Statement of Mayor Anthony A.
Williams
on
FY 2003 Proposed Budget and
Financial Plan
Council of the District of
Columbia
Committee of the Whole
March 20, 2002
Introduction
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:
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
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
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.
Education
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
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. |
