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Press release and Mayor’s talking points on budgetBack to Mayor’s Office main page

Mayor Anthony A. Williams
Statement to the Committee of the Whole on
FY 2003 Proposed Budget and Financial Plan
March 20, 2003




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Statement of Mayor Anthony A. Williams


FY 2003 Proposed Budget and Financial Plan

Council of the District of Columbia
Committee of the Whole

March 20, 2002


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 and a fund balance of $562 million. We will fully fund our mandated $250 million 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.

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.

We can do so by finding the right balance in three critical areas:

  • Controlling government spending
  • Investing in neighborhoods and key city services
  • Bestowing targeted tax relief while postponing other cuts until we can afford them.

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. 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 are two important lessons that require our immediate attention:

  • We're still feeling the impact of the recession and September 11th

  • A few key cost drivers continue to drive our expenditure growth in a way that must be, and will be controlled.

Actual spending over recent years has grown around 10% in 0 1 and 02, but it's important to note that this growth is largely driven by four agencies: DCPS, Charter Schools, PBC (and the transition costs), and 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.

Historical Expenditure Growth
FY 2000 and FY 2001

Historical Expenditure Growth, FY 2000 and FY 2001 chart

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, except for the additional investment we have made in the schools.

Historical Increase and Decrease in Size of DC Government

Historical increase and decrease in size of DC government chart

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.

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 settlement 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 $23 million in savings by FY 2005 so that this funding may be returned to the Tobacco Trust Fund for its original purpose.

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.

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.

When the CFO established the baseline budget for FY 2003, I challenged my deputy mayors to x 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. 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. 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.

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.

This transparency has led 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.

$7.2m 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.

$1.5m increase for Police civilianization, to get more officers patrolling the streets.

$2m increase for Parks and Recreation to increase summer jobs finding and provide operating costs for new recreation centers.

$9m increase for WMATA to enhance Metro services.


More than $30 million in new finding will be distributed via the Weighted Student Formula to mainstream classroom and teacher salaries.

$3.2 million increase for UDC to enhance post-secondary education at our only public university.

$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.

Safety Net

$5 million for the Children and Youth Investment Trust, which provides a wide array of child care and other support services for our citizens

$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.

Importantly, 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.

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 City-Wide 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.

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 Tax Parity. In addition, this budget supports the property tax cap that limits to 25% increases in property taxes, providing a cushion to homeowners experiencing "sticker shock.".

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 its 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 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.

Balance of Revenues and Expenditures in Mayor’s Proposed Budget and Financial Plan

Balance of revenue and expenditures graph

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 key congressional leadership positions. The GAO and Congressional Research Service are studying our structural imbalance as we speak, and are preparing to issue their reports in the spring. 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.

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 this a consensus budget.

And with that, I am happy to answer any questions you may have.

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