am submitting legislation to the Council, however, that requires the agencies running Medicaid programs to submit a plan this year for how they will create $25 million in savings by FY 2005 so that this funding may be returned to the Tobacco Trust Fund for its original purpose.
• Now, how are we going to control the other major cost driver, Special Education?
• We all know the issue with special education. DCPS has allowed its operations to decline to the extent that it has very limited capacity to provide services locally, so the courts make them send kids to expensive out-of-town schools, and provide transportation, which ends up sending costs through the roof.
• How will we address it? In the same way that we've tackled the receiverships and other crises, we will focus the highest level of this administrations resources on fixing this problem, in partnership, of course, with DCPS and with the Council. Similar to Medicaid, we expect to see another $27 million in annual savings by the beginning of FY05, and DCPS must submit a cost containment plan by the end of this year.
• There is consensus that a task force is needed to muster all the energy and cooperation needed to achieve these savings and to monitor implementation of this savings plan. Does this need for a task force mean there is a lack of confidence in the Board of Education or the Superintendent? Absolutely not. Does it mean that responsibility for special education will become scattered among government entities? Absolutely not.
• It does mean, however, that the notion of one government has never been more important than now, and DCPS, the Mayor, the Council, and the CFO must work together to solve the problems associated with special education.
• So our discussion has covered the two largest cost drivers, what about cost containment in the rest of the budget?
• Last week McKinsey and Company issued a report on the District's structural imbalance. In that report they looked at reasons why some may claim the structural imbalance is not real, and one such reason was that there are more efficiencies to be gained. Ultimately, they conclude that even though there are inefficiencies, solving them will not make the structural balance go away.
• I absolutely agree that the District is not yet a lean organization. Like any government there are still operations to be fixed, and efficiencies to be gained.
• That is why I produced over $30 million in spending reductions two years ago, reducing hundreds of positions from the payroll.
• And going forward, my budget proposal includes strategic spending reductions across the government in order to balance the FY 2003 budget and make resources available for critical neighborhood priorities.
• When the CFO established the baseline budget for FY 2003, I challenged my deputy mayors to review that baseline and identify opportunities to reduce costs. These reductions could come through scaling back lower priority programs, by finding other revenue sources such as federal grants, or by deferring spending that we can not afford at this time. At the end of the day, this effort yielded $90 million in operating cost reductions and $250 million in capital project reductions across the government.
• Here's a few highlights of these cost reductions:
  • $7.4 million in cost reductions in health care and Medicaid funds
  • $11.4 million of the $23 million that we were going to transfer to the Housing Production Trust Fund. This leaves only the original $11 million transfer that we committed to in the Housing Bill when it was passed by the Council in January.
  • $1.4 million for Department of Corrections halfway house services that we will no longer find.
  • $4.2 million in street light costs that should be moved to the Local Street Maintenance find, which means we'll pave fewer streets than hoped.
  • $6 million in lower priority personnel costs from agencies across the government
  • $34 million in lower priority non-personnel services costs from agencies across the government
  • $12 million in debt service savings resulting from canceling or postponing capital projects. This saving results from cutting out previously approved costs for major projects , including our plans for a Unified Communications Center and our Forensic Lab. It's not that the need for these critical facilities has gone down. It's that we can't afford to borrow the money to build them. We hope the Federal government will help us with this problem.
  • In addition, you should note that this $90 million in cost reductions does not include the $35 million in operational savings at DCPS in FY 2002 which are to be carried over into FY 2003.
  • Now all of these savings combined will not reach the $150 million target identified by McKinsey as a goal over five years, but it certainly moves us well down that road. To get the rest of the way, I will review their report and continue identifying every opportunity to reduce costs in this government while still protecting critical investments in neighborhoods and city services.
  • So having discussed cost reduction, let's move on to the investments made in my proposed budget.

Investing in Neighborhood Improvements and Key City Services.

