Narrowing the Budget Gap by Forgoing Paygo
As you know, the DC government is facing a $164 million budget gap for FY 2013, a gap that Mayor Gray must address through some combination of savings and new revenues when he submits his budget proposal this Friday.
Last week, we laid out some of our revenue ideas for closing that gap. Today, we want to further explain the best option, in our opinion, for reducing the budget gap: forgoing a provision requiring the city to spend $50 Million directly from its tax collections for capital projects — known as “paygo capital.” This single step would reduce the budget gap by almost one-third and limit the need for painful cuts to services — without hurting the city’s infrastructure investments.
What is Pay-Go?: Pay-Go means that “pay as we go” for capital construction projects like libraries, schools, and sidewalks rather than using the more conventional method of financing these construction projects through borrowing.
Why Does Current Law Call for $50 Million in Pay-Go Next Year? The budget adopted two years ago contained a provision requiring that one-quarter of any increase in revenues in future years be put towards pay-go for capital projects It is now set to go into effect in FY 2013. Based on the increases in revenues over the past year, the pay-go amount is around $50 million.
Is Pay-Go a Good Thing to Do? Not this year. The answer to this question really depends on what else is going on with the city’s finances. Pay-go makes sense when finances are strong, because paying for capital projects without borrowing is a good use of extra resources; however, when finances are tight, it makes more sense to borrow for capital projects, rather than pay-go.
The enormity of the current budget gap makes it clear that we should forgo this provision for FY 2013, as the Mayor and Council did for FY 2012. The District still can maintain its investments in capital projects, through borrowing, while freeing up $50 million to help preserve education, health care, public safety, housing, and other critical services. .
Mayor Gray will be presenting his budget on March 23rd. We here at DCFPI hope that he will take this very impactful revenue option into consideration as a way to narrow the budget gap.