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Financial Planning and Budget in the District of Columbia
Andrew Brimmer
February 25, 1998

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FINANCIAL PLANNING AND BUDGET IN THE DISTRICT OF COLUMBIA

The time has come to concentrate on the planning component of the financial planning and budget procedure. We must prepare and present to the Congress—by June 15, 1998—a budget for FY 1999. We will work hard to agree on a consensus budget, and we will meet the deadline.

As required by law, we integrate the 1999 budget into a long range plan covering an additional 3 years. The plan should include projections of both revenues and expenditures in considerable detail. Moreover, the key assumptions on which the projections are based must be thoroughly documented and made explicit. Finally, a number of critical issues regarding programs and spending priorities must be resolved. Of course, as we confront these issues, we may have our individual points of departure as to preferences. Today, I am prepared to sketch my own priorities and preferences. Other Authority members will have their own goals and objectives. At the same time, I am confident that—during our Working Sessions and deliberations—we will reach a genuine consensus which would be submitted to the Council—by the Mayor, and would be forwarded by the Authority. Therefore, I expect that we will submit a single consensus budget to Congress by June 15, 1998.

Outlook for Revenue, Expenditures, and Budget Surplus

The estimate of budget revenues for FY 1998 is currently being revised by the Chief Financial Officer. However, the most recent preliminary estimate projected total revenue at $4.34 billion—about $232 million below the $4,576 million recorded in FY 1997. Looking ahead, the revenue stream over the next four fiscal years may have the following profile (million dollars): FY 1999, $4.243; FY 2000, $4.322; FY 2001, $4.403, and FY 2002, $4.506. For the same years and assuming no changes in policies and programs, total expenditures may be as follows: FY 1999, $4.051; FY 2000, $4.143; FY 2001, $4.222, and FY 2002, $4.321. If these flows materialize, the City would generate a budget surplus as follows (millions of dollars): FY 1999, $192.0; FY 2000, $179.0; FY 2001, $181, and FY 2002, $185.

Policy Issues In Budget Planning

The budget results projected above raise a number of policy issues which must be resolved during the planning process. The following are among the most pressing:

1. How should the budget surpluses be used?

(a) Accelerate the pay down of the accumulated deficit.
If all of the surplus expected in FY 1998 ($348.16M) were dedicated to this purpose, the accumulated deficit would be reduced to only $10.7 million at the end of FY 1998. A positive fund balance would build over each of the succeeding four fiscal years (millions of dollars): 1999, $208.2; 2000, $387.9; 2001, $600.6, and 2002, $755.2.

My own preference would be to use some of the surplus to accelerate the pay down of the accumulated deficit. However, I would also try to satisfy some of the other pressing needs which are exerting a great deal of pressure against the revenues available in the District’s budget.

(b) Use some of the surplus to expand existing programs or to add new ones.
I would not support these objectives to the exclusion of other claims. Instead, any increase in expenditures for existing or new programs would have to be justified on a case-by-case basis.

(c) Use some of the surplus to provide pay increases for non-union employees on the City’s payroll.
Currently, the city has about 34.7 thousand full time equivalent positions (FTE’s). About 7.8 thousand of these are non-union employees. Thus, the latter group makes up between 1/5 to of the total. These non-union employees last received a wage increase (5.0%) in 1994. In 1995, they absorbed a 4.0% reduction. In the three years 1996-98, they received no pay increases. As a result, the cumulative change in wage adjustment for them amounted to only 1.0% over the period 1994-98. In contrast, among union members on the City’s payroll, the gains were as follows (%): Police: 1994, 6.0; 1995, 5.0; 1996, 0.0; 1997, 10.0; 1998, 0.0. Cumulative increase, 21.0. Fire services: 1994, 6.0; 1995, 5.0; 1996, 0.0; 1997, 0.0; 1998, 9.5. Cumulative increase, 20.5%.

In comparison, the rise in wages received by federal government employees during the period 1994-98 amounted to 11.5%. Among the surrounding local jurisdictions the increases during the same period were (%): Alexandria City, 11.0; Arlington County, 6.6; Fairfax County, 10.0; Montgomery County, 12.7; Prince George County, 3.0.

Given the above record of pay adjustment for DC employees—particularly for the non-union members—there’s clearly a pressing need to increase the wage level for the average DC government employee.

Therefore, one of the primary policy goals of the budget for FY 1999 should be an increase and realignment of the compensation of District government employees.

(d) Increase capital expenditures for infrastructure and maintenance
The District has allowed its endowment of capital and physical facilities to deteriorate to an alarming degree. Local streets and bridges, lightening and operating equipment, have all been allowed to run down and wear out. Moreover, the City has spent very little on maintenance over the years. While the pace has varied from year-to-year, the actual amount spent on maintenance has fallen far below the average of 30% of total capital expenditures achieved by many other jurisdictions. To reduce this deficit significantly will require the outlay of close to $300-400 million per year over most of the coming decade. This amount is more than double the $150 million per year of borrowing for capital expenditures the City is now carrying out.

(e) Borrowing to reduce the accumulated deficit.
The City now has Congressional authority to borrow up to $300 million for this purpose. When the FY 1998 budget was submitted and approved by Congress, it was assumed that $110 million of such borrowing would occur during the current fiscal year. However, as the estimates of revenue have increased to the point where a much larger surplus is expected, one view has emerged which holds that no deficit borrowing should occur during the current fiscal year. On the other hand, if no such borrowing is undertaken a number of high priority projects will have to compete more vigorously for the still limited amount of revenue that will be available.

I have not reached a definitive conclusion on this issue. However, I am "leaning" toward borrowing the $110 million that was included in the budget. Pursuit of this course would permit a more balanced allocation among the spectrum of uses described above.

(f) Provide tax relief for citizens and businesses.
The tax burden carried by District residents and firms doing business here is substantially above that in the surrounding jurisdictions. This is true with respect to commercial real estate property, business and individual incomes, general sales, and utilities and telecommunications.

Therefore, one goal should be a significant reduction in the tax burden being borne by the people who live in and run businesses in the District. Moreover, a start on the provision of this relief should be made in the FY 1999 budget. The size of this tax reduction—and the way it should be distributed between business and individuals—must be decided during serious discussions among the Mayor, City Council and the Authority.

(g) Management Reform
There will be a clear need to finance the continuing implementation of Management Reform. In addition, there will be a major requirement to finance the improvement of training and skills in the District workforce.

(h) Education and Public Schools
The Public Schools will require additional expenditures to improve the quality of education. Raising test scores, as well as the improvement to physical facilities, is a priority.