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Back to Mayor’s main pagePress release on FY2000 budgetPress briefing on FY 2000 budgetTestimony on FY 2000 budget

Financial Plan for FY2000
Chapters 1 and 2 of FY2000 budget book
March 15, 1999




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Completing Our Recovery: Financial Plan

Financial Plan Overview
Assessment of Fiscal Health
Summary of Revenue Projections
Summary of Expenditure Projections
Lessons for the Future

The four-year financial plan is a critical tool for ensuring the long-term fiscal health of the District. In the FY 1999 budget, District leaders set out three key goals relevant to this plan — all of which have been met or will most likely be met at the end of FY 1999.



Eliminate the accumulated deficit through budget surpluses. At the end of FY 1998, the District posted an annual surplus of $445 million, which completely eliminated the accumulated deficit. Most importantly, this was accomplished through achieving annual operating surpluses, not through additional borrowing.
Establish a positive fund balance equal to 5 percent of the gross operating budget. The FY 1998 surplus not only eliminated the deficit, but also created a $112 million positive fund balance. This balance is projected to grow to $312 million by the end of FY 1999, which is equal to 6.9 percent of this year's budget.
Achieve structural balance by aligning the growth rates of revenues and expenditures. The current financial plan shows that on average, the growth of revenues exceeds that of revenues over the course of the financial plan

These results show that the District has taken great strides toward improving its financial health. Much work remains to be done, however. Specifically, the District must continue to show progress related to these goals for several reasons:

  • Bond ratings. Structural balance and a 5 percent positive fund balance greatly enhance the District's prospects for earning investment grade bond ratings.
  • Home rule. The control period will end only when the District regains Wall Street's confidence and achieves balanced budgets for four consecutive years (FY 2000 will be the fourth consecutive year to show a balanced budget).
  • Capital investment. The District must develop adequate financial reserves and borrowing capacity to support the financing of badly needed investment in capital infrastructure.
  • Tax relief. Careful control of expenditures will allow the District to provide residents and businesses with tax relief.

The FY 2000 Budget and Financial Plan must effectively balance the tradeoffs inherent in serving these interests. In the following discussion, the following will be presented:

  • Financial plan overview
  • Assessment of fiscal health
  • Summary of revenue projections
  • Summary of expenditure projections
  • Lessons for the future

These issues will be discussed in turn, beginning with an overview.

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Financial Plan Overview

The financial plan reflects the general fund resources necessary to fulfill the Mayor's policy agenda. The purpose of this section is to present the financial plan, describe each item within, and highlight key budget issues. Specifically, the FY 2000 Budget and Financial Plan includes the following initiatives:

Supporting our children

  • Children's initiatives. The FY 2000 budget supports investments in children and youth by creating the Children and Youth Investment Fund ($33 million) and by providing $21.3 million for new and expanded District programs serving children, youth and families. The $33 million will be used to support out-of-school programs delivered by community organizations. The $21.3 million supports increases for child care subsidies, foster care programs, youth employment and internship programs, resources for public libraries, and services for youth in the juvenile justice system. For additional details see the Investing in Children chapter of the Key Budget Issues book.
  • Education. In FY 2000 the District of Columbia Public Schools will begin using the per pupil funding formula as described in the School Reform Act of 1995. The use of this formula increases the local baseline funding for non-state level costs by $37 million for FY 2000. Regarding higher education, $5 million is provided for FY 2000 to create a new endowment fund for the University of the District of Columbia. This fund is intended to be invested and matched through aggressive fund raising by the Board of Trustees.

Improving government services

  • Workforce investment strategies. The FY 2000 budget includes $17.8 million for a non- union pay increase and performance incentive programs. Specifically, the budget includes $9 million for a 3.8 percent nonunion base pay increase; $6.8 million for performance incentive programs (including 2.2 percent for nonunion); and $2 million for increased agency contributions associated with the non-union base pay increase. This pay increase reflects the efforts of the District's leadership to reduce the growing disparity between union and nonunion pay schedules. Moreover, it reflects the Mayor's policy to link pay to performance.
  • Human resource development and training. The FY 2000 budget includes an additional $6.1 million for training above what is currently spent This grows incrementally each year to approximately $7 million in FY 2003
  • Managed competition. The FY 2000 budget includes $3.5 million for training and contracting associated with building a managed competition program in the District These initiatives are projected to produce $269 million in savings by FY 2003. Because the goal is to improve services through competition, rather than simply outsourcing or cutting, the current workforce can participate in the bidding process. For areas where Contracting out may take place, the FY 2000 budget includes $6.3 million for one-time severance costs associated with contracting out functions currently performed within the government. An additional $0.7 million is included in each year of the financial plan for contracting expenses for outsourcing the remainder of disability compensation. This outsourcing is expected to achieve productivity savings, although estimates are currently in development