• At the same time that I am controlling spending this government must continue to invest in critical services. The advantage of controlling costs is that those measures help balance your budget, and they free up resources to invest in other priorities.
• These investments in this budget were not arbitrarily invented. They are the priorities articulated by thousands of citizens in the Citizen Summits we've held. They also support the top priorities of the Strategic Neighborhood Action Plans developed by each of the 39 neighborhood clusters across the city.
• Here are some highlights of service enhancements funded in this budget.
• Education
  • A $122 million increase for DCPS. Now, most this amount goes to offset the special education spending problems that we've talked about. The good news is, however, that the remainder will support increased funds for the mainstream classroom, including funding for my commitment to a 20% pay increase for District teachers over the next 3 years.
  • A $3.2 million increase for UDC to enhance post-secondary education at our only public university.
  • A $1.5 million increase for college financial aid as a down payment on my vision for someday guaranteeing a college education for all District children.
  • And this budget also includes the $17 million federal contribution for our Tuition Assistance Program, for which we have already elicited a commitment from the President in his proposed budget.
• Safety Net
  • $5 million for the Children and Youth Investment Trust, which provides a wide array child care and other support services for our citizens
  • A $21 million increase for Child and Family Services, which reflects our commitment to bringing up to standard the services for our most vulnerable children. This also reflects our commitment to demonstrating that this city does not need the courts, to manage our services, that we can provide the necessary resources and manage them well ourselves.
  • And I want to add a few contextual points here. First, here is an example of how a spreadsheet can tell an exciting story. For the first time in many years, the "Receiverships" portion of our budget table shows nothing but zeroes, because we have now returned the last of them to District control.
  • A second point is that in terms of the safety net, we have actually budgeted an additional reserve of $10 million to protect the District in case our Medicaid reform efforts fail to yield all of the revenues that we are counting on. When the economy was booming we could count on lots of extra revenues to compensate where Medicaid collections fell short. This year we expect much tighter margins, so we are reserving to ensure that there we can cover shortfalls and balance our budget. And this reserve comes after our squeezing out of agency budgets predicted revenues from Medicaid that have not been achieved in the past.
  • A final point is this, you sometimes get credit for enhancing budgets, and sometimes for reducing them, but rarely for maintaining them. Well in a year when sacrifices have been made across the government, I want to note that we have protected the budgets for our Seniors, for our Latino and Asian communities, and for our Veterans Affairs office, and for other priority areas that need our continued support.
• Neighborhood Quality of Life
  • This is perhaps the most exciting part of my proposed budget. Over the past year we have citizens in the District's 39 neighborhood clusters come together and define specific priorities for their communities. Based on their lists, my cabinet worked very hard to reorient the thinking of their agencies from that of a bureaucracy to that of a client-focused operation. It was very challenging, but the results are great.
  • In your packet you will see a packet of Citizen Budget Worksheets, which reflect for each of these neighborhood clusters the top priority commitments that are funded in my budget proposal. I think these worksheets brings the District to a level of civic engagement and government accountability that rivals any city in the nation, and I am very proud of this work.
• Many of these commitments you see were made by reallocating funds within agency budgets. Additional resources are also added in the following areas.
  • A $7.2 m increase for Public Works to enhance fleet maintenance, and to support better parking enforcement (particularly in neighborhoods where residents can't park near their homes or leave their driveways), and other enhancements.
  • A $1.5 m increase for Police civilianization, to get more officers patrolling the streets.
  • A $2 m increase for Parks and Recreation to increase summer jobs funding and provide operating costs for new recreation centers.
  • A $9 m increase for WMATA to enhance Metro services
• Making Government Work
  • Agency by agency we are continuing to implement performance-based budgeting, as you can see in your budget book. This will help us better tie dollars to programs so that the public can understand where changes are happening.
  • We are improving customer service and responsiveness by better coordinating the CityWide Call Center, the Testers Program, and the our Correspondence functions.
  • We are establishing agency-based risk-mitigation programs.
  • And we are modernizing the entire administrative services system to integrate our personnel, procurement, facility management, and other administrative processes.
• Anacostia Waterfront
  • We are beefing up the environmental crimes unit at MPD.
  • We are adding two inspectors to enhance our ability to assess environmental impacts of proposed projects across the city.
  • In addition, we are working with the Congress on fund two major initiatives.
  • The first is a $50 million Combined Sewer Overflow project that will put an end to the flow of raw sewage into the river during heavy rainstorms. The Water and Sewer Authority has already guaranteed matching funds of $50 million for this project, which makes us even more hopeful about a contribution from Congress.
  • The second is also something we're working with Congress to fund. It is $15 million to construct the Kenilworth Parkside Athletic Complex.
• Through these investments, we will be able to deliver on the most critical priorities of citizens. Having highlighted these investments, I will now discuss of how tax cuts are dealt with in this budget.