Rebuilding the human service network

  • Health care restructuring. The FY 2000 budget includes $85.1 million for the Health Care Restructuring Fund within the Department of Health. The Fund will be used to expand insurance coverage to approximately 39,000 uninsured District residents, reimburse the providers for services to those who remain uninsured under contractual arrangements, and set up a hospital transition fund. In FY 2000, these initiatives are fully offset by the reallocation of current spending on health care programs and subsidies, so there is no net impact on the FY 2000 budget. For the out years, however, the local expenditures are estimated to increase to $27 million by FY 2003 unless additional federal revenues are secured through federal legislation or through approval of a Medicaid waiver. See the Health Care Restructuring chapter of the Key Budget Issues book for further details. Substance abuse treatment and prevention is an important part of this initiative. The health care restructuring proposal includes the addition of substance abuse services as part of the standard managed care benefits package. Thus, all those newly insured and current Medicaid enrollees would have access to substance abuse services.
  • Welfare, child care, and homelessness. The FY 2000 proposed budget contains an increase of $13.5 million over FY 1999 for child care subsidies and facilities improvement. This increased funding supports subsidized child care for approximately 2,000 more children and increased child care subsidy rates. The FY 2000 budget includes $12 million for homeless services, which includes $200,000 for homeless shelter maintenance. Second, the FY 2000 proposed budget includes $140.3 million for the Temporary Aid to Needy Families (TANF) program. This budget supports the placement of 8,000 TANF recipients into work activities. Of the budgeted amount, $1 million in federal TANF funds are set aside separately within the budget for DHS to serve as a rainy day fund. These funds will remain deliberately unspent during FY 2000, ensuring that at least a carryover of $1 million will be available in FY 2001 and to begin to build a reserve to protect against future fiscal pressures.

Expanding the economy

  • Capital financing strategies. The District of Columbia has made great strides in turning around its financial condition over the last three years. Meeting financial management targets. Financial management targets are policy parameters that are important in the budget and financial planning process and are designed to both guide policy decisions and help meet financial and operating goals. The specified targets should allow the District to retain resources necessary to meet all critical operating and capital needs during the planning period. Furthermore, these targets should allow for the retention of resources necessary to reverse economic decline and facilitate economic development that improves the life of District of Columbia citizens. The financial management for the District are: maintaining structural balance, maintaining a positive fund balance, reducing the debt burden, restructuring of long-term debt obligations, and improving the District's credit ratings. A Debt restructuring plan is also in this budget for restructuring a portion of the District's front-loaded debt to provide flexibility to fund additional tax relief. Such restructuring could also provide some flexibility to fund additional capital, as well as relieve pressure on the operating budget In addition, tobacco settlement securitization is a financial initiative that will also serve education. FY 2000 budget includes $16 million in additional revenues due to the securitization of tobacco settlement funds. This amount is fully committed to fund debt service for the rehabilitation of public schools and the construction of two new schools.
  • Small business tax restructuring. This initiative will provide substantial relief and stimulation to the District economy by restructuring key taxes. Specifically, it will reduce filing thresholds; accelerate depreciation of electronic equipment; change the net operating loss deduction and eliminate carry-back of losses; eliminate OTR's professional license fee; restrict the arena fee to certain entities; reduce the commercial real property tax in D.C's economic development zones; and eliminate the sales tax on internet access. This restructuring will provide $66.7 million in relief in FY 2000.
  • Neighborhood revitalization. The FY 2000 budget invests $7.2 million in neighborhood revitalization, which is a multi-agency initiative designed to improve the District's capacity to address a variety of economic development issues. First, the policy invests needed resources in neighborhood initiatives to ensure that streets and allies are clean and vacant buildings are stabilized or demolished. Next, the policy includes a series of initiatives designed to strengthen the District's ability to plan and coordinate economic development through upgrades to the Offices of Planning and Zoning. Finally, this budget ensures that the District will have a coordinated and strategic approach to economic development by reorganizing the Office of Economic Development to include Community Project Coordinators and financial and legal staff to carefully track and plan projects throughout the city.

This discussion now turns to an overview of the financial plan, which is presented on the following page.

District of Columbia
FY 2000 — FY 2003 Budget and Financial Plan
Gross Funds (Dollars in thousands)

Revenues FY 1998 Actuals FY 1999 Budget (Revised Revenue) FY 2000 Budget FY 2001 Projected FY 2002 Projected FY 2003 Projected
1. Taxes 2,773,561 2,773,800 2,847,300 2,918,100 3,006,000 3,110,600
2. Non-Tax Revenues 235,188 222,746 232,741 224,751 228,133 227,146
3. Federal Payment (Contribution 198,000 - - - - -
4. Lottery 81,300 69,000 69,000 69,000 69,000 69,000
5. Subtotal, Tax Initiatives 3,288,049 3,065,546 3,149,041 3,211,851 3,303,133 3,406,746
6. I.R.C. 414(h) Pick Up - - (1,200) (1,200) (1,300) (1,300)
7. Tax Restructuring - - (66,700) (81,700) (82,500) (83,300)
8. Subtotal, Tax Initiatives - - (67,900) (82,900) (83,800) (84,600)
9. Grants 1,011,510 1,217,043 1,270,989 1,328,244 1,388,847 1,451,463
10. Federal Payments - 123,762 - - - -
11. Private/Other Revenues 116,954 314,660 319,291 329,830 340,933 352,006
12. Subtotal, Non-Local Funds 1,128,464 1,655,465 1,590,280 1,658,075 1,729,780 1,803,469
Expenditures (by Appropriation Title)
14. Government Direction and Support 153,828 164,144 196,144 203,109 210,399 217,802
15. Economic Development and Regulation 110,581 159,039 192,767 199,164 205,877 212,618
16. Public Safety and Justice 564,269 755,786 784,581 813,101 843,711 874,968
17. Public Education System 734,569 788,956 858,915 879,217 905,394 932,800
18. Human Support Services 1,665,119 1,514,751 1,594,933 1,669,193 1,747,783 1,829,308
19. Public Works 249,142 266,912 273,480 283,428 293,804 304,447
20. Financing and Other 421,136 461,622 399,210 408,542 422,329 429,632
21. Receiverships - 318,979 341,059 352,516 364,546 376,630
22. Financial Authority 3,220 7,840 3,640 2,806
23. Local fund support for Enterprise funds 2,498
24. Net costs of new insurance coverage - - - 13,600 23,700 26,800
25. Productivity Savings - (10,000) (20,000) (30,000) (40,000) (40,000)
26. Managed Competition Savings 0 0 (31,900) (55,900) (76,700) (104,700)
27. General Supply Schedule Savings - - (20,000) (20,560) (21,156) (21,727)
28. Productivity Bank 30,000
29. Tobacco Settlement Funds for Debt Service - - 16,050 12,610 15,142 15,285
30. Workfare Investment - - 17,800 25,000 12,000 12,000
31. Federal Payments to be allocated - 100,700 - - - -
32. Total Expenditures 3,901,864 4,521,227 4,636,679 4,755,826 4,906,828 5,065,861
33. Total Surplus – Budget Basis 514,649 199,784 34,743 31,200 42,286 59,753
34. GAAP Adjustments (69,800)
35. Total Surplus GAAP Basis 444,849
36. Fund Balance, Beginning of Year (332,357) 112,492 312,276 347,019 378,218 420,504
37. Fund Balance, End of Year 112,492 312,276 347,019 378,218 420,504 480,258
38. Federal Contribution for Mental Health 117,300 9,000 9,000 9,000
39. Federal Contribution for School Construction 73,097 141,658 102,942 100,597
40. Federal Contribution for Special Education 30,000 30,000 30,000 30,000

Each item in this plan is described below. The row numbers and headings presented below correspond to those in the financial plan