Tax Relief

• As leaders across the nation are finding, economic booms often breed tax cuts that states later find they cannot afford. Nonetheless, I agree with the Council that we should do what we can to reduce the tax burden for citizens and businesses.
• This must be done, however, within the parameters of neighborhood investment needs, our structural imbalance, and current economic realities.
• My proposed budget takes a balanced approach to tax relief. This budget suspends new personal income tax cuts until the District can accommodate them in a responsible manner.
• To ensure that the unimplemented reductions in the Tax Parity Act can resume when they become affordable, I am proposing a prospective trigger mechanism that will allow suspended tax cuts to resume when economic conditions become more favorable.
• This budget also provides funding to support the planned reduction in the franchise tax. This reduction should proceed because it benefits small businesses and other companies that are the engine of our economic recovery, and who have had no tax cuts thus far under the Tax Parity program.
• In addition, this budget supports the property tax cap that limits to 25% increases in property taxes. This funding will ensure that residents will not be discouraged from living in the District by escalating property taxes. As a side note on this issue, however, I should also note that the full cuts in tax rates for property have already gone into effect bringing our rates more in line with those of the metropolitan area.
• As a final note on taxes, my proposed budget includes a measure through which the District will join several other states by suspending the federally-initiated phase-out our local estate tax. This measure will allow the District to continue collecting an estate tax while the federal government phases out it's portion of this tax. Almost all estates will continue to pay less because of the federal phase-out of this tax, but my proposal will allow the District to continue to maintain this revenue until we reassess the our tax structure relative to our structural imbalance and other priorities.
• By suspending these tax cuts, and through the cost reductions detailed above, the revenues and expenditures of the District are in balance - and not just for FY03, but for years to come, as you'll see in CHART 3.

CHART 3

Balance of Revenues and Expenditures in
Mayors Proposed Budget and Financial Plan

• Let's not forget, though, that this balance comes at a great cost. We have limited service improvements, neighborhood enhancements, and capital investments. We have put off critical tax relief for our citizens. And we've had to use tobacco settlement funds to cover existing health care needs, rather than investing them in tackling other health care problems.
• Citizens of the District have to bear the brunt of all of these sacrifices, and why? The major reason why we have to sacrifice so much to balance our revenues and expenditures is because the Congress places restrictions on our revenue collection that no other state must bear.

Structural Imbalance

• The issue is simple. The District has a structural imbalance between its revenues and expenditures, and this imbalance is largely caused by the federal government's restriction on our ability to tax income earned here.
• Every state in the Union has the ability to tax income earned there, and that is an important part of what makes up a state's budget. Now this doesn't mean that we do not have major inefficiencies that we need to correct. Of course we do. What it does mean, however, is that until we receive some resolution with the federal government on this issue, we cannot provide the full service delivery and tax relief that our citizens deserve.
• We've been fighting for this cause for years now, but I honestly believe that this year holds real promise to see results. We have a major allies in Senators Landrieu, Senator Durbin, Congresswoman Morella and Congressman Knollenberg. The GAO and Congressional Research Service are studying our structural imbalance as we speak, and are preparing to issue their reports in the spring. A Congressional delegation just toured other major capital cities to assess their relationships with the national government. This is a time of real significant movement, and it's coming to pass because we have demonstrated that we can govern effectively.
• Congresswoman Eleanor Holmes Norton has introduced legislation to provide this compensation. The best thing that local leadership can do to support passage of this bill is to demonstrate to Congress our ability to make the sacrifices needed in order to maintain fiscal balance - as demonstrated in my proposed budget. Therefore, I'm really looking forward to a constructive and professional review process with the Council as we work to submit this budget to Congress.
• I do want to note that I appreciate all of the input and feedback that I have received from Chairman Cropp and the Council as I have developed this budget proposal. I have learned that consultation and collaboration up front always yields a better product in the end, and I have worked hard to make all the consultations possible as I've crafted this budget, so I want to say thank you to Mrs. Cropp and the other members present for all of your input and good counsel.
• And with that, I'll open this up for questions.