  1. Taxes. Includes property, sales, income, and other taxes, which are projected by the Office of Tax and Revenue and certified by the District of Columbia Financial Responsibility and Management Assistance Authority (DCFRMA). See the Revenues chapter for further details.
  2. Non-tax revenue. Includes revenue from licenses and permits, parking and traffic fines, charges for services, interest income, and other revenue sources. See the Revenues chapter for further details.
  3. Federal payment (contribution). Reflects the discretionary funding contributed by the federal government in FY 1998. The payment provided by the federal government in FY 1999 is accounted for as non-local funding. For FY 2000 and beyond, the District is proposing that the federal government provide a contribution for mental health services, school construction, and special education. These contributions are reflected under items 36-38 in the financial plan (see the District-Federal Relations chapter in the Key Budget Issues book).
  4. Lottery. Reflects revenues from the District's lottery. For FY 2000 – FY 2003, $33 million of these revenues will be dedicated to children's initiatives (see the Investing in Children chapter in the Kay Budget Issues book for further details).
  5. Subtotal local funds. Provides a summation of the revenues from local sources.
  6. I.R.C. 414(h) Pick Up. Accounts for the loss of revenue associated with a change in the way defined benefit plan employee contributions are treated under Internal Revenue Code 414(h). Under this proposal, these employee contributions will no longer be included in taxable income, resulting in a net benefit for these employees and a net loss in revenue for the District.
  7. Tax Restructuring. Reflects the reduction in revenues under the Mayor's tax restructuring initiative (see the Tax Restructuring chapter in the Key Budget Issues book for further details).
  8. Subtotal, Tax Initiatives. This item sums the revenue impact of the new tax initiatives.
  9. Grants. Federal grant awards projected by District agencies.
  10. Federal payments. Reflects federal appropriations targeted for specific uses, unlike discretionary federal payments, which are accounted for under local funds.
  11. Private/Other revenues. Includes revenue from service charges and user fees that are collected and spent by the collecting agency. This pool is distinct from the above category of non-tax revenue, which is utilized in the general pool discretionary local revenue (see the Revenues chapter for further details).
  12. Subtotal non-local funds. Provides a summation of the non-local funding sources presented immediately above.
  13. Total revenues. Provides a summation of the revenue subtotals above.
  14. -22. Discussion of these items are provided in the corresponding sections of this book In addition, further details on these initiatives, can be found in the Key Budget Issues book These items reflect the gross expenditures of District agencies by appropriation title.


  1. Local fund support for Enterprise funds. Reflects local funds provided for Enterprise funds in order to reconcile with other presentations of data in FY 1999.
  2. Net costs of new insurance coverage. Reflects the portion of insurance expansion costs that will not be offset by non-local funds as in FY 2000. The District's intention is to obtain a Medicaid waiver and/or disproportionate share funds to offset these costs, but these funds are not certain, and therefore the conservative estimate in the financial plan does not include them.
  3. Productivity savings. In the FY 1999 Consensus Budget, District leaders agreed that the District should plan for and achieve productivity savings as a result of improved operations due to management reform. For FY 1999, $10 million is to be achieved, and is shown as a separate line because these savings have not yet been allocated to agencies. For FY 2000, a target of $20 million was set, and this amount was reduced from multiple agencies during the budget formulation process, and is reflected in the expenditures by appropriation title. In addition, the Mayor proposes to produce an additional $20 million in general productivity savings, and this additional amount is reflected in the financial plan. For FY 2001, $30 million is planned, and must be allocated. For FY 2002, $40 million is planned, and must be allocated. FY 2003 reflects the resulting reduction in base expenditures.
  4. Managed Competition Savings. The FY 2000 budget includes $3.5 million in the Office of the City Administrator for contract, training, and other support costs for managed competition initiatives. The managed competition savings item reflects savings projected to result from these initiatives. For further details, see the Managed Competition chapter in the Key Budget Issues book.
  5. General supply schedule savings. Reflects the savings to be achieved by the Office of Contracting and Procurement's initiative to employ a general supply schedule. Savings for FY 1999 are projected at $20 million, but this plan takes a conservative approach by not reflecting these savings until FY 2001, then projecting them forward at the rate of inflation to appropriately offset the non- personal services projections included elsewhere in the financial plan.
  6. Productivity Bank. The Productivity Bank (Bank) is intended to be a revolving fund that will enable the District of Columbia to finance projects that decrease the cost of delivering municipal services or increase revenues to the District. The Bar k would provide up-front budget authority for approved projects, which cannot be otherwise funded from the District's Capital Budget or from an agency's operating budget without adversely impacting normal service levels. All District departments, boards, and commissions will be eligible to apply for loans from the Productivity Bank and may do so individually or in concert with other city departments or agencies for joint ventures. The Bank will consider only those projects designed to decrease expenditures or increase revenues in the General Fund.
  7. Tobacco settlement funds for debt service. This item reflects the use of tobacco settlement revenues to pay for debt service associated with school construction.
  8. Workforce investments. This item accounts for a pay increase to improve parity between union and non-union employees. For further details, see the Workforce Investment chapter.
  9. Federal payments to be reallocated. These items reflect the FY 1999 contributions provided by the federal government. These amounts are in the process of being allocated to agencies and will be reflected as such in the June budget submission to Congress.
  10. Total expenditures. This item provides a summation of all gross expenditures and savings presented immediately above.
  11. Total surplus — budget basis. This item shows the difference between total revenues and total expenditures. This is presented on a budgetary basis, which means that GAAP accounting adjustments are not reflected.
  12. GAAP adjustments. This item reflects the accounting adjustments made in the annual audit for FY 1998.
  13. Total surplus — GAAP basis. Provides a summation of the budgetary surplus and GAAP adjustments for FY 1998.
  14. Fund balance (beginning of year). Shows the accumulated fund balance for the general fund at the beginning of the fiscal year, which is identical to the end of year fund balance for the previous fiscal year.
  15. Fund balance (end of year). Shows a summation of the beginning of the year fund balance and the annual surplus.
  16. Federal contribution for mental health. Reflects the proposal that the federal government assume responsibility for selected mental health costs, as consistent with state responsibilities. For further details, see the District-Federal Relations chapter in the Key Budget Issues book.
  17. Federal contribution for school construction. Reflects the proposal that the federal government assume responsibility for school rehabilitation and construction, as consistent with traditional state responsibilities. For further details, see the District-Federal Relations chapter in the Key Budget Issues book.
  18. Federal contribution for special education. Reflects the proposal that the federal government assume responsibility for special education expenses, as consistent with traditional state responsibilities and precedent in the FY 1999 Appropriations Act. For further details, see the District-Federal Relations chapter in the Key Budget Issues book.

Having established an overview and description of the financial plan, the next section provides an assessment of this plan's impact on the financial health of the District.

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Assessment of Fiscal Health

To receive a clean bill of financial health, a financial plan must meet at least three conditions:

  1. Revenues exceed expenditures in the current year
  2. Revenues grow at the same rate or higher as expenditures in future years.
  3. The District establishes a positive fund balance of at least 5 percent ($250 million) of its operating budget.

The FY 2000 Budget and Financial Plan meets all three of these conditions. With regard to the current year fund balance, this plan includes a budgeted surplus of $34 million for FY 2000. With regard to structural balance, revenues are growing at an average rate of 3.14 percent, whereas expenditures in this plan are growing at 3.00 percent. Positive fund balances are achieved in each year of the financial plan. Figure 1 provides a magnified view of the growth of revenues and expenditures, illustrating that structural balance is sound.

Figure 1
Structural balance achieved in Financial Plan
Revenue and Expenditure Trends FY 1997 – FY 2002
Gross Funds

chart of revenue and expenditure trends

Finally, with regard to achieving a positive fund balance, this financial plan not only protects the $312 million projected for the end of FY 1999, it continues building it to $480 million by the end of FY 2003.

In sum, the FY 2000 Budget and Financial Plan effectively balances the need to aggressively invest in critical service delivery while staunchly guarding the financial health of the District. Going forward, these considerations must serve as a constant guide for all current and future spending decisions in the District. The following sections summarize the basis for the revenue and expenditure projections included in the financial plan.

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Summary of Revenue Projections

The United States is enjoying the longest peacetime economic expansion in its history and the District of Columbia is sharing in the prosperity. While containing spending has had a positive effect on the elimination of the District's debt, so too has greater than anticipated growth in the revenues of the District. A stronger economy than predicted combined with improved tax administration are among the fundamental reasons for increased optimism for revenue growth in fiscal years 1999 and 2000. The budget improvement experienced by the District parallels comparable improvements all across the country — 46 states had a budget surplus for FY 1997 and the Federal Government actually generated a surplus in FY 1998.

The national forecast is for positive real growth in gross domestic product (GDP) but lower than the average growth for 1997 and 1998. At the beginning of the period, unemployment, inflation and interest rates are all quite low.1

The outlook for the Washington Metro Regional Economy also is favorable, although, in line with national trends, growth may be somewhat lower than in 1997 and 1998. In August 1998, Stephen S. Fuller, a George Mason University economist, observed that in June 1998, the Washington Coincident Index2 stood at its highest level ever. This index represents the current condition of the economy. However, a slight decline in the Leading Index3 in June provided the first sign of a possible slowdown in the area's economy for 1999. DRI anticipates that growth in the Washington Metro Region will change more or less in line with the national economy.

Against the backdrop of a strong national and regional economy, the District of Columbia economy is forecast to show steady growth in FY 1999 and FY 2000. Although at rates below the preceding two years the District is expected to have some small increase in employment and in employment of D.C. residents. Inflation-adjusted gross state product (GSP) and personal income are forecast to increase at average annual rates of 1.1 percent and 1.9 percent respectively. Activities currently underway that will boost the economy include new retail and restaurant development associated with the MCI Center, the transfer of jobs to the Navy Yard, and construction of the new Convention Center.

Long-Term Economic Outlook (FY 2001 – 2003)

In looking further ahead to the years 2001 through 2003, the key economic issues are how much the national economy can continue to expand and the extent to which improving public services will stimulate economic development in the District. Nationally, CBO, OMB, and the Blue Chip consensus forecast all anticipate moderate growth from 2001 to 2003. DRI also forecasts growth in the Washington Metropolitan region to continue at about the rate of the nation as whole, although factors such as traffic congestion and the shortage of skilled labor for technology-oriented industries could restrain this growth.

Led increases in the service sector, the District's employment is assumed to increase by about 12,000 positions from FY 2000 to the end of FY 2003. Inflation-adjusted gross state product and personal income are expected to increase at average annual rates of 1.1 percent and 1.7 percent respectively. Resident employment is expected to increase by about 5,000 jobs. Growth in retail sales and a small decrease in population and housing starts are also expected In the hospitality sector of the economy, sales are expected to rise during the 2001 Inauguration and again when the new convention center opens in 2003.

Factors Underlying Current Revenue Estimates

The estimates are conservative, but not gloomy. They anticipate a small real growth in the economy and smaller growth in tax revenue than experienced in FY 1998. Increases in gross state product are expected to be led by the professional services (where tax generation is low) and business services. Resident employment, including self-employment, is forecast to have stabilized in FY 1998 and to show very slight growth in FY 1999 and FY 2000. With the stabilizing of government employment in the District, this is a reasonable hypothesis.

Sales taxes are expected to increase at just under the rate of inflation with no real growth until the new convention center is brought into service. Activity in property sales and deed tax generation are expected to unwind from the highs of FY 1998, but remain higher than in FY 1996. The taxable base of real property tax is anticipated to stabilize in FY 2000, as the activity of 1997 and 1998 begins to be incorporated into tax assessments under the phased implementation of triennial real property assessment. The new administrative appeals system enacted in triennial legislation is settling at the administrative level about 90 percent of the 4,000 cases annually that were referred for adjudication. Because we have no evidence yet of the impact on investment or the number of employed residents due to the 1997 federal Financial Assistance Act, the possible impact on income revenues is omitted from the estimates. The now booming stock market is forecast to advance at moderate trend levels. Neither a financial crash nor a boom is forecast.

The following table sets forth the economic assumptions used in the revenue estimates.

Economic Assumptions Underlying the Forecast
The District Economy: Key Variables for the Forecast Period:
FY 1995 to FY 20003

(Fiscal Years) 1995 actual 1996 actual 1997 actual 1998 est 1999 est 2000 est 2001 est 2002 est 2003 est
Gross State Product ($ billion) 49.23
Real Gross State Product (billions of $92) 46.59
Personal Income ($ billion) 17.74
Real Personal Income (billions of $92) 16.57
Per Capita Income ($) 32,025
Real Per Capita Income ($92) 29,910
Population (’000) 554.0
Households (’000) 234.0
Civilian Labor Force (’000) 287.7
At-Place Employment (’000) 646.2
Resident employment (’000) 263.0
Unemployment Rate 8.7% 8.7% 7.9% 8.5% 8.4% 7.8% 7.3% 6.9% 6.6%
Housing Stock, Total 267.0
Retail Trade Sales ($ billion) 3.66
Retail Trade Sales ($1992 billion) 3.52
Washington Area Consumer Price Change +2.2% +2.8% +2.1% +1.2% +2.2% +2.8% +2.8% +2.9% 2.7%

In short, the forecast for FY 2000 assumes that the District economy and tax system will function at moderate rates of improvement, with a small measure of real economic growth and growth in tax revenue below the rate of inflation. So long as economic growth is led by sectors that bear relatively little of the tax burden, this pattern can be expected to continue.

Forecasting Risks

The risks against the estimate are both small and large "Small" risks include deviations from the forecast rate of increase in GSP and Personal Income — a 1 percent error in each would adjust the estimates by approximately $20 million from income and sales taxes. Also, the FY 2000 estimate anticipates a lift of about $24 million from tax administration.

The large risks spring from the possibility of recession or growth much more robust than that forecast. A recession that begins immediately and deepens for some months could reduce FY 2000 revenues by $150 million. However, no recession of any size is forecasted at this time. Alternatively, if the local economy and income grow 2 percent more than forecast and financial markets continue strong growth, revenues could be $9.0 million or more above estimate. Finally, the level of voluntary compliance and the possibility of writing off receivables in, for example, Medicaid accounts, both have significant potential to swing revenues either up or down.

Having discussed the revenue side of the financial plan, this chapter now turns to the a discussion of expenditures.

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Summary of Expenditure Projections

The expenditure projections were developed using a three-step methodology. First, citywide personnel expenditures are estimated using an inflator of 4.3 percent to reflect expenditure increases attributable to step increases and an estimate of additional out-year labor costs. Second, non-personal services expenditures are estimated using projections of CPI growth for the Washington area provided by DRI-McGraw Hill. Third, analysis has been conducted on expenditures where growth is not directly tied to inflation. The table below summarizes the specific expenditure assumptions.

Personal Services

The personal services growth rate reflects an estimate of 1.8 percent growth attributed to step increases and 2.5 5 percent growth related to potential union salary and wage increases. The rate is based on salary growth in the Surrounding Metropolitan Statistical Area (SMSA) and the Federal government in FY 1998 and 1999. Pursuant to the Comprehensive Merit Personnel Act, compensation is deemed to be competitive if it falls reasonably within the range of compensation prevailing in the SMSA. The District may also examine public and/or private compensation outside the SMSA when conditions in the local labor market require a larger sampling in order to establish a reasonable compensation level. Based on these factors, a 2.5 percent personal service growth rate, per fiscal year, represents a conservative increase in costs associated with future labor contracts.

Non-Personal Services

Non-personal services are projected to grow at the rate of growth of the consumer price index for the District of Columbia as projected by DRI-McGraw Hill. The index accounts for the general inflation of goods and services specific to this region. This rate does not account for savings projected under the District's planned use of a general supply schedule or other cost savings initiatives. Such savings can contribute to the overall productivity savings identified in the financial plan.

Fixed costs

Fixed costs include energy, telecommunications and rent. A separate trend analysis was conducted on each of these cost to determine future expenditure growth.

Principal General Fund Expenditure Assumptions

Expenditure Category

Assumed Growth

  FY 2001 FY 2002 FY 2003
Personal Services 4.30% 4.30% 4.30%
Non-Personal Services 2.80% 2.90% 2.70%
Energy 1.30% 1.20% 1.20%
Telecommunications 2.70% 2.60% 2.60%
Rent 2.20% 2.10% 2.10%
Medicaid Analysis of cost drivers indicates growth level of 6.0%
Public Benefit Corporation subsidy Constant amount throughout the period.
WMATA Subsidy Growth level of 4% based on formula that incorporates key factors such as: the District's Metrobus service levels, the number of Metrorail stations in the District, Debt service costs, and Metrorail Construction Costs.
Financing Debt service estimates are calculated based on estimated amounts borrowed and prevailing interest rates.

Energy costs include expenditures for automotive fuel, heating fuel, natural gas, electricity, steam and water. The ten-year trend for these items indicates a consistent upward trend in expenditures, with a downward trend in FY 1995 that, compared to the overall trend, is an outlier. In order to gain a more accurate projection, the FY 1995 data was adjusted to reflect the consistent trend over the course of the ten years. Based on this adjusted trend forecast, energy expenditures are expected to grow at a modest rate of about 1.2- percent over the course of the financial plan.

Telecommunication costs have been steadily rising over last ten years. Expenditures for FY 1997 increased by over 40 percent compared to FY 1996. This dramatic increase is attributable to the purchase and replacement of telephone systems that was counted as a telecommunications expenditure. This one-time expense distorts the trend for telecommunications costs. As a result, the FY 1997 data was adjusted by removing the out-year expenditure in order to attain a more accurate projection. Based on this adjusted trend forecast, telecommunications expenditures are expected to grow at a rate of about 2.6 percent over the course of the financial plan.

Rent expenditures were on an increasing trend from FY 1988 to FY 1992. Since FY 1992 rent expenditures steadily declined until FY 1996. FY 1997 saw an increase of 9 percent in rent costs over FY 1996. The large increase from FY 1996 to FY 1997 was due to the fact that the Certificate of Participation expense for the Judiciary Square building was budgeted as rent beginning in FY 1997, but had formerly been budgeted as debt service. This change in the treatment of the CP distorts the overall ten-year trend. Thus, the FY 1997 and FY 1998 data was adjusted by removing the CP expenditure Based on this adjusted trend forecast, rent expenditures are expected to grow at a rate of 2.1 percent in the out-years.


Medicaid is an entitlement program that provides health care insurance and other services to low- income individuals. Because it is an entitlement program, the District must budget enough funds to cover expected expenditures. Between FY 1999 and FY 2000, baseline spending for Medicaid is expected to increase by approximately 5 percent. Over the remainder of the financial plan, Medicaid is expected to grow by approximately 6 percent. This rate is in line with national Medicaid growth rates and reflects trends in health care inflation

D.C. Retirement Programs for Police/Firefighters and Teachers

The District costs associated with retirement programs for police/firefighters and teachers changed dramatically in FY 1998 due to the passage of the District of Columbia Retirement Protection Act of 1997. This Act transferred most of the liabilities accrued as of June 30, 1997, as well as approximately $3.5 billion in assets to the Federal government. As a result, the District has been relieved of its responsibility to fund the costs associated with this unfunded liability, which was $4.8 billion as of October 1, 1996.

The District's pension contribution beginning in FY 1998 is calculated based on applying a normal contribution rate to the projected payroll for firefighters/police and teachers. The normal contribution rate is consistent in the out-years, so the most significant variable is the growth in payroll. Conservative payroll growth assumptions were used to reflect potential salary increases based on pending labor agreements.

Washington Metro Area Transit Authority Subsidy

The Washington Metro Area Transit Authority subsidy is projected to grow at a rate of 4 percent over the course of the financial plan. Higher than inflationary growth is projected as new Metrorail stations continue to open, new labor agreements are negotiated, and the provisions of Federal law are implemented. Laws such as the Americans with Disabilities Act, the Clear Air Act Amendments, and the Intermodal Surface Transportation Efficiency Act will impact the District's subsidy requirement.

Financing and Other Expenditures

Debt service estimates are calculated based on the anticipated short and long-term borrowing needs of the District. The general obligation bond debt service estimates are based on a planned debt restructuring that will yield approximately $50 million in savings in each year of the financial plan. For further information, see the Capital Financing Strategies chapter in the Key Budget Issues book.

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Lessons for the Future

As District leaders go forward to present a consensus budget to the Congress, they must be fully cognizant of the impact of spending decisions on the financial plan. Difficult tradeoffs are inherent in bold new policy initiatives. The District must balance the expansion of service delivery against the investment in capital infrastructure, and the growth of these expenditures against the reduction of the District's high tax burdens. The financial plan presented above accounts for each of these interests and ensures that critical priorities are served in a manner that protects the newly regained financial health of the District.

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1. The Congressional Budget Office (CBO), the Office of Management and Budget (OMB) and the consensus Blue Chip forecast.
2. The Washington Coincident Index is derived from changes in wage and salary employment, consumer confidence, nondurable goods retail sales, and passenger boarding at National Airport.
3. The Washington Leading Index is derived from durable goods sales, residential building permits, consumer expectations, initial unemployment claims in the District of Columbia, and the help-wanted index. See Stephen S. Fuller, Economic Forecast, February 6, 1998, washingtonpost.com.

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